THE OFFICIAL RECEIVER v. CHU WAI LING

HCMP 888/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 888 OF 2003

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J U D G M E N T

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I. Background

1. By an Originating Summons dated 28 February 2003 the Official Receiver ("the OR") applies for a disqualification order against the Respondent pursuant to Companies Ordinance (Cap. 32) ("CO") s. 168H.

2. Techwood Industrial Limited ("Techwood") was incorporated in Hong Kong on 6 August 1974. Techwood was wound up on 28 April 1999 on a Petition filed in HCCW 194 of 1999 ("the Winding-up") on 4 March 1999. The OR was appointed as Techwood's liquidator by Order dated 8 July 1999. The winding-up of Techwood was carried out on the OR's behalf by Messrs David C Ng & John J Toohey. The total proof of debt lodged with the OR in respect of Techwood's winding-up amounts to some $495,000. The OR has realised assets of $1,806.62.

3. The Respondent was appointed as a director of Techwood on 31 March 1988. At the time of Techwood's Annual Return made up to 31 December 1991, she held 3,800 shares in the company. Since the death in 1994 of Mr Chen Ming Ta (then Techwood's only other director) ("Mr Chen"), the Respondent has been Techwood's sole director.

4. Techwood held a corporate account with the Hotel Miramar ("the Hotel"). Techwood booked rooms with the Hotel for substantial periods in 1997:-

(1) for a Mr Lin Ya Jiu ("Mr Lin"), from 17 February to 11 March, 4 to 22 April, and 2 to 28 May; and,

(2) for a Mr Yoshitaka Mikami ("Mr Mikami"), from 25 February to 30 June).

Mr Lin was not a client of Techwood, but was Mr Chen's friend. Mr Mikami was Mr Lin's friend and was not known to the Respondent. The Respondent authorised the bookings for Mr Lin and Mr Mikami with the Hotel and agreed with the Hotel that Techwood would be liable for the expenses incurred by both.

5. The Respondent says that there was an agreement between her and Mr Lin that Mr Lin would settle the Hotel charges incurred by both Mr Mikami and himself with the Respondent in order to enable Techwood to pay the Hotel. Although contrary to this agreement Mr Lin did not pay the Respondent for Mr Lin's Hotel charges between February and April 1997, the Respondent still caused Techwood to accept liability for the subsequent Hotel bills of Mr Lin and Mr Mikami. The Respondent explains that she had little alternative as Mr Lin had told her that "he would be able to collect some payments and he would definitely get the money and leave". But (the Respondent accepts) Mr Lin showed the Respondent nothing concrete to prove that payment from him would be forthcoming.

6. As a result of the Hotel bookings, Techwood accrued a debt of $323,412.06 to the Hotel. Following a demand for payment by the Hotel's solicitors, in January 1998 a company named Great Ocean International Limited paid $4,800 of Techwood's debt to the Hotel. On 30 July 1998 the Hotel commenced HCA 12739 of 1998 ("the Action") against Techwood for the outstanding amount due to it. The Hotel obtained judgment for $318,612.05 on 23 November 1998. The judgment debt having been unsatisfied, the Hotel commenced the Winding-up proceedings.

7. The Respondent does not dispute that over $320,000 has not been paid to the Hotel. She instead claims that the Hotel wrote a letter to Techwood which led her to believe that the Hotel itself assumed responsibility for collecting all outstanding amounts from Mr Lin and Mr Mikami. The Respondent has not been able to point to such a letter among Techwood's documents. The OR invited the Respondent to look for the alleged letter among Techwood's records in the OR's possession. But the Respondent did not respond to the offer.

8. Among Techwood's records, there is a handwritten note dated 6 August 1997 to Techwood wherein Mr Frankie Cheung Ming Shum ("Mr Cheung") (the Hotel's credit manager) states that Mr Lin handed a note from Mr Mikami to the effect that overdue room charges would be paid in 3 days and, if not, the Hotel could institute legal proceedings. This note cannot be the one referred to by the Respondent as it cannot reasonably be construed as absolving Techwood from liability for the Hotel charges which Techwood accepted. Apart from the note, no document produced to the Court comes close to fitting the description of the letter alleged by the Respondent.

9. The Respondent purported to resign as Techwood's director on 4 December 1998 when she lodged a "Notification of Resignation of Secretary or Director" form ("the Notification") with the Companies Registry ("the Registry"). On 15 December 1998 the Respondent advised the Registry that Techwood, among other things:-

(1) ceased business on 1 April 1990; and

(2) "has no outstanding assets or liabilities, has no creditors and it is defunct".

The Respondent made this statement in connection with Techwood's application ("the Application") under CO s. 291AA¹ to be struck off from the Companies Register.

10. By a letter dated 5 January 1999 ("the IRD Letter") the Respondent wrote to the Inland Revenue on Techwood's behalf that "the Company has been terminated with effect from 15 December 1998 and to strike off the company". She also stated that "[t]he Company has no any Assets and Liabilities".

11. Despite the statements to the Registry and the Inland Revenue that Techwood had no liabilities, the Respondent should have been aware that the Hotel's charges remained outstanding and the Hotel had in fact obtained judgment against Techwood on 23 November 1998.

12. Ms Daisy Chan Bik Yee, a Treasury Accountant in the OR's office, has examined Techwood's records. She has summarised the results of her review in an affirmation. She states that Techwood does not appear to have a general ledger covering the period from 31 March 1990 onwards. No financial statements for the company are available as from 31 March 1991. There are therefore no accounting documents evidencing Techwood's financial position between 1 April 1991 and its winding-up.

13. From the records that are available, it seems that as at 31 March 1991 Techwood had fixed assets of $41,462 and current assets (rental and utility deposits and cash and bank balances) of $97,774. At the same time Techwood had current liabilities of $1,137,762, of which $1,130,762 constituted an amount due to a director. Although Techwood reported a turnover of $2,543,987 for the financial year ending on 31 March 1990, it apparently did not earn any revenue between 1 April 1990 and 31 March 1991. For the financial year ending 31 March 1991, Techwood had expenses (rent, stationery, depreciation, audit fee, etc.) amounting to $137,714.

14. Techwood's audited accounts for the year ended 31 March 1991 were qualified by its auditors (Messrs Morison Heng) thus:-

"We planned our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. However, the evidence available to us in respect of the following items included as current assets at March 31, 1991 was limited because we have been unable to obtain the information and explanations we considered necessary to satisfy ourselves as to their existence:-

(i) rental and utility deposits of HK$90,243

(ii) balances of cash and cash at banks of HK$7,531.

Accordingly, we are unable to satisfy ourselves that the amounts referred to in the immediate preceding paragraph are fairly stated in the balance sheet of the Company. There were no other satisfactory audit procedures that we could adopt to confirm that these amounts included in the accounts are fairly stated. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion.

OPINION ARISING FROM LIMITATION OF AUDIT SCOPE

Except for any adjustments that might have been found to be necessary had we been able to obtain sufficient evidence concerning the existence of the rental and utility deposits, cash and bank balances totalling HK$97,774 referred to above, in our opinion, the financial statement give a true and fair view, in all material respects, of the state of the Company's affairs as at March 31, 1991 and of the loss for the year then ended and have been properly prepared in accordance with the Companies Ordinance."

Curiously, although it is a statement of the company's finances as at 31 March 1991, the audited account is dated 26 February 1997.

15. Techwood had at least 2 bank accounts. The available bank statements for the 2 accounts show few transactions between July 1995 and May 1999.

16. Following the order to wind up Techwood, the Respondent provided a Statement of Affairs (Form 23 under Companies (Winding-up) Rules) on Techwood's behalf to the OR. The Statement of Affairs which is dated 15 June 1999 and signed by the Respondent was prepared cursorily. No useful information about Techwood is given. All blank spaces on the form intended for insertion of details about the company's assets and liabilities have merely been filled in with the Chinese character for "nil".

17. As a part of the OR's application under CO s.168H, the Respondent was publicly examined by Ms Fiona Lee ("Ms Lee") of the OR's Office on 27 February 2003 before Kwan J. I have been provided with a transcript of the Respondent's evidence at the examination. Ms Lee has also submitted a Report dated 10 May 2003 to the Court in support of the OR's application.

Discussion

A. Law

18. Under CO s. 168H(1) a Court is required to make ("shall make") a disqualification order against a person where 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 ... makes him unfit to be concerned in the management of a company."

CO s. 168H(3) defines the word "director" in the section to include a shadow director. A "shadow director" is "a person in accordance with whose directions or instructions the directors of a company are accustomed to act" (CO s. 168C(1)). The minimum and maximum periods of disqualification are given as 1 year and 15 years respectively by CO s.168H(4).

19. CO s. 168K states that, in determining whether a director or shadow director of a company which has become insolvent is unfit to be concerned in the management of a company, a Court is to have regard to the matters in CO Schedule 15. Among the factors in Schedule 15, the following are relevant here:-

(1) "Any misfeasance or breach of any fiduciary or other duty by the director in relation to the company " (Sch. 15, I(1)).

(2) "Any misapplication or retention by the director of, or any conduct by the director giving rise to an obligation to account for, any money or other property of the company " (Sch. 15, I(2)).

(3) "The extent of the director's responsibility for any failure by the company to comply with any of the following provisions: ... (h) [CO] section 121 [company's obligation to keep proper books of account] " (Sch. 15, I(3)).

(4) "The extent of the director's responsibility for the causes of the company becoming insolvent " (Sch. 15, II(1)).

(5) "Any failure by the director to comply with any obligation imposed on him by or under any of the following provisions: (a) [CO] section 190 [director to submit verified statement of the company's affairs to liquidator]; ... (da) [CO] section 274 [company officers liable where company fails to keep proper books of account]..." (Sch. 15, II(5)).

20. The factors which the Court can take into account when assessing whether a person is unfit to be a director are not confined to those listed in CO Schedule 15. See, for example, the approach of Neuberger J in Re Amaron Ltd. [1998] BCC 264, at 268G, on the treatment of Schedule 1 to the English Company Directors Disqualification Act 1986 ("CDDA 1986").

21. There can be no doubt that the Respondent was a director of Techwood between 31 March 1988 and 4 December 1998 (the date of the Notification) and a de facto director from 5 December 1998 to the date when Techwood was wound up. In my view, as a matter of construction, the word "director" in CO s. 168H(1)(a) is wide enough to encompass a de facto director, namely, a person who assumes upon himself the duties of a director by acting as if he were a director.

B. The OR's Grounds

22. The OR says that the Respondent is unfit to be a company director on 4 Grounds as follows:-

(1) Ground 1: "The Respondent as a director of [Techwood] authorised the booking and payment arrangement with [the Hotel]. This was when the Respondent knew [Techwood] had ceased business and had no money to settle the room charges. The agreement of reimbursement with Lin was not substantiated and not in the interests of [Techwood]. The Respondent was therefore responsible for the causes of [Techwood] becoming insolvent."

(2) Ground 2: "The Respondent provided incorrect information, namely, [Techwood] had no outstanding liabilities to the Companies Registry and IRD in support of an application for deregistration of [Techwood] under CO s. 291AA. This was a planned move after the judgment obtained by [the Hotel] in HCA 12739/1998, with intent to defraud [Techwood's] creditors."

(3) Ground 3: "As a director of [Techwood] the Respondent was responsible for failure by [Techwood] to comply with the provisions of [CO] s. 121 and [the Respondent] failed to comply with the obligation imposed by [CO] s. 274."

(4) Ground 4: "As a director of [Techwood], the Respondent failed to comply with the obligation imposed by [CO] s. 190."

23. I first assess whether the evidence factually substantiates the Grounds alleged by the OR. I shall then consider whether (individually or in combination) such Grounds as have been established warrant a conclusion that the Respondent is unfit to be a company director or someone involved in the management of a company. Finally, if I find the Respondent to be unfit, I shall determine an appropriate period of disqualification.

B.1 Ground 1

24. I am satisfied that the evidence establishes Ground 1. The Respondent caused Techwood to incur liabilities towards the Hotel in connection with Mr Lin and Mr Mikami even though:-

(1) it must have been obvious by April or May 1997 that substantial amounts had become due without any immediate prospect of Techwood receiving payment from Mr Lin or Mr Mikami; and,

(2) there was no benefit to Techwood (and thus no reason for it) to afford Mr Lin and Mr Mikami with a generous credit facility in connection with their Hotel expenses.

The Respondent must have known that Techwood had no funds with which to meet the obligations which it accepted towards the Hotel. But she did not countermand the authorisation given to the Hotel. Instead she countenanced Mr Mikami racking up further expenses at the Hotel until 30 June 1997.

B.2 Ground 2

25. The Respondent provided incorrect information to the Registry by the Notification and Application and to the Inland Revenue by the IRD Letter. Contrary to what she stated in those documents, Techwood had outstanding liabilities to the Hotel. The Respondent must have known that was the case because the Hotel sued the Company in the Action and obtained judgment on 23 November 1998.

26. But I do not think that the evidence justifies a conclusion that the Respondent provided misinformation "with the intention to defraud Techwood's creditors".

27. The Respondent (who appeared on her own behalf before me) struck me as someone who was out of her depth in matters of business. She seems to have viewed the question of Techwood's liability towards the Hotel from an extremely narrow and eccentric standpoint. As best as I could understand from the Respondent's submissions, she likened Techwood's corporate account with the Hotel to an EPS account. If the latter has no money, a transaction is not processed and does not go through. In the same way, Techwood's account with the hotel not being in credit, the booking authorised by the Respondent was invalid and should not have been processed by the Hotel. If that is the Respondent's case, that is nonsense.

28. The Respondent also stated that, when Mr Mikami failed to pay his bill, she reported the matter to the police. She claims that the police told her that, because the matter concerned relations between the Hotel and Mr Mikami, it was useless for her to complain to the police. The Respondent apparently took this to mean that Techwood need not bother or be concerned about the amounts due from it to the Hotel. Again such a submission does not make sense. Whatever the police said, Techwood remained responsible for the Hotel's charges.

29. The Respondent's belief that Techwood was absolved from payment on the basis of what the police told her is one example of wishful thinking on the Respondent's part. Her alleged understanding that by a letter the Hotel released Techwood from having to pay the Hotel's bill is another example. It is unlikely that there was ever such a letter as the Respondent alleges. Even if there were a letter as contended by her (namely, a letter from Mr Cheung saying that the Hotel would itself pursue Mr Lin and Mr Mikami for outstanding amounts), a letter of that description could not, without more, be read as exonerating Techwood from its liabilities.

30. The examples of wishful thinking which I have identified and the reasons given by the Respondent for Techwood's failure to meet its liabilities to the Hotel and for her writing to the Registry and Inland Revenue to say that Techwood had no liabilities, point to the Respondent being incompetent but not necessarily fraudulent.

31. It is possible that following Mr Chen's death, when the Respondent became Techwood's sole director, the Respondent found herself at the deep end, not knowing what to do to keep the company going. It is possible that she could not cope. In writing as she did to the Registry and the Inland Revenue she may have been at her wit's end and, with a propensity for wishful thinking, thought that striking Techwood off the Register was an easy expedient for making all her troubles go away. Having read the transcript for the Respondent's public examination, I am not able to hold that she was dishonest as opposed to being misguided.

32. Accordingly, I only find part, but not all of Ground 2, substantiated by the evidence.

B.3 Ground 3

33. I think that Ground 3 is borne by the evidence. There are just no proper accounts for Techwood for the period from April 1991 onwards. The failure to keep proper books of account for Techwood is a manifestation of the Respondent's incompetence. Left alone as a director, she likely did not know where to begin and what to do.

B.4 Ground 4

34. Ground 4 is made out. Techwood's Statement of Affairs was mechanically filled out with the Chinese character for "nil" being put in everywhere. No attempt was made to give a true picture of Techwood's liabilities, including the amount due to the Hotel. It may be that the Respondent's wishful thinking led her to fill out Techwood's Statement of Affairs in the way she did. She may have closed her mind to the reality of Techwood's debt on the slim basis of what the police told her and an overly quick reading of the alleged letter from Mr Cheung. Her conduct is again evidence of incompetence.

C. Whether the Respondent is unfit to be a director

35. From the foregoing, even though only part of Ground 2 has been made out, it is clear that the Respondent is not competent to act as a director or engage in the management of a company. Grounds 1, 3 and 4 and (to the extent established by the evidence) Ground 2 taken as a whole suggest that the Respondent is simply unable to handle corporate affairs in a responsible manner. I am thus bound by CO s.168H(1) to make a disqualification order.

D. Period of disqualification

36. Subject to the minimum and maximum disqualification periods specified in CO s.168H(4), the length of disqualification is left to a judge's discretion (Re Copcrest Ltd., Secretary of State for Trade and Industry v. McTighe (No.2) [1996] 2 BCLC 477 at 485 (Morritt LJ)).

37. It is conventional to adopt as a guideline the 3 brackets set out in Re Sevenoaks Stationers (Retail) Ltd. [1990] BCC 765 (at 771H-772A) in the context of the CDDA 1986. The brackets as described by Dillion LJ in that case are as follows:-

"(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 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 to serious cases which do not merit the top bracket."

38. I take the Respondent's defaults seriously, especially the misinformation about Techwood's outstanding liabilities communicated to the Registry and the Inland Revenue. Nonetheless, fraud not having been established, I would classify this case at the top end of the minimum bracket. Consequently, I believe that a disqualification period of 5 years is merited.

III. Conclusion

39. I make an Order that the Respondent shall not (without leave of the Court) be:-

(1) a director of a company;

(2) a liquidator of a company;

(3) a receiver or manager of a company's property; or

(4) in any way, whether directly or indirectly, concerned or take part in the promotion, formation or management of a company,

for a period of 5 years beginning on the 21st day after the day when this Order is made.

40. I make an Order Nisi that the Respondent bear the costs of and incidental to the OR's Originating Summons dated 28 February 2003.