RE AKAI HOLDINGS LTD

HCCW 50/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 50 OF 2000

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(Heard together)

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DECISION

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1. This is the hearing of an application under s.194(1)(c) of the Companies Ordinance and Rule 45(2) of the Winding-Up Rules by the Official Receiver in his capacity as provisional liquidator of Akai Holdings Ltd ("Akai") and Kong Wah Holdings Ltd ("Kong Wah").

2. Section 194(1)(c) CO provides that where meetings of the creditors and contributories of a company have been called in connection with the appointment of a liquidator, and there is a difference between the determination of those meetings, the court shall decide the difference and make such order thereon as it may think fit.

3. Rule 45(2) W-Up Rules provides that where the resolutions passed at the meetings of the creditors and contributories in connection with the appointment of a liquidator are not identical in effect, the court shall on the application of the provisional liquidator fix a time and place for considering the resolutions and determinations (if any) of the meetings, deciding differences (if any) and making such order as shall be necessary.

4. Although they are normally chambers matters, these applications were heard in open court on the Official Receiver's request as a number of matters were already in the public domain.

5. Before I deal with the differences and resolve them, it would be helpful to set out a brief history of the relevant facts.

Petitions

6. On 13 January 2000, petitions were presented in Hong Kong for the winding-up of Akai and Kong Wah. Both Akai and Kong Wah were incorporated in Bermuda but had a principal place of business in Hong Kong. Akai was listed on the Hong Kong Stock Exchange.

7. The petitioning creditors (being Den Danske Bank, the Bank of Scotland and Emirates Bank International) and the indebtedness were the same in both cases as Akai was the guarantor of Kong Wah's debt. There was one supporting creditor in the Kong Wah petition and four supporting creditors in the Akai petition.

8. After the petitions were presented, an opposing creditor Toyo Holdings Ltd ("Toyo") presented itself as a potential investor or "white knight" in a proposed restructuring agreement. Adjournments of the petitions were sought by the companies and Toyo.

9. After some 7 months however, on 23 August 2000, Le Pichon J (as she then was) made winding-up orders in both petitions. The Official Receiver became the provisional liquidator for both companies by virtue of s.194(1)(a) CO.

Companies' financial situation

10. According to the Official Receiver, Akai has suffered the largest loss in Hong Kong corporate history. There was apparently an operational loss of US$1,820m for the year ending 31 January 2000. According to the Statement of Affairs affirmed by James Henry Ting, a former director, Akai's estimated deficiency (i.e. the difference between its total assets and total liabilities) is said to be nearly US$760m., or HK$6,000m. Kong Wah's estimated deficiency is said to be about HK$2,640m

11. Those figures are alarming by any standards. Moreover, it has now emerged that shortly before the petitions were presented, Akai was involved in an unusual arrangement.

Management Agreement

12. In an affirmation (made before a notary public on the mainland) which was supplemental to the Statement of Affairs, Mr Ting disclosed a "Management Agreement" dated 12 November 1999 made between Akai (on behalf of itself and its subsidiaries and affiliates) and The Grande Group Ltd ("Grande").

13. Under this Management Agreement, Akai transferred to Grande all authority to manage all business activities of Akai and its subsidiaries and affiliates, at the sole discretion of Grande and in such manner as Grande considered appropriate. In his affirmation Ting says that from the date of the Management Agreement, he was no longer involved in the conduct of Akai's affairs and had no ready access to its books.

14. Even though Akai was listed on the Stock Exchange of Hong Kong, the authorities were not apprised of this extensive transfer of management.

Granting charges over assets

15. Thereafter, Akai executed certain security documents over its assets, charging listed and unlisted shares, trademarks and other assets. These security documents included charges made in favour of a company called Tremendous Springs Ltd and also Toyo (there is a dispute as to the extent of advances provided to Akai). Toyo was then a subsidiary of Grande.

16. According to the annual returns for 2000 of Toyo (now called O2New Technology Ltd and said to be in different hands), Toyo has exercised its rights under the security documents.

Need for investigation into companies' affairs

17. The complete transfer of Akai's management to Grande was not revealed, either by Akai or by Toyo (Grande's subsidiary), during the period of 7 months when the restructuring proposal was considered before winding-up orders were made. The companies judge was under the impression, shown in the Reasons for Decision dated 11 September 2000, that only some personnel from Grande /Toyo had been seconded to Akai.

18. It is not seriously disputed by any of the parties appearing before this Court that, given the magnitude of the losses suffered by Akai and Kong Wah and their substantial deficiencies, and the transfer of management and extent of charges granted, a prompt and thorough investigation of the companies' affairs is warranted. Clearly, it is imperative that competent and committed liquidators should be appointed as soon as possible to undertake this task.

Official Receiver

19. The question is who should be appointed liquidators. Under s.194(1)(a) CO, on a winding-up order being made, the Official Receiver by virtue of his office became the provisional liquidator until he or another person becomes liquidator.

20. However, it has always been the Official Receiver's position that he would be unable to undertake the work of a liquidator in these two cases. His office has neither the manpower or resources, or the connections with overseas insolvency practitioners or accountants required to undertake these liquidations with their international dimensions. Akai is for instance connected with a Japanese company of the same name, and there already has been litigation involving associated companies in Australia and the United States of America. There are also subsidiaries in Europe and the PRC.

Application for appointment of special managers

21. On 25 August 2000, an application was made by the Official Receiver for the appointment of Mr Joseph Fan and Mr Stephen Wong of RSM Nelson Wheeler Corporate Advisory Services Ltd, the corporate advisory and insolvency arm of Nelson Wheeler CPA ("Nelson Wheeler") as special managers under s.216 CO. The judge was concerned whether these two individuals had the necessary amount of experience to carry out liquidations of this size and nature. The judge preferred an appointment from the "Big 5" firms of accountants, but they had all been conflicted out. The matter was then adjourned to early September 2000.

22. It may be mentioned that at this hearing, presumably in an attempt to persuade the judge of the confidence that at least some of the creditors had in Nelson Wheeler, the judge was told that Standard Chartered Bank, one of the supporting creditors, was prepared to put up a fund of $10m. on the basis that Nelson Wheeler (by which is meant appointees from that practice) would be appointed. This funding arrangement has now become a source of controversy as will appear later.

Appointment of provisional liquidators by court of Bermuda

23. On 28 August 2000 meanwhile, Mr Craig Christensen of Arthur Morris, Christensen & Co., Bermuda, was appointed provisional liquidator by the court in Bermuda. Apparently his firm is a member of RSM International ("RSM").

24. On the same day, Mr Christensen appointed Nelson Wheeler to be his agent in Hong Kong. Nelson Wheeler is also a member firm of RSM.

25. On 1 September 2000, the court of Bermuda appointed Mr Fan and Mr Damien Hodgkinson (also of Nelson Wheeler) joint provisional liquidators with Mr Christensen.

26. On 29 September 2000, the companies were wound up in the Bermudan courts.

Appointment of liquidators by court of Bermuda

27. On 7 February 2001, there was a hearing in the court of Bermuda of an application for the appointment of the joint provisional liquidators (viz. Christensen, Hodgkinson and Fan) as permanent liquidators. This was heard together with a counter-application for their removal and for the appointment of the Official Receiver of Bermuda as liquidator.

28. On 16 March 2001, the Chief Justice of Bermuda gave judgment concluding that "in the eyes of a reasonable observer the joint provisional liquidators have performed their duties to the general advantage of persons interested in the winding up and should be allowed to continue to do so". He made an order appointing Christensen, Hodgkinson and Fan as liquidators and dismissed the application for their removal.

29. I have been told that an appeal has been lodged against this judgment and I have noted the points which are said will be taken upon it. No date however has yet been set for the hearing of the appeal.

Position in Hong Kong

30. The position in Hong Kong was complicated by the application for the appointment of special managers, which was eventually withdrawn by the Official Receiver after a judgment was handed down on 4 October 2000. Since that judgment was handed down in open court, it is not necessary for me to summarize it here.

31. After October 2000, meetings of creditors and contributories were held in connection with the appointment of liquidators for the companies. The latest meeting was in February 2001.

Akai

32. At the Akai creditors' meeting, 62% of the creditors in value voted in favour of appointing Christensen, Hodgkinson and Fan, with 38% voting in favour of Kennic Lui, Lauren Lau and Ruby Leung of Kennic L.H. Lui & Co., a local accountancy firm.

33. At the Akai contributories' meeting, 15 contributories were present. Ten abstained. Of the shares represented, 70% of the vote was in favour of Lui, Lau and Leung (of Kennic Lui), with apparently more than 67% of the votes cast coming from one company called Blossom Assets Ltd.

Kong Wah

34. At the Kong Wah creditors' meeting, 84% of the creditors in value voted in favour of Christensen, Hodgkinson and Fan. No other liquidators were proposed.

35. At the Kong Wah contributories' meeting, the two contributories who controlled the entire shareholding of the company voted that the Official Receiver should be liquidator.

Applications before the Court

36. These different determinations of the meetings led to these applications to Court to decide the differences. On 23 March 2001, I gave directions to the Official Receiver to advertise the hearing under Rule 45(3) W-Up Rules. An advertisement was published by the Official Receiver on 20 April 2001.

37. At the hearing, submissions were made on behalf of the Official Receiver, by leading counsel for the petitioning creditors and by leading counsel for Crescent Court Enterprises Ltd.

38. Crescent Court is a creditor of Akai. Apparently Crescent Court took an assignment of a debt due from Akai to a bank called Unibank in December 1999 although it was not until October 2000 that it notified the Bermudan provisional liquidators of the assignment. It is not disputed that it is connected with Grande.

39. The petitioners urged the Court to appoint Christensen, Hodgkinson and Fan. Crescent Court argued against this appointment. It has no "favourite" alternative candidate, and it has nominated Lui, Lau and Leung simply to avoid criticism that it had not put forward an alternative.

40. The Official Receiver's position as provisional liquidator is that whilst he has no reason to oppose the appointment of either Christensen, Hodgkinson and Fan or Lui, Lau and Leung, both being Panel A members, he considers that there would be advantages in appointing Christensen, Hodgkinson and Fan as he has been co-operating with them in their capacity of Bermudan provisional liquidators and in the course of that co-operation, has noted "their expertise, perseverance and commitment in this most difficult of liquidations".

Principles

41. It is common ground that the Court has a wide discretion when appointing liquidators. It is not bound by the determinations of the meeting of the creditors or of the meeting of contributories, although the Court would of course have due regard to those determinations. Nor is the Court bound by the decision of the Bermudan court, although the effect of the nationality by incorporation principle is that the Hong Kong liquidation is ancillary to the principal Bermudan liquidation.

42. In deciding whom to appoint as liquidators, the Court considers what is in the best interests of all persons interested in the winding-up.

43. Naturally any appointment that would result in a saving in the time and costs of investigating the companies' affairs should be preferred. This consideration hardly needs articulation, but it has to be emphasized in the present cases, where much money has already been lost to creditors (with the proofs of debt accepted for voting purposes amounting to more than $3,000m.) and where a great deal of time has been taken only to get to this stage of the liquidation process in Hong Kong. It is now 1 year and 4 months since the petitions were presented.

Benefits of appointing Christensen, Hodgkinson and Fan

44. With the above in mind, it is clear that Christensen, Hodgkinson and Fan would be the natural choice as liquidators. They have been involved as provisional liquidators in Bermuda for the past 8 months and they have been the Hong Kong agents for Mr Christensen for a similar period. There is an obvious advantage in appointing the same persons as liquidators in both jurisdictions because of the benefits (both in time and costs) of sharing information and co-ordinating investigative and other activities.

45. To date, Christensen, Hodgkinson and Fan have, in their capacity of initially Bermudan provisional liquidators and now Bermudan full liquidators, conducted an "intensive review" of Akai's books. They have liaised with overseas associates in connection with reviews of European sales and distributions operations and valuations of Japanese assets. They have also been in contact with lawyers concerning litigation in the United States. Directors have been put in place on the boards of many subsidiaries all over the world.

46. Christensen, Hodgkinson and Fan are thus high up on the "learning curve" of these companies' affairs. By contrast, any responsible liquidators coming on board only now would obviously have to take time and expend costs in acquainting themselves with the companies' affairs and possibly having to put new people into place. Some sort of protocol would also have to be agreed and established with the Bermudan liquidators for matters affecting both sets of liquidations.

47. Christensen, Hodgkinson and Fan also have an international network by reason of the RSM connection, said to be the 8th largest accounting and consultancy organization in the world. With the "Big 5" conflicted out, an established international network such as that enjoyed by RSM members would surely be of assistance in these liquidations which require international logistical support.

48. It should also be noted that Christensen, Hodgkinson and Fan have the confidence of the majority of creditors. This is important when there is little in the way of assets in the companies, so that the process of liquidation will have to be financially supported by funds raised from creditors.

49. Against this analysis of the substantial benefits that would be gained from the appointment of Christensen, Hodgkinson and Fan, I consider the objections that have been raised by Crescent Court.

Objections by Crescent Court

50. The objections can be listed as follows:-

(1) there is an appearance of a lack of independence and impartiality of Christensen, Hodgkinson and Fan

(2) Christensen, Hodgkinson and Fan have breached the scope of their authority in the Bermudan liquidation and have been in breach of a section in the Hong Kong Companies Ordinance

(3) Christensen, Hodgkinson and Fan lack experience and expertise.

Breach of authority and of Companies Ordinance

51. I will deal with this objection first as a matter of convenience. The first point concerning authority is that although the Bermudan court had appointed Mr Hodgkinson to act jointly, and not jointly and severally, as provisional liquidator, he had thereafter done certain acts on his own and had signed some letters in which he is described (clearly in error) as "joint and several" provisional liquidator.

52. His response to that on affidavit is that the joint provisional liquidators were in regular weekly telephone contact and agreed on the strategic direction of the provisional liquidation. Each had been consulted in respect of acts taken, save where time zone constraints had made that impossible, when reports were made at the earliest practicable opportunity and actions were ratified. In my view, that is an adequate explanation. There was no breach of authority. I would add that the appointment as liquidators in March 2001 was as joint and several liquidators.

53. As for the letters Mr Hodgkinson has signed, this objection is not of great consequence. Of course Mr Hodgkinson should have been more careful in checking how his position is typed in his correspondence, but this is a matter of form rather than of substance. What is important is that no breach of authority has been shown as far as actions or decisions are concerned. There is another point concerning authority which will be dealt with in a latter part of this decision.

54. As for the point of breach of the Companies Ordinance, this has arisen from the appointment of a BVI company with no registered office or place of business in Hong Kong as company secretary for eight Hong Kong companies. This was in breach of s.154(2) CO but the matter has apparently been rectified. Mr Hodgkinson has referred to this as an "administrative oversight". In any event, it would appear to be no more than a technical error of no real significance.

Lack of experience and expertise

55. Apart from the points arising from the description of "joint and several" provisional liquidators and the technical error referred to in the preceding paragraph, which I have dealt with above, Crescent Court has criticized Christensen, Hodgkinson and Fan for not reporting in advance of the 1st creditors meeting of Akai and for abandoning certain claims overseas, including claims against the Singer group of companies in the United States and against the Graeme group. The latter has also led to an accusation by Crescent Court of lack of authority.

56. I shall first deal with the criticism that there was no report in advance. This has been explained by Mr Hodgkinson in paragraph 29 of his affidavit. He has explained that one of the reasons why the report could not be provided in advance was because progress has been impeded by the lack of co-operation from companies and individuals connected with the Akai group. I have been taken to correspondence written by the Bermudan provisional liquidators asking for meetings with various individuals, which have not been successful. Attempts to obtain information from Toyo, Tremendous Springs and Grande have also been unsuccessful. It is apparent that this liquidation is an extremely challenging one and I do not consider it an indication of lack of experience or expertise by reason only that no report had been provided in advance of the meeting.

57. As for the abandonment of claims, it is apparent that these are extremely complicated areas of mixed law and fact, the law including foreign law. The claims are at different stages of litigation and it would be necessary to consider the opinions of foreign lawyers as to the merits or demerits of particular claims. There is also the question of funding. For instance, in the Singer claims in the US Bankruptcy Court, a payment into court of US$8m. was required. It has not been suggested by Crescent Court that these funds were available. The abandonment of the claim has also been approved by the Chief Justice of the court of Bermuda, and it would appear that there was no limit on the provisional liquidators' powers under the terms of appointment in Bermuda.

58. It is not for this Court in an application of this nature to go into such complex factual and legal problems. If it is to be suggested by Crescent Court that Christensen, Hodgkinson and Fan have been 搃ncompetent" in their handling of these matters, that would have to be clearly shown. I am far from being persuaded that that is so on the materials before me now.

Appearance of lack of independence and impartiality

59. It is well-established that liquidators should not only be independent and impartial, but should also be seen to be so. Any conflict of interests or even over-familiarization should be discouraged. On the other hand, it is not every connection or action that can give rise to an allegation of an appearance of lack of independence and impartiality on which the Court should act.

60. Crescent Court's allegations in this regard can be summarized as follows:-

(a) Nelson Wheeler had been engaged by the petitioning creditors in February/March 2000 at a discounted fee of $100,000 as "investigative accountants";

(b) Nelson Wheeler were appointed provisional liquidators in Bermuda even though the judge in Hong Kong had concerns about their proposed appointment as special managers here;

(c) Standard Chartered Bank ("SCB") had entered into a funding agreement on the basis that Christensen, Hodgkinson and Fan (and any other persons reasonably acceptable to SCB) would be appointed, and a set-off by SCB may have to be investigated in the liquidation process;

(d) the Bermudan provisional liquidators had called a meeting of bank creditors in Hong Kong without inviting non-bank creditors.

61. When properly analysed, these allegations are not sufficient to cause me to appoint liquidators other than those resolved upon by the majority at the creditors' meetings (viz. Christensen, Hodgkinson and Fan) and who, by reason of the force of circumstances set out above, are the natural choice.

62. As for (a), Mr Hodgkinson has sworn on affidavit that Nelson Wheeler's role in February/March 2000 was limited to performing research of publicly available information. As a result of an advance agreement on fees, a lump sum of $100,000 was contracted.

63. The advisors to the steering committee, which included the petitioning creditors, on the restructuring proposal were not Nelson Wheeler, but Ferrier Hodgson CPA.

64. In my view, the remit to gather publicly available information is not such a relationship as should lead to a proper perception that Christensen, Hodgkinson and Fan, if appointed as liquidators, would be partial to the petitioning creditors.

65. As for (b), the court of Bermuda had been informed of the views expressed by the judge here. Possibly as a result, Mr Wong (whose experience had been questioned by the judge here as he had been on Panel A for only 2 years) was not appointed. Mr Hodgkinson has had 11 years of experience in insolvency work both in Hong Kong and abroad. This Court must respect this decision of the court of Bermuda.

66. I do not see how the petitioning creditors' decision to apply to wind-up the companies at their places of incorporation should impact negatively on the integrity or independence of the proposed liquidators, or anyone's perception of them.

67. As for (c), the provisions of the funding agreement have been considered in detail. It was executed on behalf of Christensen, Hodgkinson and Fan as Bermudan provisional liquidators after obtaining the sanction of the Bermudan court which considered it in the light of the Hong Kong judge's comments.

68. Even apart from that, I do not see any difficulties with the terms of the funding agreement save one provision with which I had some difficulty. This was cl. 6.1.2(b) which was not well drafted. There is obviously an error in the typing, but apart from that, the word "reports" is ambiguous. If it was intended to include confidential reports, then this was a clause which independent liquidators should not have agreed to. However, I am told that this was not so, whether in intention or execution and this was not challenged by leading counsel for Crescent Court.

69. As for the funding, it is well-established that the fact that a creditor is funding the liquidation (or even only specific parts or steps in the liquidation) is not a reason for criticism. Indeed it has been accepted that "where a company is being wound up and it has no assets, or insufficient assets, to enable the due processes of the liquidation to be carried through, a creditor is to be encouraged, rather than criticized, in making funds available to the liquidators. Nor need a liquidator be diffident in accepting funds or indemnities from creditor so as to enable a winding-up to proceed" (Re Allebart Pty Ltd [1971] 1 NSWLR 24, 28).

70. So the fact that a creditor is funding the liquidators does not mean that liquidators are "in the pocket", or would be properly perceived to be "in the pocket" of a creditor. Nor the fact that a creditor would only fund certain liquidators. A creditor who has already lost his money is reasonably expected to be careful that he is not throwing good money after bad. He is entitled to make sure that the funds are not wasted and to be vigilant that the liquidators who will be expending the funds are worthy of his confidence. In my view it was reasonable for SCB to provide that Christensen, Hodgkinson and Fan and, importantly, "any other persons reasonably acceptable to SCB" would be appointed. That does not make them beholden to it.

71. Of course the court must be alert to see if, in the process of accepting funding, the liquidator would be (or might be perceived to be) surrendering his independence in any way.

72. Re Goodway Ltd [1999] 1 HKC 141 was a case where there was considerable sensitivity and distrust between two creditors, and the liquidators' own remuneration, even though approved by the rest of the creditors, was at the mercy of the funding creditor.

73. The present funding agreement does not disclose control by SCB of the actions of the Bermudan provisional liquidators. The control is of costs rather than actions or decisions. If a creditor can restrict his funding to specific steps in the liquidation, I do not see why he cannot require a liquidator to inform him what the money is needed for, so long as the liquidator is free to act as he thinks fit and is free to get funding from elsewhere. This would include getting costs to pursue SCB if there is a case of possible fraudulent preference as Crescent Court suggests.

74. Indeed, in the present case, the Bermudan provisional liquidators did call a meeting of bank creditors to attempt to get further funding. This takes me to (d). On 15 September 2000, the Bermudan provisional liquidators called a meeting to be held on 25 September 2000 to hear the report of the provisional liquidators and to discuss funding. This is clear from the Agenda which lists "funding and budget requirements".

75. Crescent Court's complaint is that it and other non-bank creditors were not invited to the meeting. There is nothing in its complaint that it was not invited because at that time it had not yet notified the provisional liquidators of the assignment of the debt from Unibank to it. Unibank was invited to the meeting.

76. As for the other non-bank creditors, the reason given by the Bermudan provisional liquidators was that the meeting was to discuss funding, and it was not anticipated that non-bank creditors would have either the interest or the resources to provide funding. In any event, the report given to the bank creditors on 25 September 2000 was identical to that given to all the creditors at a meeting the next day.

77. In my view, it would have been more prudent for the Bermudan provisional liquidators to have informed all creditors of their meeting with the bank creditors and of the purpose of that meeting. However, as it was not unreasonable for them to think that non-bank creditors would not be interested and importantly, in light of the fact that the report given was identical to that given to all creditors the next day, I accept that their failure to do so should not lead to a perception that they are biased towards bank creditors only.

Conclusion

78. In conclusion, in the exercise of the Court's discretion having considered the matters set out above, I would appoint Christensen, Hodgkinson and Fan as liquidators of both Akai and Kong Wah.

79. As a matter of completeness, I would only add that the suggestion of leading counsel for Crescent Court that the Official Receiver should be the liquidator or should remain provisional liquidator, appointing special managers ad hoc to deal with specific areas or claims is impracticable. This liquidation needs to be tightly run and efficiently managed. With no disrespect, I cannot see how such an ad hoc process managed by an office which has admitted to a lack of manpower or expertise could achieve that.

80. Finally there is the matter of the composition of the Committee of Inspection. No evidence was adduced or submissions made on this aspect. I have considered the reports of the Official Receiver relating to the determinations of the respective meetings.

81. For Akai, I would appoint HSBC, Bank of Scotland, SCB (having the largest number of votes in favour than votes against at the creditors' meeting). There were no nominations at the contributories' meeting.

82. For Kong Wah, I would appoint similarly HSBC, Bank of Scotland, SCB (being the 3 members nominated at the creditors' meeting) and the majority contributory to the Committee of Inspection.

83. I will hear counsel on the issue of costs at a date to be fixed.