THE JOINT & SEVERAL LIQUIDATORS OF KONG WAH HOLDINGS LTD (IN LIQUIDATION) v. HERBERT TSOI & PARTNERS (a firm) AND ANOTHER

HCCW 49/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 49 OF 2000

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AND

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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D E C I S I O N

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The applications

1.  I have before me two identical summonses issued on 19 August 2004 by the liquidators of Akai Holdings Limited and Kong Wah Holdings Limited (“Akai”, “Kong Wah”, and collectively “the Companies”) under section 221 of the Companies Ordinance, Cap. 32 against a firm of solicitors, Herbert Tsoi & Partners (“the 1^st respondent”), and a partner therein, Mr Tsoi Hak Kong Herbert (“the 2^nd respondent”), for disclosure of documents in relation to professional services rendered by the 1^st respondent to the Akai group of Companies and the Kong Wah group of companies (they are to include subsidiaries and associated companies), and for an order to examine the 2^nd respondent on oath.  A large measure of agreement has been reached since the summonses were issued, and a consent order was made on 5 November 2004 in respect of what the parties were able to agree.  The only issues outstanding relate to documents sought for some of the companies which are no longer the subsidiaries of the Companies and the question of costs of these applications.

The background

2.  Both Akai and Kong Wah were listed on the Hong Kong Stock Exchange, they are part of the Semi-Tech Corporation (“STC”) group.  STC was listed on the stock exchanges in Toronto and New York until 1999.

3.  The founder of STC, James Ting was the director and chairman of each of the Companies when they were wound up on 23 August 2000 in Hong Kong.  Mr Ting has also been the executive director or director of The Grande Holdings Limited (“Grande HK”) and Toyo Holdings Limited (“Toyo”).

4.  Investigation of the liquidators has indicated that major assets once owned by the Companies are now owned or controlled by Grande HK or companies associated with Grande HK.  Grande HK now claims to own an estimated value of at least US$700 million of assets once owned by the Akai Group.

5.  I have gone into the background of the Companies, the events leading up to the winding up of the Companies, their financial position upon liquidation, and areas that require investigation in my Reasons for Decision given on 11 November 2003 in a similar application of the liquidators against Ernst & Young, the former auditors of the Companies.  I do not propose to repeat them.  There are numerous and substantial transactions and events which the liquidators require further investigation.

6.  The liquidators’ investigations were hampered by the lack of available books and records of the Companies, limited assistance from the former directors and officers, and lack of financial resources to complete their investigations.  The Companies had no staff or premises or business when they were wound up; the books and records which the liquidators have managed to locate were clearly insufficient for an operation of the size and complexity of these groups of companies, and the books available were unable to give even a basic understanding of the Companies and their operations.

The respondents’ involvement

7.  The 1^st respondent commenced business in 1999.  It acted as a legal adviser to Akai, members of the Akai Group and Kong Wah in relation to various matters, including litigation and legal advisory matters.

8.  The 2^nd respondent, who is a partner of the 1^st respondent, also acted as a non-executive director of Grande HK since at least 15 January 1999.

9.  In response to the liquidators’ previous request on 24 October 2001, the 1^st respondent had provided the liquidators 10 lever arch files in December 2001, in relation to a legal proceeding in which the 1^st respondent had acted for Kong Wah.

10.  As a result of the review of files recently obtained by the liquidators from Ernst & Young, the liquidators became aware that the 1^st respondent was also involved in providing legal opinion to Akai regarding various properties in the Mainland held by the Akai Group on 6 December 1999.  However, this was not mentioned when the 10 lever arch files were provided in December 2001.

11.  Due to the paucity of books and records available to the liquidators, they did not know the full extent of the services provided by the 1^st respondent to the Akai Group.  The liquidators did know however that the 1^st respondent was engaged in providing legal services to the Akai Group since at least 1999, when significant activity and numerous transactions were undertaken by the Companies.

Previous requests for assistance

12.  On 25 March 2004, the liquidators wrote to the 1^st respondent noting that despite the previous assistance of the 1^st respondent, they had not provided copies of other documents relating to other services provided for the Akai Group and requested to review the files for the transactions of properties in the Mainland in the 1^st respondent’s office to identify relevant documents.

13.  An informal response was received on the telephone in April 2004 that the files were being retrieved.  However nothing happened thereafter.  On 10 June 2004, the liquidators sent a follow up letter to the 1^st respondent requesting delivery of all documents or information relating to the Akai Group which should include the categories of documents set out in that letter.

14.  On 18 June 2004, the 1^st respondent replied stating that the disclosure sought was onerous, unreasonably wide and would lead to breach of client confidentiality.  The 1^st respondent further claimed a lien on the papers of the Companies on account of unpaid costs and expenses.

15.  On 28 June 2004, the liquidators replied by their solicitors stating that the documents sought are necessary for the liquidators to properly discharge their statutory duty and giving grounds why the liquidators believe that the 1^st respondent is in a position to materially assist their investigation.  The categories of documents for which disclosure was sought were listed in the letter.  A request was also made to interview the 2^nd respondent on a voluntary basis.  In the event that voluntary assistance was not forthcoming the liquidators would apply under section 221.

16.  On 30 June 2004, the 1^st respondent replied reiterating that the disclosure sought was unreasonably wide in that the liquidators have not pointed to which relevant cases or transactions they wanted to investigate and complaining that the request for assistance was made without providing for their fees in answering the request.  The 1^st respondent offered to allow the liquidators to attend their office to review two files they have retrieved.

17.  On 9 July 2004, the liquidators’ solicitors explained why the liquidators cannot identify specific transactions in this large and complex insolvency due to the unavailability of adequate records.  They suggested that the 1^st respondent should make available a list of all the files or matters handled by them for the Akai Group so that the liquidators would be able to narrow down what files they would need to review.  The liquidators agreed to pay the photocopying charges of the documents but not the time costs of the 2^nd respondent in attending the interview with the liquidators.

18.  On 14 July 2004, the 1^st respondent asked the liquidators’ solicitors for a list of the companies that the liquidators consider are within the Akai Group before they were to consider the request made in the letter of the liquidators’ solicitors of 9 July 2004.

19.  A list of 5 pages of these companies headed “subsidiaries”, which is not exhaustive, was provided by the liquidators’ solicitors on 20 July 2004.

20.  The 1^st respondent replied on 23 July 2004 stating that the 1^st respondent could not have any of the information the liquidators requested from January 1997 up to the commencement of their practice, and as the 2^nd respondent would be on vacation, he could only review all the files in September 2004.

21.  On 26 July 2004, the liquidators’ solicitors asked if any member of the 1^st respondent’s firm had done work for the Akai Group before the commencement of practice of the firm, whilst noting that this was the third time the liquidators were asking if the 1^st respondent would assist on a voluntary basis.

22.  No substantive reply was given up to the time the summonses were issued on 19 August 2004.

The Respondents’ position

23.  In the 2nd respondent’s affidavit filed in opposition to these summonses on 20 October 2004, he stated that the 1st respondent “does not object in principle to production of documents of companies in the Akai Group”, “provided that such companies are identified and that they have remained wholly owned subsidiaries of Akai Holdings or Kong Wah Holdings”.

24.  He pointed out that the list provided by the liquidators’ solicitors to the 1^st respondent in July 2004 is not exhaustive, and consisted only of subsidiaries.  The liquidators have not provided a list of associated companies in the Akai Group.

25.  It was only in mid October 2004 that progress was made with a view to resolving this application and consent summonses were signed by the liquidators and the 1^st respondent in respect of 9 companies in the Akai Group.  As the 2^nd respondent is now willing to attend an interview with the liquidators, it was agreed to adjourn sine die with liberty to restore the application for an order to examine him on oath.  The order by consent was made on 5 November 2004.

26.  Apart from the costs of the summonses, there was only one major outstanding matter, this related to the companies which were once subsidiaries in the Akai Group but no longer so.  There are 3 such companies for whom the 1^st respondent had acted.  They are Akai Electric Company Limited (“AECo”), Guestlink International Limited (“Guestlink”) and Sansui Acoustics Research Corporation (“Sansui Acoustics”).  In respect of a fourth company, Serlen Limited (“Serlen”), it would appear that the liquidators’ solicitors have provided wrong information to the 1^st respondent’s solicitors in October 2004 as to its status and that Serlen has remained a subsidiary in the Akai Group.  The 1^st respondent indicated on 9 November 2004 they are willing to disclose documents relating to Serlen.  Leaving aside the question of costs, I will make a consent order in the same terms as the consent order on 5 November 2004 in respect of the documents of Serlen, save that the time for the production of documents in paragraph 1 thereof would be altered to “by 7 December 2004”.

27.  The 1^st respondent confirmed that other than the 13 companies referred to above, they are not aware of any other companies for whom they have acted and which formed or had formed part of the Akai Group.

The former subsidiaries

28.  AECo was a major operating subsidiary of Akai.  Akai acquired 55% shares in this company in 1999 and this was increased to 74.4% in April 1999.  As a result of various transactions, Akai’s shares were reduced to 38.1% in March 2000.

29.  Guestlink was 99.99% held by a company incorporated in the British Virgin Islands which was in turn a subsidiary of Akai.  On 6 December 1999, Akai purportedly entered into a series of share mortgages and assignments, as a result of which its indirect interest in Guestlink was transferred to Tremendous Springs Limited (“TSL”), a wholly owned subsidiary of Akai.  Further, as a result of the enforcement of the purported share mortgage to Toyo, Akai lost control of TSL and hence Guestlink on 6 December 1999.  The share mortgages to TSL and to Toyo are among the matters that the liquidators would wish to investigate.

30.  Sansui Acoustics, a company incorporated in the British Virgin Islands, is believed to be a subsidiary of Sansui Electric Company Limited (“Sansui Electric”).  Akai held a substantial equity interest in Sansui Electric from 1992 to 1999.  Very little is known about Sansui Acoustics.

31.  The 1^st respondent took the view that in relation to these former subsidiaries, consent for release of their documents must be obtained from them.

32.  The 1^st respondent also provided the information that work was carried out by them for these companies after they were no longer subsidiaries in the Akai Group, according to the dates as provided by the liquidators’ solicitors.

33.  The 1^st respondent’s solicitors have written to these companies requesting consent for release of their documents.  A copy of each of the summonses was enclosed, the transaction for which the 1^st respondent had acted for the company concerned was summarised in the appendix attached, and the companies were informed of the hearing date of the summonses and requested to respond well before the hearing date.  They were also told that the 1^st respondent has no objection to assisting the liquidators.

34.  No response has been received from Guestlink to date.  AECo and Sansui Acoustics wrote on 10 November 2004 stating that they do not consent to the 1^st respondent complying with the order sought in the liquidators’ summonses, before the liquidators have identified and particularised the relevance of any of the documents owned by them.  The replies of AECo and Sansui Acoustics were received by the 1^st respondent’s solicitors on 16 November 2004 and provided to the liquidators’ solicitors on the same day.

35.  For the documents sought from the 1^st respondent in respect of their professional services rendered for these 3 former subsidiaries, it seems to me that the proper way to proceed is to join them as respondents to the summonses, as no exceptional circumstances have been made out why the application should proceed in their absence (see Morris v. Director of the Serious Fraud Office [1993] Ch 372 at 384B to E, 385B to D and 387F; Soden v Burns [1996] 1 WLR 1512 at 1529B to E, 1531F to G; Re Zhu Kuan Group Company Limited, HCCW No.874 of 2003, 3 November 2004, Barma J, paras 31 to 38).

36.  The liquidators have applied at the hearing today to amend their summonses to join the 3 former subsidiaries as respondents to the applications.  I have made an order giving leave to amend and adjourning the amended summonses to 8 December 2004.  I have further provided in the order that it is not necessary for the 1^st and 2^nd respondents to be further involved in the amended summonses, as their counsel has indicated that the 1^st respondent would abide by whatever order the court may make regarding these 3 companies.

Wasted Costs

37.  In relation to Serlen, Mr Jenkin Suen who appeared for the 1^st and 2^nd respondents submitted that unnecessary costs have been wasted in relation to discovery of the documents of Serlen, as this company could have been dealt with by consent on 5 November 2004, but for the fact that the liquidators’ solicitors gave wrong information about the status of this company.  He sought an order that the liquidators should pay the respondents the wasted costs in relation to Serlen.  I think that must be right.  I order that the wasted costs for the documents sought relating to Serlen be awarded to the 1^st and 2^nd respondents against the liquidators.  I have assessed these on a gross sum basis at HK$4,000.00.

Costs of the summonses

38.  There was no agreement between the parties on the costs of the summonses, although the liquidators have agreed that in respect of the consent summonses there should be no order as to costs for that application alone.  I have set out in some detail the correspondence exchanged by the parties from March 2004 down to the time the summonses were issued on 19 August 2004.  It seems to me that much work could and would have been saved if the respondents had cooperated with the liquidators at the outset by responding in a more constructive manner to the request made on 9 July 2004, and made available to the liquidators a list of all the matters or files handled by them for the Akai Group so that the liquidators would be able to narrow down the scope of their request for disclosure.  I note that a complaint was made that the liquidators did not define what they meant by associated companies when they sought disclosure.  That complaint was raised however only in October 2004.

39.  The mere fact that the summonses were adjourned insofar as some of the documents sought related to 3 former subsidiaries is not a reason that the liquidators should not have the costs incurred for obtaining disclosure of documents of the 10 other companies.  The 1^st respondent has only agreed to give disclosure of these documents well after the summonses were issued, and after fruitless correspondence was exchanged for 4 or 5 months.

40.  The hearing today was needed in any event to resolve the question of costs.  The response of 2 of the former subsidiaries has come too late for the liquidators to bring them in as additional respondents for the hearing today.

41.  It was not feasible for the liquidators to notify the associated companies or other third parties for which they wish to seek disclosure until they were given a list of the companies for whom the 1^st respondent had acted.  This was only provided to them after mid October 2004.  The complaint made at the outset that the discovery was unreasonably wide is not in my view justified. 

42.  For the above reasons, I make the following order as to costs.  The costs of the summonses including the hearing today, save for the costs in respect of the consent order made on 5 November 2004, and save for the wasted costs relating to disclosure for the documents of Serlen, are to be paid by the 1^st and 2^nd respondents to the liquidators, to be taxed if not agreed.