THE OFFICIAL RECEIVER v. STEVEN TODD KRAUSE

HCMP 531/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 531 OF 2008

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J U D G M E N T

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1.  This is an originating summons taken out by the Official Receiver on 25 March 2008 against Steven Todd Krause, the sole liquidator of Well Bond Group Limited (“Well Bond”) and Rainbow Gate Limited (“Rainbow Gate”) pursuant to section 168G(1)(b) of the Companies Ordinance, Cap. 32.  The Official Receiver seeks a disqualification order against the respondent on the ground that he has acted in clear breach of his duties as the liquidator of the companies, justifying a disqualification order.  The effect of a disqualification order is that the respondent shall not, without leave of the court, be a company director, a liquidator, a receiver or manager of a company’s property, or in any way be concerned or take part in the promotion, formation or management of a company, for a period as specified in the order.

2.  There is no decided case in Hong Kong regarding an application for a disqualification order under section 168G(1)(b).  I understand there are very few decided cases regarding an application under section 4 of the Company Directors Disqualification Act 1986, upon which the Hong Kong legislation is based.

3.  Section 168G(1) provides as follows:

“The court may make a disqualification order against a person if, in the course of the winding up of a company, it appears that he –

(a)     has been guilty of an offence for which he is liable (whether he has been convicted or not) under section 275; or

(b)     has otherwise been guilty, while an officer or liquidator of the company or receiver or manager of its property, of any fraud in relation to the company or of any breach of his duty as such officer, liquidator, receiver or manager.”

4.  The power to make a disqualification order under this provision is discretionary, not mandatory, unlike section 168H, which is concerned with directors of insolvent companies unfit to be concerned in the management.

5.  For the discretion to be exercised in the present situation, the court must be satisfied that the respondent, as the liquidator of the companies, has been guilty of a breach of his duty as the liquidator of the companies.

6.  I turn to the evidence adduced by the Official Receiver in support of this application.

7.  The originating summons, the Official Receiver’s  report and the order of a Master at the first hearing were served on the respondent by post at his last known address at the material time.  The documents sent by post have not been returned undelivered.  On 15 August 2008, the hearing bundles and the Official Receiver’s submission were delivered to that address and received by the respondent’s secretary.  On 20 August 2008, the Official Receiver received a fax of the same day which bore the respondent’s signature stating that with effect from 1 August 2008, International Consulting Services (Asia) Limited (the respondent is a shareholder and director of this company) “will move” to an address in Wanchai which was previously used by him.  The respondent has not filed any evidence in this application or an acknowledgement of service.  He has not appeared at the hearing today.

8.  Well Bond was wound up by the court on 29 July 1998 in HCCW No. 389 of 1998.  Rainbow Gate was wound up by the court on 7 October 1998 in HCCW No. 593 of 1998.

9.  The respondent and Geoffrey Alan Bourne were appointed as joint and several liquidators of Well Bond without a committee of inspection on 27 October 1998, and they were appointed joint and several liquidators of Rainbow Gate without a committee of inspection on 27 November 1998.  Mr Bourne passed away in April 1999.  Ms Tang Lai Yuk was appointed in his place as liquidator of Well Bond, she resigned and the respondent continued to act as the sole liquidator of both companies.

10.  The Official Receiver applied for the respondent’s removal as the liquidator of Well Bond on 27 September 2006 and of Rainbow Gate on 26 October 2007, as a result of serious misconduct and breach of duties on his part.  The respondent did not appear at the hearings of the applications for his removal, nor has he filed any evidence.  An order for his removal as the liquidator of Well Bond was made on 1 December 2006, and for his removal as the liquidator of Rainbow Gate on 20 December 2007.  I refer to the decisions I gave in HCCW No. 389 of 1998 on 1 December 2006 and in HCCW No. 593 of 1998 on 20 December 2007 for the detailed reasons why the orders were made.

11.  In the present application, the Official Receiver relies on the various breaches of duties of the respondent as the liquidator of the companies as stated in the reports filed in the applications for the removal orders.  These breaches were summarized in paragraph 6 of each of the decisions I gave in those applications.

12.  In respect of Well Bond, the breaches were that the respondent had:

(1)     failed to submit liquidator’s accounts in accordance with section 203(1) and failed to furnish the Official Receiver with information regarding the liquidator’s accounts in accordance with section 203(3);

(2)     failed to provide security to the Official Receiver in accordance with section 195;

(3)     failed to comply with the orders made on 30 October 2002 and 4 May 2006 upon the application of the Official Receiver under section 204;

(4)     failed to take effective steps to declare and distribute dividends to creditors in accordance with rule 142 of the Companies (Winding-up) Rules;

(5)     failed to cause to be filed with the Registrar of the court a verified statement of affairs in accordance with rule 39(1) and a list of proofs of debt in accordance with rule 101;

(6)     failed to proceed with the liquidation with reasonable expedition;

(7)     failed to forward to the Official Receiver reports on the position of the liquidation of the company in accordance with rule 162(1); and

(8)     persistently ignored enquiries raised by the Official Receiver in the exercise of his functions and powers under Cap. 32, and the reminders.

13.  Further, the respondent has failed to comply with paragraphs 8 to 12 of the removal order in relation to Well Bond in that he:

(1)     failed to submit an application for the approval of the court of the disbursements within 2 months of the date of the order;

(2)     failed to return to the Official Receiver for payment to the Companies Liquidation Account the interim payment on account of the total sum of $716,353.11 less the approved disbursements;

(3)     failed to submit to the Official Receiver:

(i)    the liquidator’s account from 29 January 2004 onwards;

(ii)    the bank accounts maintained by the respondent and the Companies Liquidation Account;

(iii)   a certified copy of the bank statement up to 14 days from the date of the order;

(4)     failed to pay to the Companies Liquidation Account all the cash balance of the company held by him; and

(5)     failed to pay to the Official Receiver his costs of $83,000 in the application for the order on 1 December 2006.

14.  In respect of Rainbow Gate, the respondent’s breaches were that he had:

(1)     failed to pay to the Companies Liquidation Account monies received by him as liquidator in excess of $10,000 in accordance with sections 202(1) and (2);

(2)     misapplied assets of the company for unlawful payment of his fees and disbursements of $72,078.82 without first seeking approval of the court on the liquidator’s bill as required by section 196(2)(b) and without observing the priority of payment of the Official Receiver’s fees estimated at about $17,997 prescribed under rule 179;

(3)     failed to submit liquidator’s accounts after 7 October 2002 in accordance with section 203(1);

(4)     failed to send to the Official Receiver reports after 6 October 2002 on the position of the liquidation of the company in accordance with rule 162(1);

(5)     failed to proceed with the liquidation with reasonable expedition which is still pending to date;

(6)     persistently failed to respond to enquiries raised by the Official Receiver in the exercise of his functions and powers under Cap. 32, and the reminders; and

(7)     failed to comply with the order made on 30 October 2002 upon the application of the Official Receiver under section 204.

15.  Further, the respondent has failed to comply with paragraphs 5 to 10 of the removal orders regarding Rainbow Gate in that he:

(1) failed to pay to the Companies Liquidation Account all the cash balance of the company held by him;

(2) failed to submit to the Official Receiver:

(i)    the liquidator’s account from 7 October 2002 onwards;

(ii)    a copy of the cash books from 7 October 2002 onwards for the current account and the Companies Liquidation Account;

(iii)   a certified copy of the bank statement of the current account;

(3)     failed to pay to the company interests for two periods of retention of money from 7 April 2001 and 9 February 2002 respectively;

(4)     failed to make repayment to the company; and

(5)     failed to pay the Official Receiver’s costs of $44,000 in the application for the order on 20 December 2007.

16.  Pursuant to section 168P, the Official Receiver sent to the respondent a letter dated 26 February 2008 to his then last known address informing him of the Official Receiver’s intention to apply for a disqualification order against him.

17.  I hold it has been established to the satisfaction of the court that the respondent has been guilty of breach of his duty as the liquidator of Well Bond and Rainbow Gate.

18.  I am of the view that the breaches of duty are sufficiently serious in this case to warrant the exercise of the discretion in making a disqualification order.

19.  Notwithstanding warnings and opportunities given to the respondent since 2002, he had persistently failed to discharge his duties as the liquidator of the companies and to observe the requirements imposed on him by statute.  The court orders made against him were quite simply ignored, with no explanation from him.  He has been removed as the liquidator of the companies on the basis that he is not a fit and proper person to act as such.

20.  For the protection of the public, it is appropriate that a disqualification order be made against him so that he would not, without the leave of the court, be a liquidator or be otherwise concerned in the management of a company for a specified period.

21.  Under section 168G(2), the maximum period of disqualification is 15 years, the same as a disqualification order under section 168H(4).  Unlike section  168H(4), there is no minimum period.

22.  I will follow the guidance in Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 at 174 and divide the disqualification period into 3 brackets, notwithstanding that is a case concerning a disqualification order made under the equivalent of our section 168H, as the maximum period in both instances is 15 years.

23.  So for very serious cases, the top bracket is over 10 years.  For cases that are relatively not very serious, the minimum bracket is 5 years or below.  The middle bracket is from 6 to 10 years and is for cases that do not merit the top bracket.

24.  The Official Receiver has urged for the middle bracket, there being no mitigating factor in this situation.  I am inclined to agree.  Taking into account all the circumstances, 6 years would be an appropriate period of disqualification.

25.  It was held in Re Gower Enterprises Ltd (No. 2) [1995] 2 BCLC 201 that the word “or” between section 1(1)(a) to (d) of the Company Directors Disqualification Act, equivalent to our section 168D(1), is intended to be conjunctive, with the consequence that a disqualification order is one that disqualifies a person from holding any of the offices mentioned in the provision.  The same consequence would apply to a disqualification order in section 168D(1) made in an application under section 168G(1).

26.  I make a disqualification order against the respondent for a period of 6 years effective from the beginning of the 21^st day after the day on which this order is made.

27.  I order the respondent to pay the Official Receiver’s fees in this application which I have assessed on a gross sum basis at $102,720.