THE OFFICIAL RECEIVER v. LUI WAI HUNG

HCMP 757/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 757 OF 2006

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J U D G M E N T

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The Application

1.  This is an application by the Official Receiver (“the OR”) for a disqualification order under section 168H of the Companies Ordinance (“the Ord.”) against the Respondent, Lui Wai Hung, also known as Lui Wai Hung Harry. 

The Law

2.  Section 168H(1) reads –

(1) The court shall make a disqualification order against a person in any case where, on an application under this section, 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, either taken alone or taken together with his conduct as a director of any other company or companies, makes him unfit to be concerned in the management of a company.

3.  At the material time, the Respondent was a director of Erbal International Limited (“Erbal”) and Pines Investment Corporation Limited (“Pines”) and some other companies.  Erbal was wound up on 22 January 2003 and Pines on 23 April 2003.  As stated in the First Report of OR, both companies are insolvent.  Indeed, there is no dispute that both Erbal and Pines became insolvent while the Respondent was a director, so that the requirement of section 168H(1)(a) is satisfied.  What the OR is required to establish is that the conduct of the Respondent as a director of the companies, either taken alone or taken together with his conduct as directors of any other company or companies, makes him unfit to be concerned in the management of a company.  A disqualification order is mandatory if the requirements of 168H(1) are satisfied.

4.  In determining the question of unfitness, the Court shall take into account the matters set out in Part I and Part II of the Fifteenth Schedule of the Ord., in particular, the extent of the director’s responsibility for any failure by the company(ies) to comply with, inter alia, sections 107, 109, 121, 122 and 190 of the Ord.

The Complaint

5.  The following allegations were made by the OR against the Respondent –

a.      The Respondent as director of Erbal and Pines failed to ensure that books and records as required by section 121 of the Ord. are kept and/or preserved; and he failed to prepare the audited account and/or profit and loss account and balance sheet of the companies as required by section 122 of the Ord.;

b.     After Erbal and Pines were wound up, the Respondent failed to submit any Statement ofAffairs for these companies to their respective liquidators, and was in breach of section 190 of the Ord.;

c.     The Respondent as director of the following companies failed to file Annual Return in accordance with sections 107 and 109 of the Ord. -

	Companies Default Period
(1)	Erbal	2001 to 2003
(2)	Pines	2000 to 2003
(3)	Aimful Realty Co. Ltd.	2002 to 2006
(4)	Grandview Finance Ltd.	2002 to 2006
(5)	Jones Rich Ltd.	2002 to 2006
(6)	Hong Kong Chinese I-Picture	2001 to 2006
	International Co. Ltd.
(7)	Ocean Water Treatment Ltd.	2001 to 2006

The Evidence

6.  The OR filed 4 Reports.  The reports of OR shall be prima facie evidence of any matter contained in it.  (Rule 4(2) of the Companies (Disqualification of Directors) Rules).

7.  The Respondent filed one affirmation in reply.

8.  In compliance with section 168P, a notice of intention to apply for disqualification order has been served by the OR on the Respondent.

Failure to Comply with section 121 and 122

9.  The background of Erbal and Pines are set out in paragraphs 7 to 17 of the First Report and I do not intend to repeat herein.  I first deal with the complaint on failing to ensure that books and records are kept in accordance with s. 121 of the Ord.

10.  The Respondent did not dispute the fact that no books and records of Erbal and Pines had been submitted to the respective liquidator of these companies or the OR after liquidation.  He contended that they were lost.

11.  A meeting was held by the OR with the Respondent on 15 March 2006 and the minutes are exhibited to the First Report as “TT-4”.  The Respondent explained that there were books and records for Erbal prepared in accordance with section 121, and they had been kept at the office of Harvest Metro Investments Limited (“Harvest”)(another company controlled by him) at Unit 1107 on 11^th Floor of No.113 Argyle Street Kowloon.  Later, the landlord recovered possession and all the books and records were thrown away.

12.  As for the books and record of Pines, the Respondent explained in the same meeting that Pines was owned by his friend, one Mr. Zhang, who was also a director of the company.  He did not know the whereabouts of the books and records of Pines or the name of its auditors.  He had lost contact with Mr. Zhang for a long time as he was detained in China.

13.  In a Preliminary Examination of Director submitted by the Respondent in respect of Pines on 12 March 2004, the Respondent changed his version on the whereabouts of the books and records of Pines.  He mentioned that all the books of account had been lost when the said premises were distrained by the landlord.

14.  In his affirmation filed herein dated 11 August 2006, he further explained that in a distraint action on 5 March 2004 by the landlord against Harvest at the said office, all the books and records had been seized or detained.  And his residential property was re-possessed by the Bank and he had no financial means to store the books and records of these companies.  It is not clear if he meant all the books and records of both companies were lost, or only those of Erbal.

15.  The Respondent produced a Notice issued by the bailiff under section 89 of the Landlord & Tenant (Consolidation) Ordinance.  There should be an inventory attached listing out the goods seized by the bailiff.  The inventory had not been produced.

16.  In reply to the Respondent’s case, the OR submitted that without the inventory, it could not be shown that the books and records had been seized by the bailiff.

17.  Further, the OR submitted that there is no evidence on any effort taken by the Respondent to rescue the books and records, if any.  And the OR had enquired with the liquidator of Erbal and Pines.  Mr. Kong Chi How, Johnson, the former liquidator of Erbal confirmed in a letter that the Respondent had not informed him about the distraint action or to recover the books and records of Erbal before, during or after his interview on 12 March 2004.  And Mr. Chan Suk King, the released joint and several liquidator of Pines confirmed in a letter that he had not been informed by the Respondent about the distraint action or to recover the books and records of Pines before his interview on 12 March 2004.  The OR submitted that the evidence of the Respondent is not believable.

My Finding on s.121 Complaint

18.  Section 121 of the Companies Ordinance reads –

(1) Every company shall cause to be kept proper books of account with respect to-

(a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place;

(b) all sales and purchases of goods by the company;

(c) the assets and liabilities of the company.

(2) For the purposes of subsection (1), proper books of account shall not be deemed to be kept with respect to the matters aforesaid if there are not kept such books as are necessary to give a true and fair view of the state of the company's affairs and to explain its transactions.

(3) …..

(3A) ….

(4) If any person being a director of a company fails to take all reasonable steps to secure compliance by the company with the requirements of this section, or has by his own wilful act been the cause of any default by the company thereunder, he shall, in respect of each offence, be liable to imprisonment and a fine:…..

19.  It is the duty of a director of a company to ensure that there are proper books and records.  In the present case, no books and records had been produced.  Except for his own allegation, there is no evidence that these books and records did exist.

20.  First, in respect of Erbal, the evidence of the Respondent is that the books had been lost in the distraint action.  But I have no evidence that they were seized by the bailiff.  No inventory of the goods seized by the bailiff was produced.  If the books were seized by the landlord, I would expect the Respondent to report the problem to the Liquidator in the meeting on 12 March 2004.  He did not.  The evidence of the Respondent is unbelievable.

21.  And in respect of Pines, it is not clear from the evidence of the Respondent whether he knew if there were books and record for Pines.  As set out above, he gave different explanation at different stage.  His evidence is unbelievable. 

22.  In conclusion, I am not persuaded that Pines and Erbal had books and accounts in accordance with section 121.  The Plaintiff had failed in his duty as director to ensure that these documents and records are kept.

The Section 122 Complaint

23.  I now turn to consider the complaint on failure to comply with section 122.  Section 122 of the Ord. reads –

(1) Subject to subsection (1B), the directors of every company shall lay before the company at its annual general meeting a profit and loss account or, in the case of a company not trading for profit, an income and expenditure account for the period, in the case of the first account, since the incorporation of the company, and, in any other case, since the preceding accounts.

(1A) …..

(1B) ….

(2) The directors shall cause to be made out in every calendar year, and to be laid before the company at its annual general meeting or at such other general meeting of the company as may be specified by the court under subsection (1B), a balance sheet as at the date to which the profit and loss account, or the income and expenditure account, as the case may be, is made up. (Amended 10 of 1987 s. 4; L.N. 245 of 1987)

(3) If any person being a director of a company fails to take all reasonable steps to comply with the provisions of this section he shall, in respect of each offence, be liable to imprisonment and a fine: (Amended 7 of 1990 s. 2)
Provided that-

(a) in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that he had reasonable ground to believe and did believe that a competent and reliable person was charged with the duty of seeing that the provisions of this section were complied with and was in a position to discharge that duty; and

(b) a person shall not be sentenced to imprisonment for such an offence unless, in the opinion of the court dealing with the case, the offence was committed wilfully.

24.  It is not disputed that no audited accounts or income and expenditure statement had been produced to the liquidators.

25.  On the audited accounts, the Respondent claimed that he did prepare the audited accounts for Erbal and the accounts were lost in the said distraint action.  The Respondent submitted that he used to instruct one auditor Mr. Lui to prepare all the audited accounts of his companies, including Erbal.  He submitted the audited account for Grand General Investment Limited for the year ending 31 March 2000.  He said with reference to the audited account submitted, he must have instructed Mr. Lui to prepare the account of Erbal at the same time.

26.  He also mentioned in his first meeting with OR that the Inland Revenue Department did not require Erbal to submit profit tax return as the company was not making profit.  But section 122 of the Ord. requires the directors to keep balance sheet or income and expenditure account for company making no profit.  He also said that since the company had no finance, it could not pay audit fees and no audited financial statement had been prepared.  But that is not a legitimate excuse for not keeping the income and expenditure account of the company.  The Respondent had not explained why no income and expenditure account for the company had been kept.

27.  It is not clear which period he said he did prepare the accounts for Erbal.  He only submitted the audited account for Grand General Investment Limited for the year ending 31 March 2000.

28.  I am not persuaded that the accounts were lost in the distraint action.  I found that the Respondent had failed to keep the account for Erbal.

29.  On the accounts for Pines, the Respondent submitted that it is the responsibility of Mr. Zhang, a co-director.  He submitted that this is not a company owned by him.  In his report to the liquidator, the Respondent said he only represents Mr. Zhang to conduct the daily affairs of the company.

30.  The Respondent also alleged that he could not give any detail on the former auditors of Pines, as his co-director, Mr. Zhang is now imprisoned in China and could not be in touch.

31.  But once he took the responsibility of a director, his has a duty towards the company to ensure that the statutory requirements are complied with.  There is no excuse that a director is not the shareholder or ultimate owner of a company for not complying with the statutory duty under the Ord.  If he has to delegate the duty to co-director, he has to ensure that the co-director would perform the duty, and ensure that he himself is in a position to take over the duty if the co-director does not perform. It is for the Respondent to establish that he had delegated the duty to a reliable person.  From his evidence, it is clear that he took a stand by position and only acts according to the instruction of Mr. Zhang.  This may be their arrangement, but it is not a defence to his failure to ensure that section 122 had been complied with.  On the evidence before me, I am satisfied that the Respondent had failed to ensure that there were audited account prepared for Pines.

32.  In conclusion, I found that the Respondent had failed to maintain the accounts for the 2 companies as required by section 122 of the Ordinance.

Failure to Submit Statement of Affairs of Erbal and Pines

33.  As set out in the First Report of the OR, no Statement of Affairs had been submitted for Erbal and Pines to their respective liquidators.  There is no dispute on the fact.  As rightly pointed out by the OR, without the books and records, the Respondent could not possibly prepare any meaningful statement of affairs for the companies.

34.  There is no dispute to this fact.  And it is a breach of his responsibility under section 190.

Failure to file annual returns in accordance with s.107 and 109

35.  As set out in the First Report of the OR, there is no annual return for the companies set out in 41 of the report.  The Respondent had no answer to this complaint and it had been established.

The Ruling

36.  It has been proved that the Respondent was in breach of sections 121 and 122 in failing to keep the books and accounts of Pines and Erbal.  He was also in breach of section 190 in failing to provide the statements of affair of Erbal and Pines, and he was in breach of section 109 in failing to submit annual return for all the companies listed above.

37.  In conclusion, the OR has proved their complaints and satisfied the requirement under section 168H.  I found that the Respondent should be suspended from being a director.  Having taken into account all the facts herein, I rule that he should be suspended for a period of 2 years.  I see no reason that costs should not follow the event and I give an order nisi that the Respondent to pay the costs of OR to be taxed if not agreed, such order to become absolute within 14 days.