THE OFFICIAL RECEIVER v. TONG WING MAN AND OTHERS

HCMP 5157/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5157 OF 2001

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J U D G M E N T

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The application

1. This is an application taken out by the Official Receiver under section 168H of the Companies Ordinance, Cap. 32, seeking a disqualification order against five former directors of Wealth Property Agency Company Limited ("the Company"). There can be no dispute that the Company was insolvent while the respondents were directors, so section 168H(1)(a) is satisfied. What the Official Receiver is required to establish is that the "conduct of [each of the respondents] as a director of [the 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", in compliance with section 168H(1)(b). A disqualification order is mandatory if the requirements of section 168H(1) are satisfied, so the only matter to be considered is the period of disqualification, from a minimum of one year up to a period of 15 years (Re Bath Glass Ltd (1988) 4 BCC 130 at 132).

The background

2. The 1st to 4th respondents are brothers. The 4th respondent is the eldest brother. The 5th respondent is their mother. The 1st and 3rd respondents have since the liquidation of the Company changed their names by deed poll. The 1st respondent was at one time also known as Raymond Tong and the 2nd respondent was also known as Paul Tong.

3. The Company was incorporated as a private company in Hong Kong on 28 January 1992 and was engaged in the business of estate agent. Prior to the incorporation of the Company, the 1st respondent had carried on the business of an estate agent as a sole proprietor in the name of Wealth Property Company since about 1986. As the business was successful, and with the expansion of the business, the Company was formed.

4. According to the return of allotments of the Company dated 8 February 1992, each of the respondents was allotted with 2,000 shares of the Company, so they each held 20% of the shares of the Company. There were no outside shareholders. On 8 February 1992, the five respondents were appointed directors of the Company. No notice of resignation as director of any of the respondents has been filed with the Companies Registry.

5. A petition to wind up the Company was presented by a creditor, Nan Fung Textiles Limited, on 24 September 1997 on account that the Company was in arrears of rent. On 12 November 1997, a winding-up order was made against the Company. The Official Receiver was the liquidator of the Company.

6. Four creditors have submitted proofs of debt in the liquidation and they are as follows:

Creditors	Amount claimed (HK$)
Commissioner of Inland Revenue	21,220,000.00
	525,000.00
Collector of Stamp Revenue	70,130.00
Nan Fung Textiles Limited	384,361.46
Protection of Wages on Insolvency Fund Board	2,803.70

Up to the date of the first report of the Official Receiver on 21 September 2001, the assets realised by the Official Receiver amounted to HK$164,589.39. The Company is insolvent as its assets are insufficient to pay its debts and liabilities and the expenses of the liquidation.

7. Prior to the events mentioned below in 1996, the Company had carried on business in about 20 branch offices in Hong Kong, including a branch in Tai Wai, one in Tuen Mun and nine in Tsuen Wan and Kwai Chung. During the prosperous times of the Company, the staffs employed were over a hundred.

8. The 4th respondent was the general manager of the Company and responsible for the financial and administrative matters until 1994 when he went to the mainland to do business. His responsibilities were taken over by the 1st respondent until 1996 or so. The 2nd and 3rd respondents were responsible for running some of the branches. The 5th respondent did not appear to have taken an active role in the operations of the Company.

The evidence in this application

9. The Official Receiver has submitted a total of four reports in support of this application and two affirmations made by a treasury accountant in the employ of the Official Receiver's Office. The reports of the Official Receiver shall be prima facie evidence of any matter contained in it (see rule 4(2) of the Companies (Disqualification of Directors Proceedings) Rules).

10. All of the respondents have filed separate affirmations in answer to the reports filed by the Official Receiver in support of the present application, pursuant to the directions given by a Master on 11 April 2002.

11. All five respondents appeared at the hearing before me and they acted in person. I have explained to them the procedure and purpose of the proceedings, including their right to give evidence under section 168P(1). The 1st and 4th respondents elected to give evidence and were cross-examined by the Official Receiver and questioned by the court. The other three respondents elected not to give evidence and they made no submissions to the court.

12. The 2nd respondent was publicly examined by the Official Receiver before a Master on 27 August 2001 pursuant to an order made on 12 June 2001. The Official Receiver wishes to rely on the evidence given by the 2nd respondent in the public examination as evidence against the 2nd respondent. The examination before the Master was conducted under section 168IA. This was not in accordance with rule 5(1)(f) of the Companies (Winding-up) Rules, which provides that public examinations shall be heard before a judge in open court. The jurisdiction of the Registrar to exercise and perform the powers and duties conferred by sections 221 and 222 does not include section 168IA (see section 222A(1)). Hence, it would appear that the evidence obtained in the public examination was irregularly obtained.

13. Notwithstanding this irregularity, it was submitted by Miss Lee for the Official Receiver that the evidence is admissible in these proceedings, provided that it is relevant to the matters in issue, citing Kuruma v. The Queen [1955] AC 197 at 203 and Helliwell v. Piggott-Sims [1980] FSR 356. I accept this submission and rule that the evidence given by the 2nd respondent is admissible against him in this application.

14. In considering the case of the Official Receiver for a disqualification order against each of the respondents, I have looked at the misconduct alleged against each of them separately and considered the evidence adduced by each of them in opposition. The standard of proof in these proceedings, which are civil proceedings, is proof on the balance of probabilities. Any misconduct of the respondents as directors may be relevant even if it does not fall within a specific provision of the Companies Ordinance (Re Bath Glass Ltd, supra. at 133).

The allegations against the respondents

15. The following allegations are made against each of the respondents:

(1) failure to comply with statutory filing obligation in respect of annual returns under sections 107 and 109;

(2) accounting records offences under sections 121, 274 and 122;

(3) failure to submit statement of affairs under section 190;

(4) breach of fiduciary duty in relation to four agreements entered into by the Company to dispose of the businesses in 11 branch offices in 1996;

(5) breach of fiduciary duty in respect of the sale of the property at Shop B52, 1st Floor, Kwai Chung Plaza, No. 7 to 11 Kwai Foo Road, Kwai Chung, New Territories ("the Kwai Chung Plaza property");

(6) breach of fiduciary duty in respect of the sale of the property at Shop No. 22, 1st Floor, Level 3, Tsuen Fung Centre, No. 138 to 168 Sai Lau Kok Road and No. 144 to 172 Castle Peak Road, Tsuen Wan, New Territories ("the Tsuen Fung Centre property");

(7) failure to co-operate with the Official Receiver in the investigation of the affairs of the Company.

16. The following additional allegation is made against the 1st respondent:

(1) misapplication of company assets in respect of the payment of HK$369,502.00 to the 1st respondent.

17. The following additional allegation is made against the 2nd respondent:

(1) misapplication of company assets in respect of cheques he had signed in blank.

18. The following additional allegation is made against the 3rd respondent:

(1) misapplication of company assets in respect of the payment of HK$554,760.00 to the 3rd respondent.

19. The following additional allegations are made against the 4th respondent:

(1) misapplication of company assets in respect of the payment of rent of three properties;

(2) misapplication of company assets in respect of the payment of HK$376,000.00 to the 4th respondent.

20. I turn to deal with each of the allegations.

Failure to comply with statutory filing obligation

21. Since its incorporation in January 1992, no annual return of the Company has ever been filed by or on behalf of the Company with the Companies Registry.

22. Other than the Company, the 1st to 4th respondents were appointed as directors to the following companies:

The 1st respondent Company	Date of appointment
Raymondtong Limited	12 July 1994
Wealth Property Limited	15 August 1997
Wealth Property and Realty Agency Limited	18 December 1998

The 2nd respondent Company	Date of appointment
280 Video Consultant Company Limited	26 July 1994
The 3rd respondent Company	Date of appointment
Charter Miracle Limited	12 March 1997
Kwun Kee Limited	12 March 1997
Way Choice Limited	8 January 1997
The 4th respondent Company	Date of appointment
Central Year International Limited	6 March 1997
Wealth Property Group Limited	18 June 1996

23. Of the above companies, annual returns have not been filed for various periods. The 1st to 5th respondents are responsible for the failure by the companies of which they are directors to comply with sections 107 and 109 of the Companies Ordinance in that they have permitted default to be made in the filing of an annual return or a certificate in the prescribed form within 42 days after the most recent anniversary of the date of incorporation of the relevant company. The companies concerned, the directors responsible and the periods in default are as follows:

Company	Responsible director	Default period
the Company	all five respondents	1993 to 1997
Raymondtong Limited	1st respondent	1996 and 2000 to date
Wealth Property Limited	1st respondent	2000 to date
Wealth Property and Realty Agency Limited	1st respondent	1999 to date
280 Video Consultant Company Limited	2nd respondent	1994 to date
Charter Miracle Limited	3rd respondent	1998 to date
Kwun Kee Limited	3rd respondent	1998 to date
Way Choice Limited	3rd respondent	1998 to date
Central Year International Limited	4th respondent	1997 to date
Weallth Property Group Limited	4th respondent	1999 to date

There is no doubt that the respondents have failed to ensure that the company or companies of which they are directors have complied with the statutory obligation to file annual returns.

24. The 4th respondent has submitted that no public interest was affected in this failure to ensure that annual returns and accounts (which I will deal with in the next section) were filed, as all these companies are private companies, owned by the respondents as a "family business" or by the respondents separately. He would appear to suggest that such failure to comply with statutory obligations is merely a technical breach and the court should not make a disqualification order against him or the other respondents on account of such failure.

25. I do not accept this. In my judgment, the persistent failure to file annual returns and accounts is hardly a trivial matter. These are obligations imposed by statute for the protection of members of the public in their dealings with an entity that has the benefit of trading with limited liability. As stated by Warner J. in Re Tansoft Ltd [1991] BCLC 339 at 357d:

"Lest I be misunderstood, let me say that I do not regard as among the less serious [the failure of the director concerned] to ensure that companies of which he was a director complied with the statutory requirements as to accounts and annual returns. Compliance with those requirements is not a mere formality. Those dealing with limited companies and others concerned with their affairs are entitled to have access to the information that those documents should contain, and it is important that they should have such access."

Accounting records offences

26. A treasury accountant employed in the Official Receiver's Office has examined the available accounting records of the Company and found that there was no general ledger or periodic financial statements of the Company. A general ledger would contain a classification and summarisation of the company's financial transactions and would form the basis for the preparation of its financial statements. The general ledger would also allow one to see the balance of a given account at a particular time and its movement during a particular period. No audited financial statements of the Company have been recovered by the Official Receiver.

27. According to a memo of the Inland Revenue Department to the Official Receiver dated 8 October 2001, assessments for profits tax were issued to the Company dated 19 December 1997 (after the Company was wound up) for the years of assessment 1992/93 to 1996/97 and the assessable profits were made on estimates based on the total net bank deposit of the Company and its directors during the years in question. Subsequently, due to some technical problems, the assessments were invalid and they were all cancelled by the Inland Revenue Department (these assessments were in the sum of HK$21,220,000.00, being one of the two proofs of debt lodged by the Commissioner of Inland Revenue). A fresh assessment was then issued on 19 March 1999 for the year of assessment 1993/94 in the sum of HK$525,000.00 and this was based on "draft accounts" submitted by John K. K. Ma & Co., certified public accountants, for years of assessment 1992/93 and 1993/94. I note also from the audit report of the Inland Revenue Department enclosed with the said memo to the Official Receiver that it was found that "no books of account" were maintained by the Company.

28. I draw the inference from the above matters that no audited financial statements of the Company had been prepared since its incorporation.

29. Under section 121, a director is obliged to take all reasonable steps to ensure compliance by the company with the requirement to keep proper books of account as are necessary to give a true and fair view of the state of the company's affairs and to explain its transactions.

30. It is provided inter alia in section 274 that where a company is wound up and it is shown that proper books of account were not kept by the company throughout the period of two years immediately preceding the commencement of the winding up, every officer of the company in default shall be guilty of an offence, unless he shows that he acted honestly and that in the circumstances in which the business was carried on, the default was excusable.

31. Further, under section 122, the directors of a company are obliged to lay before the company at its annual general meeting a profit and loss account and a balance sheet.

32. The 1st and 2nd respondents were convicted of an offence under sections 121 and 274 on 8 November 1999 and 6 December 1999 respectively at the Western Magistracy and were fined HK$3,000.00 each.

33. I find that all five respondents had been in breach of sections 121, 274 and 122 in that proper books of account were not kept by the Company. The 1st and 4th respondents are clearly responsible as they were in charge of financial and administrative affairs of the Company at various periods. As for the other three respondents, although they would appear to be less culpable, they cannot shirk their responsibility merely because they were not involved in the general administration.

34. A company director has assumed a position involving duties which cannot be shirked by leaving everything to others, and the public is entitled to be protected against someone who has failed to observe the duties attendant on the privilege of trading with the benefit of limited liability (Re Majestic Recording Studios Ltd (1988) 4 BCC 519 at 522 to 523). As stated by the English Court of Appeal in Re Westmid Packing Services Ltd, Secretary of State for Trade and Industry v. Griffiths [1998] 2 All ER 124 at 130,

"... the collegiate or collective responsibility of the board of directors of a company is of fundamental importance to corporate governance under English company law. That collegiate or collective responsibility must however be based on individual responsibility. Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them.

A proper degree of delegation and division of responsibility is of course permissible, and often necessary, but not total abrogation of responsibility."

Failure to submit statement of affairs

35. No statement of affairs of the Company has been submitted to the Official Receiver.

36. All five respondents have failed to comply with section 190 in that they did not submit to the Official Receiver any statement as to the affairs of the Company in the prescribed form within 28 days of the making of the winding-up order or such extended time as may be appointed.

The agreements to dispose of the businesses in branch offices

37. Between June and November 1996, the Company had entered into these four agreements to dispose of part of its assets to related parties:

(1) By an agreement dated 15 June 1996, the business of the Company at the branch in Tai Wai was sold to Wealth Property (Shatin) Agency Company, of which the 2nd respondent was the sole proprietor, for a consideration of HK$230,000.00.

(2) By an agreement dated 20 July 1996, the business of the Company at the branch in Tuen Mun was sold to Wealth Property Limited for a consideration of HK$200,000.00. Wealth Property Limited was incorporated on 18 July 1996 with a paid up capital of HK$2.00 and was controlled by the 1st respondent.

(3) By an agreement dated 1 October 1996, the businesses of the Company at nine branch offices in Tsuen Wan and Kwai Chung were sold to Wealth Property Group Limited for a consideration of HK$1.5 million. Wealth Property Group Limited was incorporated on 14 May 1996 and was under the control of the 4th respondent who owned 99% of the shares.

(4) By an agreement dated 6 November 1996, two vehicles registered in the name of the Company and were on hire purchase were transferred by the Company to Wealth Property Group Limited for a consideration of HK$43,500.00 and the transferee was to assume the obligation of paying the instalments under the hire-purchase agreements.

It was provided in each of the agreements for transfer of business that as from the date of transfer, the transferee was to be responsible for the staff of the branch in question, the obligations under the tenancy agreement of the shop premises and all the liabilities of the branch.

38. It is alleged by the Official Receiver that in causing the Company to enter into the above agreements, all the respondents had acted in breach of fiduciary duty.

39. The Official Receiver had written to the respondents seeking information if the Company had obtained any valuation of the businesses of the branch offices prior to the agreements, and if not how the consideration for the sale of the businesses was calculated. Letters were also sent by the Official Receiver to the various transferees seeking information and documents on the payment of the consideration, the arrangements relating to the tenancy of the shop premises and the employment of staff after the transfers of businesses, the liabilities of the branch offices before the transfers. No reply was given by the respondents or the transferees to these letters.

40. I was asked by the Official Receiver to draw the inference from the failure to respond to inquiries that the Company did not receive the consideration payable in any of the agreements. I note also from each of the three agreements for transfer of business that the purchaser was obliged to pay the consideration in full by a specific date, which was three to six months after the transfer agreement was made.

41. Alternatively, I was asked to find that the transfers were made without independent valuation and that there was a serious lack of commercial probity on the respondents' part in causing the Company to enter into such transactions.

42. The respondents have now given an explanation in their affirmations and in their oral evidence why and how the agreements came to be made.

43. The Company was incorporated in 1992 with an authorised and paid up capital of HK$10,000.00. Business was profitable initially and most of the profits were used for the setting up of new branch offices. In 1993 or 1994, some of the respondents proposed to invest in real estate and a quarrying business in the mainland. It was resolved that the Company was to contribute 50% and the 4th respondent 50% towards the capital required for these new business ventures. Heavy losses were suffered in these businesses over the next few years. Some of the respondents rejected a proposal to inject further funds into these businesses and this had led to quarrels and conflicts among them and the decision to divide up the businesses of the Company in 1996 when the four agreements were made.

44. During 1994 to 1996, the branch offices had increased to over fifteen. Due to the high rentals payable for some of the premises rented for the branch offices, the decline in the volume of business because of fierce competition at the time, and the fact that the Company had expanded its business too quickly, the Company began to have serious liquidity problems in 1995. Between 1994 and 1996, there were four or five occasions when the respondents were required to inject funds into the Company by making shareholders' loans, until things had come to a head in 1996 when they lost faith in the prospects of the Company and they were unwilling or unable to continue to support the Company with further loans.

45. It was in the above circumstances that the respondents arrived at an understanding to resolve their differences by transferring some of the businesses in the branch offices to any of them who was in a position to take over the operations, so there would be a parting of ways.

46. According to the 1st, 2nd and 4th respondents, the consideration payable under the agreements for transfer of business was to be set off against the shareholders' loans due from the Company to that particular respondent who had agreed to take a transfer of business.

47. The 1st respondent has provided some documents being his bank passbook, customer's advice issued by his bank, minutes of members meetings and board meetings of the Company in support of his assertion that he had made loans to the Company. According to these documents, it would appear that he had made advances to the Company in 1995 and 1996 in the total sum of about HK$3.8 million. As to how the consideration was worked out, he said that the respondents would look at the operation results of the branch in question in the last three to six months, as well as the outgoings and expenses for the branch and would arrive at a figure.

48. The 4th respondent has not provided any documentary evidence to support his contention that he had made loans to the Company. He claimed that by the time the businesses were divided up in this way, what were divided up were in fact liabilities and if the respondents had not individually assumed some of the liabilities of the Company in this manner, the Company would have collapsed at once. Further, as the other respondents were reluctant to accept a transfer of the businesses, he had ended up with taking over the nine branches in Tsuen Wan and Kwai Chung. These branches were closed down within ten months of his taking over. No cash was received by the Company under the transfers. He claimed that he and the 5th respondent had together advanced a total of HK$2 to 3 million to the Company.

49. The 2nd respondent has testified in his public examination that he had paid to the 4th respondent cash of HK$230,000.00 being the consideration for the transfer of the business of the Tai Wai branch. However, he admitted that he was not able to adduce any evidence to prove his assertion. He was unsure how the consideration was worked out although he had signed as one of the directors on behalf of the Company in respect of two of the transfer agreements as this was arranged by the 4th respondent.

50. After the examination, and in compliance with an order made by the Master, the 2nd respondent has produced to the Official Receiver his bank statements in his own name and in the name of his firm from 1996 to 1998. As the Official Receiver is not able to identify any entry that would support the 2nd respondent's contention he had paid cash of HK$230,000.00, the Official Receiver wrote to him on 30 November 2001 seeking evidence of payment of this sum. There was no response to the letter.

51. In his affirmation, the 2nd respondent asserted that the shareholders of the Company had made advances to the Company during 1996 to 1998 to enable the Company to discharge its liabilities and later when it was decided to transfer the businesses of some of the branches to the shareholders, the consideration was set off against the outstanding loans advanced by the shareholders to the Company. He did not, however, give details of any loans he had made to the Company. And as I have mentioned earlier, he elected not to give evidence and made no submissions to the court. I do note from one of the minutes adduced by the 1st respondent that it was recorded that the 2nd respondent had lent HK$200,000.00 to the Company in 1995.

52. I should mention that when the Company was ordered to be wound up, it would appear that virtually all of its creditors were paid, save for the petitioning creditor which was owed six months rent. The Inland Revenue Department had not at that time made any assessments as to the tax payable. Insofar as the transfers of businesses were made with the view of reducing the liabilities of the Company, that objective was achieved to a large extent.

53. I am mindful of the fact that the documentary evidence adduced by the respondents is incomplete and inadequate and that the 2nd respondent would appear to have given discrepant versions on the payment of consideration. However, I am not inclined to disbelieve the respondents that substantial shareholders' loans were made. The accounting records of the Company were not properly kept in the first place. I understand from the respondents that all the documents of the Company were seized firstly by the Inland Revenue Department and later taken into the possession of the Official Receiver and some of the documents might well have been lost in this process. Further, the respondents have fallen out and no one has taken up the responsibility of assisting with the investigation of the Official Receiver. In the absence of any records, it is not surprising that the 4th and 2nd respondents are unable to provide details of shareholders' loans they had made in 1996 or earlier.

54. I am not prepared to infer that no consideration was actually received by the Company under the various transfer agreements. I accept the evidence of the respondents that the consideration payable was set off against the outstanding shareholders' loans. The allegation of breach of fiduciary duty of the respondents in this respect is not established. In the particular circumstances in which the businesses were transferred, I do not think that the failure to obtain independent valuations would amount to a lack of commercial probity on the part of the respondents.

The sale of the Kwai Chung Plaza property

55. By an assignment dated 28 June 1996, the Kwai Chung Plaza property was assigned by the Company in favour of Kwai Hong Development Limited at the price of HK$8.5 million. There was an agreement for sale and purchase between the parties in May 1996. Of the proceeds of sale received by the Company, HK$1.7 million was applied to discharge its liabilities to a bank secured by a legal charge of the property.

56. According to the minutes of a general meeting of the shareholders on 11 May 1996, it was unanimously resolved by all the respondents that the balance of the proceeds of about HK$6.9 million was to be distributed to them as follows:

(1) the 4th respondent - HK$1.4 million;

(2) the 5th respondent - HK$600,000.00;

(3) the 2nd respondent - HK$1.5 million;

(4) the 3rd respondent - HK$800,000.00;

(5) the 1st respondent - HK$2.6 million.

57. After the sale, the Kwai Chung Plaza property was leased back by the purchaser to the Company for a five-year term commencing from 28 June 1996 at the monthly rent of HK$58,000.00.

58. It would appear from the valuation given by the Commissioner of Rating and Valuation to the Official Receiver that the price at which the property was sold was the market price. There is evidence that rent was paid to the purchaser after the property was leased back to the Company.

59. It is alleged by the Official Receiver that the sale and leasing back of this property and the distribution of the net proceeds of sale were transactions without commercial justification and/or that the respondents had entered into the transactions with a lack of commercial probity.

60. In his public examination, the 2nd respondent was asked if he had received a distribution of the proceeds of sale of the property and he claimed he had not. He stated that he did not have any recollection of the meeting in May 1996 when the shareholders resolved to distribute the net proceeds among themselves and he was not sure how much was distributed as he was not responsible for the financial operations.

61. In their affirmations filed in these proceedings, the respondents have claimed that the two properties owned by the Company, namely the Tsuen Fung Centre property and the Kwai Chung Plaza property, were sold in September 1995 and June 1996 respectively. The net proceeds of the Tsuen Fung Centre property were used partly to pay off the advances made by the 1st respondent to the Company and partly towards the expenses of the Company including the setting up of the auction department of the Kowloon branch office. The net proceeds of the Kwai Chung Plaza property were used to pay off the advances that were made by the shareholders to the Company to discharge its liabilities to trade creditors in the sum of about HK$6.5 million.

62. For the reasons given earlier, I am not prepared to reject the respondents' evidence on the shareholders' loans. I do not accept the allegation that the transactions were entered into without commercial justification or that the respondents had acted without commercial probity in this respect.

The sale of the Tsuen Fung Centre property

63. By an assignment dated 6 September 1995, the Company assigned the Tsuen Fung Centre property to Raymondtong Limited, a company controlled by the 1st respondent, at the price of HK$4,380,000.00. The parties had entered into an agreement for sale and purchase in July 1995. The Company had used part of the proceeds of sale in the sum of HK$2,230,000.00 to discharge its liabilities to a bank secured by a legal charge of the property. The net proceeds of sale were in the sum of HK$2,146,807.00 and according to the solicitors who had acted for the Company in the transaction, this amount was paid by the purchaser to the Company directly.

64. The Official Receiver wrote to Raymondtong Limited on 3 August 2001 seeking evidence of the payment of HK$2,146,807.00 to the Company. There was no reply to the letter.

65. The Official Receiver has asked the court to infer that the net proceeds of sale were not paid to the Company and that the respondents were in breach of fiduciary duty in failing to obtain full payment of the purchase price from the purchaser which was a related party.

66. In his affirmation, the 1st respondent has produced relevant pages of his savings passbook and a number of cheques drawn on his account in favour of the Company to show that he had paid a total of HK$800,000.00 directly to the Company towards the purchase price. He is unable to produce evidence on the balance of the amount that made up the net proceeds.

67. I refuse to draw the inference that the 1st respondent's company had not paid in full the balance of the net proceeds of sale, merely because he is not able to produce documents in support of the payment of the full sum seven years later. The allegation of breach of fiduciary duty of the respondents in this respect is not established.

Failure to co-operate with the Official Receiver

68. The 1st, 3rd, 4th and 5th respondents had failed to attend the public examination on 27 August 2001 notwithstanding that an order was made on 12 June 2001 requiring them to attend.

69. In the case of the 3rd respondent, the order for examination was served on him personally by the Official Receiver who is his trustee in bankruptcy on 20 June 2001 and he had acknowledged receipt of the order. On 4 August 2001, he informed the Official Receiver by letter of his residential address and requested all documents and correspondence to be sent to him at that address with Chinese translation. Notwithstanding that letters were sent to this address, the 3rd respondent did not respond to the inquiries of the Official Receiver.

70. As for the 5th respondent, the Official Receiver had obtained confirmation from the Housing Manager of Tai Wo Hau Estate in April 2000 that she was the tenant of a unit in the estate at that time. She did not reply to any of the letters that the Official Receiver sent to her residential address.

71. As mentioned earlier, the 1st, 2nd and 4th respondents had failed to respond to the letters of the Official Receiver seeking information on the transfers of the assets of the Company to related parties.

72. From one of the Official Receiver's reports, it would appear that the letters sent to the 1st, 3rd, 4th and 5th respondents in October 2001 were all returned undelivered. The Official Receiver applied for a warrant of arrest against these respondents and the warrants were issued on 24 October 2001. The warrant against the 1st respondent was executed on 11 February 2002 and later discharged. Following the execution of the warrant against the 1st respondent, the 3rd, 4th and 5th respondents contacted the Official Receiver by telephone and the warrants against them were also discharged.

73. The 1st respondent claimed that he did not receive the letters of the Official Receiver. The 4th respondent would appear to have changed his working and residential addresses. The 5th respondent had a major surgery in March 1999 and had to be looked after by the 4th respondent.

74. The Official Receiver had relied on the last known addresses of the respondents as given in various documents registered in the Companies Ordinance when documents and letters were sent to the respondents. The respondents did not update the records when they changed their addresses. In a number of instances, they did not receive the documents and letters sent to them. Insofar as there was failure to co-operate with the Official Receiver, it does not seem to me that such failure was so bad to constitute misconduct as to render them unfit to be concerned in the management of a company.

Payment of money to the 1st, 3rd and 4th respondents

75. Two cheques of HK$30,000.00 each dated 26 September 1996 and 13 November 1996 were issued by the Company to the 1st respondent. A third cheque in the sum of HK$309,502.00 was issued to him on 5 September 1997. The 1st respondent did not respond to the Official Receiver's letter dated 9 March 2001 seeking information on the purpose of payment of the said sums.

76. Eight cheques in the total sum of HK$554,760.00 were issued by the Company to the 3rd respondent between 8 September 1996 and 26 May 1997. He did not respond to the Official Receiver's letter dated 6 June 2001 seeking information on the purpose of payment.

77. Four cheques in the total sum of HK$376,000.00 were issued by the Company to the 4th respondent between 7 November 1996 and 19 May 1997. He too did not respond to the letter of the Official Receiver dated 9 March 2001 seeking information on the purpose of payment.

78. It is alleged by the Official Receiver that there was no commercial justification for these payments made to the 1st, 3rd and 4th respondents and that there was misapplication of company assets by these respondents.

79. According to the evidence given by these respondents, they claimed that the payments were made to them as repayment of shareholders' loans with interest. For the reasons I have given earlier, I am not inclined to reject the respondents' evidence on this. The allegation of misapplication of company assets in this respect is not established.

Misuse of bank accounts by the 2nd respondent

80. The 2nd respondent was an authorised signatory of the accounts of the Company in three banks. In his public examination, he gave evidence that when cheque books were obtained from the bank, he and some of the other authorised signatories were told by the 4th respondent to sign in blank all the cheques which were then kept by the 4th respondent and that he had done this "most of the time". He agreed to do so for convenience and because the 4th respondent was the only one to make decisions. He said he was a mere employee and apparently he was so regarded by the 4th respondent. It is alleged by the Official Receiver that he had misused the bank accounts of the Company.

81. I find this allegation established. I reiterate what I have said earlier about the collegiate responsibility of directors.

Payment of rent of three properties

82. Of the businesses of nine branch offices transferred to the 4th respondent's company, Wealth Property Group Limited, as from 1 October 1996, in respect of the premises of three branch offices, it was the Company and not the transferee that had paid rent to the landlord after the transfer. The particulars are as follows:

83. It is alleged by the Official Receiver that the above amounted to misapplication of company assets by the 4th respondent as there is no commercial justification why the Company should be responsible for paying the rentals of these three properties after the transfer of the businesses of the branch offices in question to the 4th respondent's company.

84. In his evidence, the 4th respondent was unable to give any or any proper justification for the above payments of rentals. He admitted that his company did not repay the Company what the Company had paid as rentals during the periods aforesaid. I find the allegation proved against him.

Conclusion and orders

85. To recapitulate, the following allegations are established against the respondents:

(1) As against all respondents,

(i) the failure to comply with statutory filing obligation in respect of annual returns;

(ii) accounting records offences;

(iii) failure to submit statement of affairs.

(2) As against the 2nd respondent,

(i) the misuse of the bank accounts of the Company in signing cheques in blank.

(3) As against the 4th respondent,

(i) the misapplication of company assets in respect of the rentals paid by the Company for three properties.

86. I find that the allegations established against each of the respondents are such as to render them unfit to be concerned in the management of a company. Hence, it is mandatory to make a disqualification order against each of them.

87. In imposing a period of disqualification against these respondents, I bear in mind that the objectives of such an order are to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others (Re Lo-Line Electric Motors Ltd [1988] Ch 477) and to be a deterrent to the director concerned (Re Westmid Packing Services Ltd, supra. at 132a).

88. Guidelines and broad tariffs were laid down by the English Court of Appeal in Re Sevenoaks Stationers (Retail) Ltd [1990] BCC 765 at 771H to 772A. The top bracket of over ten years should be reserved for particularly serious cases. The minimum bracket of five years or under should be applied where the case is, relatively speaking, not very serious. The middle bracket of six to ten years should apply for serious cases which do not merit the top bracket.

89. Of the five respondents, I would regard the 4th respondent to be the most culpable and his period of disqualification should be the longest of all. He was responsible for the management and financial affairs of the Company and he had misapplied the assets of the Company. I would place his misconduct in the serious category and impose a period of disqualification of six years. The disqualification order is to take effect from the beginning of the 21st day after the day on which this order is made, pursuant to rule 10 of the Companies (Disqualification of Directors) Proceedings Rules. The effect of this is that the order is temporarily suspended for a period of 21 days although the term of the disqualification would begin from the day of the handing down of the judgment. The purpose of this temporary suspension is to give the respondent concerned a reasonable period to put his affairs in order so as to comply with the disqualification order (Re Cannonquest Ltd [1997] BCC 644 at 648 to 649).

90. Next in the degree of culpability are the 1st and 2nd respondents. The 1st respondent was, for a period when the 4th respondent was working in the mainland, charged with the management and financial affairs of the Company. The 2nd respondent was found to have misused the bank accounts of the Company. I would place the misconduct of both in the minimum bracket. I impose a term of disqualification of four years for each.

91. The 3rd and 5th respondents were not involved in the administration and financial affairs of the Company. For this reason, I would regard them as the least culpable. In this instance, there was persistent failure to comply with statutory obligations. I impose a term of disqualification of three years for each of them.

92. I make an order nisi that the respondents do pay the Official Receiver's costs of this application. The costs order will become absolute if none of the respondents should apply to vary it within 14 days of the handing down of this judgment.