RE FITNESS CENTRE LTD

HCCW 99/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 99 OF 2002

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(Heard Together)

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J U D G M E N T

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1. There are currently fixed two applications to be heard before me this Thursday and Friday, 25 and 26 September 2003. One is an application by the Official Receiver taken out initially under sections 191, 196 and 204 of the Companies Ordinance. The application was first taken out on 27 June 2003 and was amended pursuant to leave granted by Kwan J with an amended summons being issued on 25 July 2003.

2. The summons originally sought, in essence, an order for Mr William Nicholas Giles and Alan Hubert Day, liquidators of a total of 63 companies to be examined on oath concerning certain matters relating to the winding up of these companies. In particular it was sought to examine them in relation to: (1) the number and grade of staff employed by a service company operated by Messrs Horvath & Giles, the firm of solicitors in which Mr Giles and Mr Day are partners; (2) whether the liquidators' fees and charges in relation to the liquidations had been properly or necessarily incurred; (3) whether the indemnity policy in respect of Horvath and Giles Services Limited ("HGSL") could have been avoided as a result of alleged delegation of work to Messrs RSM Nelson Wheeler Corporate Advisory Services Limited; and (4) whether cause had been shown to remove Messrs Giles & Day as liquidators in the various liquidation proceedings in question.

3. Also sought was an order that Messrs Giles and Day produce all books, correspondence and documents in their custody or power relating to the questions listed in paragraph 1 of the summons which dealt with the question of cross-examination.

4. The amendments made to the summons seek an order that Messrs Giles and Day be removed as liquidators in the relevant liquidations on the ground that they have a personal interest which conflicted with their interest as liquidators, or alternatively because they are not fit and proper competent persons to be liquidators.

5. Orders were also sought disallowing the fees of the liquidators in so far they represented charges which had been made by RSM Nelson Wheeler to the liquidator in relation to assistance provided by RSM Nelson Wheeler in the conduct of the liquidation, and a direction was sought that pending the determination as to that order, no further fees be paid to the liquidators.

6. This application was met by an application on the part of Messrs Giles & Day by summons dated 15 July 2003 seeking the dismissal or striking out of the Official Receiver's summons. The summons in its initial form was brief but it was substantially amended pursuant to leave given by Kwan J on 25 July 2003 and an amended summons was issued on 4 August 2003. In that amended summons, grounds were provided for the relief sought, namely the dismissal of the Official Receiver's summons and the removal from the court records of his report on which that summons was based, firstly on the ground that the summons was embarrassing - that is a ground that is, I think, substantially to be based on legal submissions.

7. Secondly, and pertinently for today's purposes, it is said that the summons is vexatious for a number of reasons which have been deposed to in affidavits filed in support of the liquidators' summons.

8. In this respect, a total of 8 grounds are stated and these include an allegation that the arrangement between RSM Nelson Wheeler & HGSLwas approved or sanctioned by the Official Receiver in advance; that all enquires made by the Official Receiver for request for access to records or copies of documents had been complied with by the liquidators, that following the Official Receiver being informed of the said agreement, a copy of the agreement was requested and provided; that there was an off the record meeting at which the liquidators discussed the matter with the Official Receiver, and at one such meeting, there was agreed a settlement or compromise of the matter which is said to be evidenced in correspondence; that in consequence and pursuant to that settlement, the liquidators provided full cooperation in the conduct of a special audit by personnel of the Official Receiver of their offices and of their facilities; and that notwithstanding all of this, the Official Receiver had purported to resile from the agreement notwithstanding the cessation of the arrangement between RSM Nelson Wheeler & HGSL. It is then alleged that the Official Receiver has engaged in a course of oppressive conduct against the liquidators in the filing of the report and the taking out of the summons on 27 June 2003. Reference was also made to a report made by the Official Receiver to the Law Society against the liquidators in which he suggested that the liquidators are or may be guilty of professional misconduct. It is said also that the liquidators have been reported by the Official Receiver to the Secretary for Justice alleging possible fraud, and that a formal complaint had been made to the Commercial Crime Bureau of the Hong Kong Police. Finally it is said that the Official Receiver's application for examination of the liquidator is not made bona fide to obtain relevant information in respect of any of the liquidations with which they are concerned, and that it was simply an attempt to exert improper pressure on the liquidators or alternatively to obtain evidence in support of the complaints that had been made to the police, the Secretary for Justice and the Law Society.

9. A final ground that is put forward in support of the application to strike out the Official Receivers' summons is that it is an abuse of the process of the court, because it is not concerned with the conduct of the liquidations of which Messrs Giles and Day were liquidators, but is more concerned with the workings of the Official Receiver's own non-statutory administrative scheme under which a certain portion of the work of his department can be delegated or sub-contracted out to private insolvency practitioners.

10. The underlying disputes as to whether or not Mr Giles and Mr Day should be removed as liquidators and as to whether or not the liquidators' summons should be acceded to, have at their heart an arrangement that was entered into between HGSL and RSM Nelson Wheeler which had the effect of enabling HGSL (to put it no higher) to have access to and use of staff of RSM Nelson Wheeler in the carrying out of liquidations in respect of which they might be appointed liquidators.

11. It has been clear that this agreement will be the focus of attention at the hearing before me, and it is quite clear from the Official Receiver's Reports and from the various affidavits filed on behalf of the liquidators that there is a sharp conflict of evidence as to whether or not this arrangement was the subject of discussion or mention by persons representing or acting for HGSL on the one hand and the Official Receiver on the other. Ordinarily, this conflict of evidence is not a matter that I would have felt able to resolve without the benefit of the hearing the parties give evidence orally, if necessary with cross-examination as appropriate from the opposing party.

12. Mr Barlow has (although not formally by way of summons) indicated, in his skeleton argument filed in support of a directions hearing held last Wednesday, 17 September 2003, his intention to seek to cross-examine the Official Receiver on his report in relation to those matters. Among them, no doubt, will be the Official Receiver's recollection as to the alleged agreement or alleged sanction of the agreement between Messrs Nelson Wheeler and HGSL. There will no doubt also be certain other matters to which cross-examination may be directed.

13. Mr Beresford, on the other hand, suggests that it is not necessary for me at this stage to hear oral evidence on any of the matters in relation to the two summonses as amended. He said that what is envisaged and what is appropriate is a two-stage process. In relation to Official Receiver's summons, the two-stage process would involve first, a consideration of whether on the material set forth in the papers, sufficient cause is shown for the removal of the liquidators as liquidators of 63 companies with which we are concerned.

14. It is only if the court is not able to come to a conclusion that sufficient material is shown to warrant such a removal or, perhaps, if the court is of the view that it is necessary or desirable to investigate the manner in which the liquidations have been carried out before coming to a conclusion as to whether or not to order such removal, that there should be examination in the terms, and of the ambit, indicated in the Official Receiver's summons as amended.

15. Mr Beresford suggests a similar approach can and should be taken to the summons issued by the liquidators in that it may be possible (and Mr Beresford suggests that it is possible) for the court to determine that summons without reference to oral evidence. In this regard, Mr Beresford mentions that an examination of the various affidavits filed on behalf of the liquidator discloses that the terms of the conversation that is alleged to have taken place in which such approval of the arrangements was given, are not entirely consistent, and that there are differences in the account of that conversation given by the various deponents, so that the evidence is therefore so unclear that it will not be possible for the court to come to a conclusion that any approval had in fact been given.

16. Mr Beresford also says that whatever may or may not have been said, and he makes it clear that the Official Receiver (as is clear from his 2nd report) does not recollect and does not think any such conversation took place or that any such approval was given, that it should have been apparent - and would have been apparent - that the Official Receiver had no authority to grant such an approval or sanction any such arrangement.

17. It seems to me that while it is possible that the court would feel able, having heard full submissions on the matter, to dispose of the liquidators' summons without reference to the evidence, that is a course which I feel reluctant to take, because it seems to me that the summons issued by the liquidators goes beyond simply an investigation of the rights and wrongs or what was said in relation to the proposed arrangement that was to be made, and involves a suggestion on the part of the liquidators of unfairness or bad faith on the part of the Official Receiver, which requires oral evidence to be given with cross-examination as necessary in order that the matter can be determined.

18. While I accept that it would be possible for me to deal with matters in a two-stage process, as Mr Beresford suggests, by first hearing argument on all points on which oral evidence would not be required, and coming to a conclusion on those points before moving on, if necessary, to consideration of the oral evidence, it seems to me that such a course would not involve efficient or satisfactory case management. To adopt that course would mean in effect that the argument would proceed on the basis of the papers, without the benefit of oral evidence. A decision would have to be reached as to whether the court could or could not come to any conclusion on the basis of that material and in the event (which I regard as more than a possibility) that the court is not able to conclude one way or other whether the complaints of the liquidators, as itemised in their grounds for contending that the Official Receiver's summons is frivolous and vexatious, it would be necessary to have a further hearing.

19. I cannot rule out the possibility that it would be necessary for me to go into the evidence in order to determine whether or not the allegations of the liquidators have substance. It seems to me to be much more desirable for the entirety of the argument to be heard and dealt with at a single hearing, rather than in a two-stage process, the two parts of which may be separated by an appreciable period of time.

20. In these circumstances, it seems to me that it would be appropriate at this stage to give directions designed to ensure that such oral evidence as is thought necessary by both parties for the determination of the liquidator's summons to strike out or dismiss the Official Receiver's amended summons should be given at a single hearing at which that summons can be determined and disposed of.

21. So far as the Official Receiver's summons is concerned, however, I can see that there may be merit in adopting a two-stage process in that the nature of the examination that is sought under section 204 relates exclusively to the manner in which the liquidators carried out their duties under the liquidations, and to their arrangements for doing so.

22. For these reasons, it is my view that it would be appropriate to have a single hearing, at which oral evidence is given in relation to the matters that are relevant to grounds (b)(i) to (viii) of the liquidators' summons.