RE GOLDCONE PROPERTIES LTD.

HCCW 391/99

Headnote

Companies - winding up - petition to wind up company already in voluntary liquidation - principles on which discretion exercised

HCCW 391/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP NO. 391 OF 1999

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J U D G M E N T

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A. The primary issue

1. On 3 May 1999, Kong Mou Holdings Limited ("Kong Mou") presented a petition for the compulsory winding-up of Goldcone Properties Limited ("Goldcone") on the basis of an unpaid judgment debt of $15,099,565.94 with interest taking the amount owed as at the date of the petition to $17,484,469.99.

2. Goldcone was at the time already in creditors' voluntary liquidation. The petition is opposed by a Mr Cheung Shuen Lung ("Cheung Shuen Lung") who is one of Goldcone's directors and shareholders. He opposes it on the basis that he is a creditor of Goldcone in the sum of $6,467,080.00. Other creditors supporting and opposing the petition are referred to further below.

3. On the hearing of the petition, the debate was fundamentally as to whether the Court should permit the voluntary liquidation to proceed or whether it should order Goldcone to be compulsorily wound up. It is most likely, although not certain, that if a compulsory winding-up order is made, the present liquidators, who were appointed by the directors in the voluntary liquidation, will be replaced. To achieve their replacement and to bring the liquidation process into the legal framework of a compulsory liquidation are the petitioner's main objectives.

B. The owners of Goldcone

4. Goldcone is a property trading or investment company owned and controlled by members of Cheung Shuen Lung's family and their respective spouses. Its six directors consisted of Cheung Shuen Lung and his wife Chu Nien Shian, Cheung Siu Lung (who is Cheung Shuen Lung's brother) and his wife Lau Tung Ping, and Cheung Siu Ha (who is Cheung Shuen Lung's sister) and her husband Yip Ka Yeung.

5. These three married couples are also all shareholders in Goldcone. The only other shareholders are three BVI companies, namely, Highland Crest Limited, Fullworth Overseas Limited and Caprice Pacific Limited. They are beneficially owned, respectively, by Cheung Shuen Lung and his wife, by Cheung Siu Lung and his wife, and by Cheung Siu Ha and her husband.

C. The events leading to the voluntary liquidation

6. On 18 June 1997, Goldcone entered into a sale and purchase agreement with Kong Mou to purchase premises known as Flat B, 59 & 60/F, Tower 3, in a development known as Tregunter ("the Tregunter property") for $63 million, with completion due on 12 December 1997.

7. Two days earlier, on 16 June 1997, Goldcone had entered into a sale and purchase agreement with Young Brothers Development Co Ltd ("Young Brothers") to acquire House No. 24 in a development known as Manderly Gardens for $58.8 million, with a completion date of 12 March 1998.

8. Then a few days later, on 23 June 1997, Goldcone entered into a further sale and purchase agreement with Rich Gold Holdings Limited ("Rich Gold") to purchase an additional property in Tregunter, known as Flat C, 53 and 54th floors, Tower 3 ("the 2nd Tregunter property") for $79 million. The completion date does not appear to have been specified in the sale and purchase agreement.

9. Goldcone defaulted on the transactions with Kong Mou and Young Brothers. This led to Kong Mou issuing a Writ against it on 24 December 1997 and Young Brothers doing the same on 31 March 1998. Goldcone, however, elected to complete the transaction involving purchase of the 2nd Tregunter property from Rich Gold.

10. On 13 January 1998, Kong Mou sold the Tregunter property for $36 million and on 21 January 1998, it obtained judgment against Goldcone by consent for damages to be assessed.

11. On 4 April a company called Faith On Industrial Ltd ("Faith On") issued a Writ against Goldcone, for an alleged default on loan of $9,999,890.00 bearing interest at 12.06% per annum.

12. While the assessment of damages on its judgment was pending, Kong Mou became concerned that Goldcone might be dissipating its assets. On 17 April 1998, it obtained from Findlay J a Mareva injunction and an order for disclosure in aid of its judgment.

13. The disclosures, contained in an affirmation dated 27 April 1998 provided by Yip Ka Yeung (one of the directors), were regarded by Kong Mou as alarming. In the three-week the period from 23 February 1998 to 16 March 1998, Goldcone had entered into sale and purchase agreements for the sale of all of it 9 properties with completion dates spanning the period between 30 April 1998 and 1 June 1998. One of those sales had already been completed. However, the affirmation did not show what had happened to the proceeds or to the deposits on the other sales so far received. It merely indicated that Goldcone had an insignificant amount of cash at banks. Kong Mou took this as an indication that the monies received had been dissipated.

14. The affirmation stated that Goldcone's current assets stood at $37 million, consisting almost entirely of debts owed to the company by three of its directors, namely, by Cheung Shuen Lung (in the sum of $19,782,906.92), Cheung Siu Lung ($5,251,244.32) and Yip Ka Yeung ($11,510,871.12). Such debts totalled $36,545,022.36.

15. Against such current assets, the affirmation stated Goldcone's current liabilities as then totalling $112.4 million. Of those liabilities, about $65.5 million was said to be owed on mortgage and bank debts, presumably incurred in the financing of Goldcone's property acquisitions. Leaving aside the single completed sale and the deposits allegedly already received, the affirmation indicated that a total sum of about $73.9 million was expected on completion of the contracted sales of its remaining 8 properties. Accordingly, the inference was that after repaying the $65.5 million due to Goldcone's bankers, the asset sales would yield a net receipt of only about $8.4 million.

16. Ignoring immaterial sums, the balance of those current liabilities comprised alleged debts owing by Goldcone to three individuals and four private companies as follows:-

17. The three individuals were all directors of Goldcone and were the wives of the three directors who together owed the company $36,545,022.36, as indicated above. Company searches revealed that Starfair Ltd, Goldstar Properties Ltd and Super Kingsun Ltd were all companies whose shareholders and directors consisted of various combinations of the three married couples who made up the directors of Goldcone. It is not in dispute that these three companies are in each case beneficially owned and controlled by the respective Goldcone directors in question.

18. As I have stated, Faith On had issued a Writ claiming the debt disclosed in the affirmation. Its registered shareholders are one Li Chi Kong and Powernoon Ltd. Li Chi Kong is also a director. In his affirmation of disclosure, Yip Ka Yeung stated that Faith On was not related to the Goldcone directors. However, this is a matter of controversy.

19. Leaving aside Faith On for the moment, the total liability of Goldcone to three wives and the three companies totalled $36,692,348.69. The affirmation went on to state that on 3 April 1998, these "wife directors" and the three companies mentioned above (other than Faith On) gave notice to Goldcone that they had assigned the debts owed to them by Goldcone to the three "husband directors" who were Goldcone's debtors, thereby extinguishing the debts of the latter. Details of the assignments as disclosed are as follows.

20. All of these assignments were said to have taken place on 2 April 1998 except for that by Cheung Siu Ha to Yip Ka Yeung, which was dated 26 March 1998. For convenience, I will call them "the April assignments".

21. Yip Ka Yeung later filed a corrective affirmation stating that Cheung Shuen Lung's debt had been overstated because a payment which the latter had made on Goldcone's behalf had been overlooked. The correct amount owed by Cheung Shuen Lung was $13,315,826.92 and not $19,782,906.92. The April assignments therefore had the effect, in Cheung Shuen Lung's case, not only of extinguishing his debt to Goldcone, but of making him one of Goldcone's creditors, the balance of the assigned debt being in the sum of $6,467,080.00. It is on the basis of the debt so arising that Cheung Shuen Lung assumes the role of opposing creditor in the present proceedings.

22. Finally, it was disclosed in Yip Ka Yeung's affirmation that on 1 December 1997, Goldcone had entered into a sale and purchase agreement to acquire a property on the mainland ("the PRC property") for RMB 45,903,823.20 from the vendor, Li Chi Kong. A sum of RMB 10 million, described as "an initial deposit" was said to have been paid. It was later revealed by the liquidators (in their letter to PCW dated 6 November 1998) that such sum was the first instalment payable under the agreement and that payment was made on 6 March 1998. As a result of a supplemental agreement entered into on 27 March 1998, payment of further instalments and of the balance were postponed so that the next instalment was to fall due on 31 December 1998.

23. Kong Mou's reaction of alarm to these disclosures was entirely understandable. Whether Goldcone was a property trading or a property investment company, all of its trading or fixed assets, comprising 9 properties, had been sold. The cash proceeds so far received were not apparently reflected in current assets and so had presumably been applied for some other, undisclosed, purpose. Almost all of the remaining receivables, comprising the proceeds expected on completion of the various sales, would have to be used to pay off mortgage liabilities, leaving only a net sum of about $8.4 million to come to Goldcone. There was an apparent deficiency of current assets against current liabilities after the set-offs resulting from the April assignments. Goldcone's financial condition was therefore apparently dire. Goldcone was seen to be engaging in a de facto insolvent liquidation after having dissipated certain assets which were unaccounted for. Moreover, a very high level of transactions involving its directors, including loans made to three of them totalling $36.5 million, was evident. The director/shareholders were also showing no signs of coming to Goldcone's support but, as the April assignments indicated, the debtors were liquidating their liabilities to the company by setting them off against debts owed to the creditor directors, who happened to be their respective spouses. There was no explanation as to the basis of the directors' loans and debts.

24. It was obviously also likely to be disturbing for Kong Mou to note that some 11 days before completion was to fall due on its sale of the Tregunter property to Goldcone, Goldcone had incurred a RMB 43 million liability to purchase the PRC property but had then had gone on to default on its obligations to Kong Mou. Li Chi Kong, who was alleged to have sold the PRC property to Goldcone, was a shareholder and director of Faith On which claimed to be a creditor of Goldcone.

25. Furthermore, Kong Mou could see that Goldcone had chosen to complete its purchase of the 2nd Tregunter property while defaulting on the Kong Mou transaction, even though the 2nd Tregunter property, costing $79 million, was significantly more expensive, Kong Mou's property being priced at $63 million. The affirmation now disclosed that the 2nd Tregunter property had been re-sold for $47 million, crystallizing a loss to Goldcone of $32 million.

26. On 1 May 1998, Goldcone applied to vary the Mareva, but its application was dismissed by Sears J. Spurred by its concerns as to Goldcone's dealings with its assets and its financial condition, on 15 May, Kong Mou took out a summons seeking further protective orders. However, its application was unsuccessful.

27. Meanwhile, Faith On entered default judgment against Goldcone for $9,999,890.00 plus interest on 24 April and registered a charging order nisi against each of Goldcone's remaining properties on 4 May 1998. Those charging orders were discovered by Kong Mou when a land search was conducted on 18 May 1998, causing it even greater concern. If such orders nisi became absolute, Faith On would achieve priority over Kong Mou in relation to the anticipated $8.4 million balance of the sale proceeds.

28. Hoping to forestall this, on the same day, 18 May 1998, Kong Mou issued a summons seeking to appoint a receiver over Goldcone's properties under section 21L of the High Court Ordinance. However, the application for a receiver was not pursued because on 21 May 1998, Goldcone's directors passed a resolution for Goldcone to enter into a voluntary winding-up under s. 228A of the Companies Ordinance.

29. The resolution recited that Goldcone could not, by reason of its liabilities, continue in business and that there were good and sufficient reasons for such winding-up. It also appointed as provisional liquidators, Mr John Robert Lees and Mr Desmond Chiong Chung Seng ("Messrs Lees and Chiong"). On the same day, solicitors who had been acting for Goldcone, namely, Messrs Koo & Partners ("K&P") wrote to Messrs P.C. Woo & Co. ("PCW"), solicitors acting for Kong Mou, informing them of the winding-up resolution.

D. The appointment of Messrs Lees and Chiong as liquidators in the voluntary liquidation

30. No doubt still driven by their concerns discussed above, two days later, on 23 May 1998, Kong Mou, through PCW, wrote to K&P complaining that the liquidators had been appointed to pre-empt Kong Mou's application for appointment of receivers and emphasising the duty of the provisional liquidators to get in and protect Goldcone's assets. They also raised a number of issues for investigation, including Faith On's charging order nisi.

31. On 28 May 1998, PCW followed this up with a second letter to K&P stating that their client was anxious to know the result of the investigations by the provisional liquidators.

32. The 1st creditors' meeting was held on 16 June 1998. It was chaired by Yip Ka Yeung and attended by the following persons claiming to be creditors:-

33. Messrs Lees and Chiong were in attendance, as were Mr Mark Side and Mr Myles Seto of K&P. Yip Ka Yeung told the meeting that the company was insolvent because of the drastic collapse of the property market. A statement of affairs was laid before meeting. This showed that Goldcone held a property for resale with a net book value of $9.3 million. Its estimated realisable value was stated to be "unknown". When asked about this, Mr Chiong of the provisional liquidators explained that this was the PRC property and that the amount stated represented the initial RMB 10 million deposit paid for its purchase. When asked whether there were any other properties owned by Goldcone, Mr Chiong replied that all other properties had been sold and that the sale proceeds in the region of $7.5 million were held in the provisional liquidators' bank account. This was about $1 million less than the receivable calculated on the basis of Yip Ka Yeung's affirmation of disclosure in the Mareva proceedings.

34. The statement of affairs estimated an overall deficiency before liquidation costs of some $8.5 million. This was, however, a figure arrived at on the basis that unsecured creditors were owed a total of about $16.8 million, a figure which excluded the amounts claimed by Young Brothers and Kong Mou on the basis that their claims were as yet unliquidated. Their two claims, if made out, would come to over $25 million and so would exceed the total claims of the unsecured creditors recognized at the 1st creditors' meeting. The minutes record a ruling in the following terms:-

35. Kong Mou nominated Mr Alan Tang and Mr Gabriel Tam of KPMG Peat Marwick to be the liquidators, however, although their nomination appears to have been put to the vote, they were themselves ruled not entitled to vote, again on the advice of Mr Side of K&P. In the result, the liquidators were appointed by the votes of Super Kingsun, Cheung Shuen Lung and Faith On. These creditors all voted in favour of appointing Messrs Lees and Chiong and none voted in favour of Messrs Tang and Tam. They also resolved that there be no committee of inspection.

36. Accordingly, Messrs Lees and Chiong have been in place as provisional liquidators since they were appointed by the resolution of Goldcone's directors passed on 21 May 1998, and as liquidators appointed in the abovementioned circumstances on 16 June 1998.

E. The general principle

37. Mr Winston Poon SC appeared with Mr Godfrey Lam for the petitioner. In opening, Mr Poon suggested, on the basis of In re James Millward and Company, Limited [1940] 1 Ch 333, that I should approach this case on the footing that the petitioner is entitled ex debito justiti? to an order for the compulsory winding-up of the company. He did not, however, persist in that suggestion which, in my view, was untenable.

38. It is clear that an entitlement ex debito justitiae to a winding-up order only arises as between a debtor who establishes his debt and the company sought to be wound up. The effect of the James Millward decision was explained by Simonds J in In re Home Remedies Limited [1943] Ch 1 as follows:-

39. This has since been the accepted view. In In re Southard & Co Ltd [1979] 1 WLR 1198 at 1205, Buckley LJ put it as follows:-

40. Plainly, the court has an unfettered discretion, to be exercised judicially, where the contest is between creditors, some favouring and some opposing a compulsory winding-up order.

41. Section 287 of the Companies Ordinance is derived from provisions in the Companies legislation in the United Kingdom enacted at various times as s 288 of the 1929 Act , s 346 of the Act of 1948 and s 645 of the 1985 Act.

42. By s 287(1) of the Companies Ordinance, the court may, as to all matters relating to the winding-up of a company, have regard to the wishes of the creditors or contributories of the company, as proved to it by any sufficient evidence. If the court decides to have regard to their wishes, then by section 287(2), regard must be had to the value of their debts: see Hoffmann J on s 645 of the Companies Act 1985 in In re Palmer Marine Surveys Ltd [1986] 1 WLR 573 at 578B.

43. The decision of the English Court of Appeal in In re J D Swain Ltd [1965] 1 WLR 909 provides useful guidance as to the applicable principles. In that case, after a petition for a compulsory winding-up was presented, the company called a meeting of its creditors at which it was resolved to put the company into voluntary liquidation. At the hearing of the petition, only three creditors, whose proofs of debt totalled about ￡2,200, supported a compulsory winding-up. Against them were 211 creditors whose proofs of debt amounted in aggregate to about ￡82,000. The petition was dismissed, as was the appeal against such dismissal.

44. Harman LJ referred to s 346 of the Companies Act 1948 and continued (at p 911) as follows:-

45. Harman LJ stated his conclusion (at p 913) as follows:-

46. Diplock LJ agreed and identified certain different situations which may arise as follows:-

47. Mr Benjamin Yu SC appeared with Mr Jat Sew Tong on behalf of Cheung Shuen Lung, the opposing creditor. Mr Yu cited a number of cases where the court was faced with deciding between making compulsory order and permitting the voluntary liquidation to continue. I will refer to some of those authorities later in the context of particular factors relevant to the exercise of my discretion. They are useful as illustrations of the sorts of factors which have been taken into account. However, it is clear that the weight to be given to any specific factor very much depends on what, if any, countervailing or supporting factors also exist and on the interplay among the various factors in any particular case. The principle is therefore a broad one, namely, that the choice between a compulsory order and allowing a voluntary liquidation to continue lies within the court's unfettered discretion, to be exercised judicially, taking into account all material factors.

48. Mr Yu submitted that an especially helpful formulation of the discretionary question is to be found in Re Rhine Film Corporation (UK) Ltd (1986) 2 BCC 98,949 where (at 98,950) Harman J described it as:-

49. I agree that this is a helpful way of approaching the court's decision and I consider below how it may be applied to the evidence in the present case.

F. The opposing creditor's main arguments

F.(a) The majority

50. As at the date of the hearing of the petition, and as previously reported to the creditors and contributories at a meeting called by the liquidators on 6 August 1999, the known creditors of Goldcone and their respective stances in relation to the winding-up petition were as follows.

51. Accordingly, on these figures, a majority of about 61.3% of the creditors by value and 3 out of 5 creditors owed material amounts support the petition. Mr Yu accepts this, as he must. However, he stressed, as Harman LJ stated in In re J D Swain Ltd (supra), that it was not simply a question of counting heads.

52. I certainly accept that to be the case. It is however a factor which, in the absence of contrary reasons, would incline me towards the making of a compulsory order (as suggested by the court in In re B. Karsberg Ltd (supra), discussed above).

53. Mr Poon submits that must a fortiori be the case since the only opposing creditors, Faith On and Cheung Shuen Lung are, for reasons discussed later, both implicated in questionable activities and who may be targets for proceedings by the liquidators and therefore may have a selfish motive for resisting a compulsory order and the likely consequence of new liquidators being appointed. This is a topic to which I will return.

F.(b) Reasons why the majority's wishes should be overridden

54. At the forefront of Mr Yu's submissions was the fact that the winding-up petition was not presented until 3 May 1999, almost one year after Goldcone's directors had resolved to place the company into liquidation (on 20 May 1998) and some 10 1/2 months after the liquidators were appointed at the 1st creditors' meeting (held on 16 June 1998). Mr Yu submitted that this was highly unusual. He pointed out that in every one of the authorities cited, other than Re William Thorpe & Son Ltd (1989) 5 BCC 156, passage of the resolution for a voluntary liquidation and presentation of the petition were events which took place within a very short time of each other.

55. This was not merely a complaint as to delay. Mr Yu submitted that what it meant in the present case was that the liquidators had in this period been able to demonstrate that, although they had been appointed by Goldcone's directors, they were carrying out their duties independently, impartially and competently. He submitted that the liquidators had already made good progress. Indeed, although I am not sure that Mr Yu supported the suggestion in argument, Cheung Shuen Lung filed an affirmation saying that he had obtained English leading counsel's advice to the effect a compulsory order should be refused inter alia since the voluntary liquidation "is almost complete".

56. What Mr Yu did submit was that the liquidators had carried out extensive investigations and had, with the benefit of independent legal advice, already identified the only significant matters outstanding for further investigation and action. These matters involved :-

57. There was accordingly no benefit to be gained by bringing in fresh liquidators. Mr Yu submitted that there was little or no complaint in evidence from Kong Mou relating to the liquidators' performance or progress and no suggestion that the liquidators had neglected investigations in any areas properly calling for investigation.

58. This was with the exception of Kong Mou's agitating for the liquidators to pursue payments totalling $19.85 million made by Goldcone to its directors and to Super Kingsun Ltd on 5 January 1998 ("the 5 January payments"). It was submitted that so far as these payments were concerned, the points taken by Kong Mou are so thoroughly bad that the liquidators are justified in ignoring it.

59. Mr Yu argued that Kong Mou had for this lengthy period effectively (if not strictly legally) acquiesced in the appointment of the liquidators and had no valid reason for seeking to have them replaced by liquidators appointed in a compulsory winding-up. On the contrary, there were good reasons not to make a change. The liquidators' remuneration to date had come to $721,478.50 and legal fees that they had incurred stood at $727,500.23. Much of this work and expense would be needlessly duplicated if new liquidators were appointed. Moreover, a compulsory order would mean delays to the liquidation as well as incurring the ad valorem charges of the Official Receiver which were estimated to be in the region of $400,000. All of this wasted expense and delay, it was argued, would be avoided by dismissing the petition and allowing the voluntary liquidation to proceed to its conclusion.

G. Grounds for a compulsory order

60. For the reasons which follow, I have come firmly to the conclusion that there are ample grounds for exercising my discretion in favour of a compulsory winding-up order. I shall endeavour to explain why I reject some of Mr Yu's arguments and why, although I accept some of his other arguments, the balance seems to me emphatically in favour of a compulsory order. In so doing, I will have to discuss areas which, the petitioner submits, require further investigation, possibly leading to claims against the directors or others. I wish however to make it clear that these are matters discussed solely for the limited purpose of identifying possible areas of investigation. I must not be taken to be making any findings of fact or to be suggesting that any such investigations will bear fruit or that they may in fact establish liability on any person's part.

G.(a) Outstanding issues and liquidators' lack of progress

61. As I have indicated, it was suggested by Cheung Shuen Lung in his affirmation that a compulsory order might be refused on the basis that the voluntary liquidation "is almost complete". While Mr Yu did not put his case quite that high, he did submit that the liquidators had already identified all the issues worth investigating, that they were duly pursuing such issues and that appointing fresh liquidators would bring no real benefits. There was, in other words, nothing to outweigh the disadvantages of duplicated expense and delay.

62. He cited Re Medisco Equipment Ltd [1983] BCLC 305 where, on the evidence, Harman J found (at p 308) as follows: -

63. Harman J also found (at p 309) that there was nothing to show that the class remedy offered by the voluntary liquidation was inadequate in that case. He stated:-

64. Harman J therefore had a very clear case and dismissed the petition, permitting the voluntary liquidation to proceed to its imminent conclusion.

65. In my judgment, Re Medisco is factually a long way from the present case. The evidence here indicates that the liquidators face a substantial volume of unfinished work, in terms both of further investigation and possibly of claims against the directors and others. If the possible claims are pursued, the evidence suggests that they will have to be litigated and that such litigation may be hard fought. The evidence also shows that Kong Mou displayed and expressed a consistent anxiety as to the liquidators' apparent lack of progress and what Mr Poon called their "lack of vigour" in the pursuit of such claims. Young Brothers have also shown signs of discontent.

66. Where, as in the present case, the petitioning and supporting creditors press for further matters to be investigated or pursued and the opposing creditors say that this would be a waste of time and money, the court asks itself whether:-

67. The court has to be satisfied that there is sufficient prima facie evidence to form the basis of such a rational judgment. As Stout CJ, of the New Zealand Supreme Court, stated in In re Wellington Farmers' Meat and Manufacturing Co Ltd [1924] NZLR 623 at p 625 :-

68. I am satisfied that there is sufficient prima facie evidence raising issues which rational creditors could think need investigation and further action by the liquidators, possibly leading to a favourable financial outcome. I turn now to the evidence which, in my view, makes good this finding.

G.(a)(i) The $5 million deposit

69. It is common ground between the petitioner and the liquidators that a claim arising out the $5 million deposit remains to be pursued against Yip Ka Yeung.

70. The evidence is as follows. In May 1997, Goldcone contracted to sell a property which it owned in Stanley Village Road. K&P, Goldcone's solicitors, received a $5 million deposit from the purchaser. By letter dated 22 May 1997, Goldcone instructed K&P to issue a cheque for $5 million "being the deposit received by us on the sub-sale of the Property" in Yip Ka Yeung's favour. This was duly done on the following day, and on 27 May 1997, the Stanley Village Road property was duly assigned to the purchaser.

71. At the 1st creditors' meeting held on 16 June 1998, Yip Ka Yeung (who was chairing that meeting) was asked about an apparent discrepancy in Goldcone's statement of affairs involving a missing sum of $5 million. He explained that this was due to an accounting error.

72. Three days later, the liquidators had seen that this was not a satisfactory explanation. They wrote to Yip on 19 June 1998 saying that they had now discovered that the sum was the deposit received upon the sale of the Stanley Village Road property and that the money had gone into Yip's account. They recorded that Yip was now alleging that Cheung Shuen Lung had been owed the $5 million sum by Goldcone and that Cheung Shuen Lung had agreed to lend that money to him, which was why Goldcone had caused the sum to be paid into Yip's account. The liquidators demanded that Yip Ka Yeung confirm this explanation in writing with supporting documents.

73. No explanation was received until 3 August 1998, when Yip Ka Yeung set down in writing the account of the events which he had already given to the liquidators. However, he provided no documents in support.

74. After that, the liquidators appear to have done very little. In their letter dated 13 October 1998, PCW on behalf of the petitioning creditor raised a number of questions as to what, if any, steps the liquidators had taken in relation to the $5 million deposit. In their letter dated 6 November 1998 in reply, the liquidators said that they were taking legal advice but were keeping that advice confidential. This was repeated in their circular to creditors dated 10 November 1998.

75. It is clear that Yip Ka Yeung's explanation was rejected by the liquidators. On 27 November 1998, Mr Chiong wrote to him stating :-

76. The letter then demanded payment of the HK$5 million on or before 10 December 1998. Yip Ka Yeung obviously did not comply.

77. The liquidator apparently then took the view that he ought also claim payment from Chu Nien Shian and Lau Tung Ping, presumably because they were the directors who had authorized the payment and might be guilty of misfeasance. On 31 December 1998, he sent letters of demand to them, as well as a further letter to Yip, requiring payment within 7 days.

78. To get to this stage had taken over 6 months from the time the liquidators first sought an explanation from Yip. One might have thought that some form of claim might have eventuated at this point. However, for reasons not made clear in the evidence, no claim was advanced.

79. On 16 April 1999, the liquidators decided to write to Chu Nien Shian asking for an explanation. This is a little odd since payment had already been demanded of her on 31 December 1998. This April request led to correspondence with Messrs Baker & McKenzie ("B&MCK") who had begun representing the directors and it was not until 27 July 1999 that a substantive response was received. In that response, B&McK alleged that the demand letters of 31 December 1998 had never been received by Yip, Chu or Lau. So far as the $5 million deposit was concerned, it did no more than repeat the story which Yip had told and which the liquidators had already rejected on 27 November 1998. This was now almost 8 months later and some 13 months since the liquidators had first sought Yip's explanation.

80. At the creditors' meeting held on 6 August 1999, Ms Karen Wan, representing Young Brothers, asked what actions the liquidators would take in relation to, inter alia, the $5 million deposit. She was told that they and their legal adviser "were considering the replies provided by the directors" through B&McK. As I have pointed out, the reply relating to the $5 million deposit added nothing to the explanation given back in November 1998.

81. On 2 September 1999, Messrs So Keung Yip and Sin ("SKY&S"), acting as the liquidators' solicitors, wrote to B&McK stating that since it had now been confirmed that the payment had been made with the knowledge and approval of all the directors:-

82. This is a slightly puzzling letter since the possible liability of the other directors, or at least those who had signed the authorisation to K&P to make the payment, must have been recognized by no later than 31 December 1998 when demand letters were sent not only to Yip, but also to Chu and Lau. Yet 9 months later, SKY&S were still only saying that the liquidators were "considering" necessary action.

83. Accordingly, in my view, the evidence in relation to this issue clearly shows that Kong Mou has at least prima facie grounds for discontent at the liquidators' lack of progress. It also suggests that much of the work in relation to this possible claim remains to be done.

G.(a)(ii) The April assignments

84. Details of the April assignments have been set out in Section C. above. They resulted in loans made by Goldcone to three of the "husband directors" being extinguished and in Cheung Shuen Lung's case, his becoming a creditor of Goldcone.

85. It is common ground that the April assignments also represent an area for further investigation and possible claims. However, the evidence again prima facie shows that little progress has been made.

86. In the 13 October letter, PCW raised numerous queries (in questions 100 to 133) concerning the debts allegedly owed by Goldcone to the "wife directors" and their companies and regarding the April assignments to their respective husbands.

87. In their reply of 6 November 1998, the liquidators provided PCW with the known details and indicated the effect of the April assignments. They took the view that Goldcone was insolvent at the time of that April assignments and said that they had sought legal advice from SKY&S in relation to "the validity of the agreements on the assignment of debts; whether the assignments constitute fraudulent preferences under s 266 of the Companies Ordinance; and the merit of taking recovery actions against the assignees for recovery of the debt." They indicated that they were expecting the advice shortly but would keep it confidential. This was repeated in the circular to creditors dated 10 November 1998.

88. However, no steps appear to have been taken pursuant to any legal advice so obtained until some 41/2 months later when, on 18 March 1999, SKY&S wrote to Cheung Shuen Lung alleging that his borrowing of $13.3 million from Goldcone constituted a breach of s. 157H of the Companies Ordinance and demanding repayment. Similar letters were written to the other two "husband directors", demanding repayment of $11.5 million from Yip Ka Yeung and $5.25 million from Cheung Siu Lung.

89. After another month, on 16 April, the liquidators wrote to Chu Nien Shian asking for an explanation of the loans to the directors. This resulted in correspondence with B&McK, and again, no substantive answer was received until 27 July 1999, over 9 months after PCW's 13 October letter and more than a year after Goldcone went into voluntary liquidation.

90. B&McK's explanation started with the allegation that all the directors had intended credits and debits on a single directors' account to be shared equally. B&McK stated that an accounting exercise was then carried out in about March 1998 which involved a retrospective breaking down of amounts "found to be 'owing' to the wives and companies owned by the directors of the Company and 'owed' from the husbands". The quotation marks around the words "owing" and "owed" appear in the letter itself and are evidently intended to question the true nature of such transactions. The letter then went on to say that Yip Ka Yeung was advised by K&P that the April assignments were acceptable "in order to achieve the common intention and practice of the directors in the past." This led to the assertion that "the amounts 'owed' by the three husbands were not 'loans' granted to them by the Company" so that breach of section 157H was denied.

91. At the creditors' meeting held on 6 August 1999, the liquidators reported having received the B&McK reply and that they were "currently looking into this matter."

92. On 2 September 1999, SKY&S wrote to B&McK saying that they did not see the relevance of the explanation tendered, pointing out, among other things, that Goldcone's ledgers undoubtedly showed the loans outstanding for the year ended 31 March 1998, that there had been no approval from the shareholders and that the assignees had given no consideration for the assignments. They stated that counsel's advice had been received that "to allow such purported set off by the respective assignees would prejudice the interests of the other creditors."

93. The position therefore appears to be that over a year after being appointed liquidators at the 1st creditors' meeting, little more had been done on this matter than to seek explanations and to demand payment. The work done, as indicated in the letter of 2 September, does not appear to have involved investigation going beyond an examination of the books and some correspondence with the directors. In my judgment, the petitioner again has prima facie grounds for disquiet at the lack of progress and the need for more effective investigation and action on this issue.

G.(a)(iii) The PRC property transaction and Faith On's loan

94. As indicated above, on 1 December 1997, Goldcone entered into a sale and purchase agreement to acquire the PRC property for RMB 45,903,823.20. On 6 March 1998, it paid a deposit of RMB 10 million to the vendor, Li Chi Kong.

95. Goldcone's records appear to show that shortly after the agreement, namely on 2 December and 12 December 1997, Faith On lent to Goldcone a total of $9,999,890. It is this debt which formed the basis of Faith On's default judgment and its charging order nisi (later discharged by consent) and which gives it the status of a creditor in the liquidation. It will be recalled that Li Chi Kong is a shareholder and a director of Faith On.

96. It is clear that from a relatively early stage, this transaction excited concern on Kong Mou's part. In its letter to the liquidators dated 11 August 1998, Kong Mou asked for information as to the progress of their investigation into the affairs of Goldcone, singling out the PRC property deal and the Faith On loan for mention. These were topics again raised in the 13 October letter (questions 38 to 58). Kong Mou wanted to know whether the liquidators intended to challenge the payment to Li and whether they were looking into the liability of the directors in this connection.

97. In their letter dated 6 November 1998 to Kong Mou (repeated in the circular to creditors which followed shortly), the liquidators explained that they had attended the site to ascertain its existence, obtained a professional valuation of the land, obtained legal advice as to its ownership, reviewed the sale and purchase agreement to determine its validity and determined the source of funding.

98. The valuation obtained by the liquidators showed that the land was worth RMB 15 million and not the RMB 45.9 million representing the contract price. The liquidators therefore concluded that "Goldcone had purchased the land for an unrealistic price". They also concluded that since selling Goldcone's interest to a sub-purchaser would require the sub-purchaser to pay not only an amount for that interest but also an additional RMB 35 million to complete the acquisition, a sale was an obviously uneconomic prospect. The liquidators accordingly decided to cease trying to sell that interest. They reported that at that stage, they were "considering the legal implications of the Faith On transaction entered into by the directors of Goldcone" but had to keep their deliberations confidential.

99. Nothing further seems to have been done by 25 March 1999 when representatives of Kong Mou held a meeting with the liquidators. They asked the liquidators about the PRC property transaction and the note of what they were told (which had not been shown to the liquidators and has not been agreed by them) suggests that the liquidators' approach was to disregard or reject Faith On's claim by identifying Faith On with Li Chi Kong. The note also records that the liquidators did not "so far" have any supporting documents for the PRC property and that they had not seen any original documents but only a photocopy of a letter of agreement to buy it for RMB 45.9 million. It records that the liquidators were unable to say whether the document was legal or not.

In their report to the creditors dated 6 August 1999, the liquidators stated:-

100. However, it would appear to be the case that no steps at all have been taken towards setting it aside.

101. In my view, a rational creditor would have grounds for regarding as unsatisfactory the liquidator's approach (confirmed by Mr Yu at the hearing) of regarding the creditors' interests as sufficiently safeguarded by rejecting any proof of debt that Faith On might lodge.

102. It is true that Faith On's alleged debt is roughly of the same value as the sum paid by Goldcone to Li Chi Kong. However, Li Chi Kong and Faith On are separate entities. Prima facie, it is difficult to see how a set-off relying on the Faith On debt could be raised by Li Chi Kong by way of defence if he were pursued by the liquidators. Likewise, if Faith On were to lodge a proof, it is not immediately easy to see how the liquidators could rely on their complaint against Li Chi Kong as a basis for rejecting it.

103. If, as the liquidators have suggested, the PRC property transaction may be capable of being set aside, Li Chi Kong could in consequence presumably be pursued for the return of the whole amount received. Faith On, on the other hand, could only claim an entitlement to a dividend in the liquidation.

104. In any case, investigation of the directors' role in the transaction and of any possible misfeasance claims against them in relation to their authorization of the PRC property transaction and the payment to Li Chi Kong has no bearing on how Faith On's proof, if any, might be treated.

105. I am therefore satisfied that the prima facie evidence is such that creditors may rationally demand a more extensive inquiry into this transaction and into the roles played by the directors in it. It is clear that RMB 10 million has been lost to the company. The valuation suggests that a massively inflated price (in the region of 300% of valuation) was contracted. Yet there is no evidence that the liquidators have questioned the directors about their making of the deal or considered possible claims against them.

106. If Kong Mou's note of the March 1999 meeting is correct, the liquidators have not even secured from the directors the original documents. If the directors do not have them, they ought to be able to explain what has happened to them. If the directors did not receive the originals, questions would have to be asked as to the basis upon which they permitted RMB 10 million of the company's money to be paid to Li Chi Kong.

107. To have reached only the stage described above some 14 months after they were appointed liquidators, in my judgment, gives a rational creditor a prima facie basis for disquiet as to lack of progress and grounds for questioning the enthusiasm with which the liquidation has been conducted.

G.(a)(iv) Extending the period of investigation

108. A further area for investigation was raised at the hearing. This was based on a change in the law of fraudulent preference which came into force on 1 April 1998.

109. In their circular to the creditors dated 10 November 1998, the liquidators stated that they had:-

110. It was said that in doing so, they had "paid special attention to payments made to directors and related companies" within that 6 month period, checking and identifying the nature of such payments, reconciling them with the banks statements and determining whether Goldcone was insolvent at the time when the payments were made. This evidence suggests that transactions occurring outside that 6 month period were either not subjected to investigation or not scrutinised for instances of possible fraudulent preference.

111. Before 1 April 1998, by s 266 of the Companies Ordinance, transactions including payments could be invalidated if done within 6 months before the commencement of a company's winding-up and if deemed a fraudulent preference.

112. By s 266B, on and after 1 April 1998, the new concept of "unfair preference" in the Bankruptcy Ordinance was made applicable to companies. The relevant period during which transactions may be invalidated as an unfair preference is 2 years "in the case of a person who is an associate" as defined in s 51B of the Bankruptcy Ordinance. By s 51B(6), a company is deemed an associate of a debtor if that debtor has control of that company or if that debtor and persons who are his associates together control that company.

113. Mr Poon submits that the liquidators erred in not applying the new law. They should not have confined their examination of transactions involving the directors to the 6 month period but, on the footing that the directors were "associates" of Goldcone, they ought to have scrutinised transactions going back for two years, that is, down to May 1996, to see if any unfair preferences could be identified.

114. In my judgment, although it is not clear that further investigation would yield anything at all, a rational creditor could, on the evidence, regard this as an issue which properly requires further investigation (although by no means necessarily an investigation of the whole two-year period).

115. The liquidators prima facie appear to have confined their investigations to the period beginning on 21 December 1997, counting back 6 months from 21 May 1998 (when Goldcone was placed in voluntary liquidation). This caught within the net the 5 January payments totalling $19.85 million mentioned above (and discussed further in the next section). It also meant scrutiny of the sale by Goldcone of its entire property portfolio in the period from 23 February 1998 to 16 March 1998.

116. Since, as Yip Ka Yeung has stated in his affirmation, the property market in Hong Kong dropped drastically during November 1997, it is rationally arguable that the guillotine on investigations should not have come down on 21 December 1997, but that investigations should extend to a somewhat earlier date. It is plausible that with the drastic fall in the market having occurred a month or two before 21 December, questionable transactions, so far undetected, might be found if the directors' activities were scrutinised over a period extended by, say, three months. I consider this a minor factor to be placed in the balance.

G.(a)(v) The 5 January payments

117. The 5 January payments represent a major area of contention between the liquidators and the petitioning creditor. The liquidators discovered that on 5 January 1998, payments totalling $19.85 million were made by Goldcone to its directors and to Super Kingsun. Of this amount, Super Kingsun received $6.25 million.

118. Super Kingsun is said by Cheung Shuen Lung to be a company owned equally by the directors personally or through their respective companies. It has the same directors as Goldcone except for Cheung Shuen Lung and Cheung Siu Ha. It was involved in the April assignments, having been named in Yip Ka Yeung's Mareva affirmation as a creditor to whom Goldcone owed the sum of $10,615,200 before it assigned that debt (save for $147,326.33) in various portions to Yip Ka Yeung, Cheung Siu Lung and Cheung Shuen Lung respectively. Super Kingsun also voted as one of the creditors (on the basis of the said $147,326.33 debt) who appointed the liquidators at the 1st creditors' meeting.

119. It is not surprising that the petitioning and supporting creditors view these 5 January payments with suspicion. It is striking that the $19.85 million was paid out of the company to the directors and their own companies less than 3 weeks after Goldcone had defaulted on completion of its agreement with Kong Mou. Those payments were made a mere 12 days after Kong Mou's Writ was served on Goldcone. They were also payments made after Goldcone had evidently thought it necessary on 2 and 12 December 1997 to borrow at least a total of $9,999,890.00, from Faith On, allegedly agreeing to pay interest at 12.06% per annum on the sum borrowed.

120. However, in their letter to PCW of 6 November 1998 and their circular of 10 November, the liquidators stated that in their view Goldcone did not become insolvent until 31 March 1998 (presumably the date when the Young Brothers writ was served and after various losses on liquidation of Goldcone's property portfolio were realised). They said that even after making accounting adjustments which took Goldcone's working capital down from $78. million to $46.5 million, Goldcone was solvent as at the date of the 5 January payments. Accordingly, they said, the 5 January payments "may not be regarded as fraudulent preference as the company was solvent at the time of making such payments." The implication was that the liquidators did not intend to pursue this matter further.

121. Kong Mou was not happy with this view. On 5 March 1999, it wrote to the liquidators stating:-

122. Turning to the 5 January payments, they called for an explanation as to how, with a reported "adjusted" working capital of $46.46 million as at 5 January, Goldcone became insolvent less than 3 months later on 31 March 1998.

123. On 27 July 1999, Yip Ka Yeung made an affirmation in the present proceedings providing the only explanation of the 5 January payments to be found in the evidence. He stated that the background was Goldcone's difficulty in finding finance to complete its acquisition of the 2nd Tregunter property. Goldcone's main bankers, the Bank of China, had turned it down because of the condition of the property market. Goldcone therefore approached the China & South Sea Bank which agreed to provide finance, but could only advance the loan proceeds during 1998 as they had used up their loan quota for 1997.

124. Since the completion monies for the 2nd Tregunter property were payable on 20 December 1997, bridging loans totalling $60,299,890 were made to Goldcone by Faith On ($9,999,890), Yip Ka Yeung ($8.5 million), Super Kingsun ($7 million), Chu Nien Shian ($10.5 million), Cheung Shuen Lung ($8.3 million) and a Chinese enterprise referred to phonetically as Fong Jihng ($16 million). After the completion, China & South Sea Bank provided mortgage funds totalling about $39.8 million, of which $35.85 million was used to repay part of the bridging loans. That sum of $35.85 million was said to comprise the 5 January payments totalling $19.85 million plus the sum of $16 million repaid to Fong Jihng. Accordingly, according to Yip Ka Yeung, there was nothing untoward about the 5 January payments, given that Goldcone was solvent at that stage.

125. The liquidators have not disputed this version of events and, by the time they reported to the creditors on 6 August 1999, they no longer referred to the 5 January payments as a live issue.

126. The petitioning creditor contends that it has legitimate demands for this issue to be further investigated. Mr Poon argued that, contrary to the views of the liquidators (and of Messrs Ernst and Young, retained by the opposing creditor and other directors), there is prima facie evidence that Goldcone was insolvent as at 5 January.

127. Mr Poon pointed out that the liquidators' view as to Goldcone's solvency relied on Goldcone's balance sheet showing as part of its then current assets "Properties held for resale" having a value of $143.6 million. Kong Mou (which has also instructed professional accountants to advise it), argued that as at 5 January 1998, this must have been an extremely questionable figure. It was submitted that in accordance with a Statement of Standard Accounting Practice applicable in Hong Kong (SSAP 2.122), such an asset should be stated at cost or realisable value, whichever is the lower. The figure in Goldcone's balance sheet states the value of those properties at cost when, with the collapse in the property market, a much lower realisable value should instead have been shown, with an obvious impact on any assessment of solvency.

128. Secondly, Mr Poon stressed that when making an assessment of Goldcone's solvency as at 5 January 1998, it was necessary, as a matter of law, to take into account its prospective and contingent liabilities and not to adopt too blinkered a view. In my view, there is force in that submission. In s 51(3) of the Bankruptcy Ordinance (made applicable to companies by s 266B as mentioned above), for the purposes of unfair preferences, a debtor is insolvent if either he is unable to pay his debts as they fall due or, "the value of his assets is less than the amount of his liabilities, taking into account his contingent and prospective liabilities." Accordingly, in asking whether Goldcone was insolvent as at 5 January 1998, it is necessary to take into account its contingent and prospective liabilities which had been incurred by that date.

129. As I have already stated, the 5 January payments were made shortly after Goldcone had defaulted on its agreement with Kong Mou. Taking into account what Yip Ka Yeung's version of the background to those payments, Goldcone's application for finance had been turned down by its main bankers. About a month earlier, it had incurred a prospective liability under its sale and purchase agreement dated 1 December 1997 with Li Chi Kong to purchase a PRC property for RMB 45.9 million, payable in 3 instalments, the first of these being due in March 1998. We now know that this was prima facie a vastly inflated price and also that the March instalment was later put back to the end of 1998 by a supplemental agreement entered into on 27 March 1998. However, prima facie that would not have been known at the time of the 5 January payments. Also falling due for completion on 12 March 1998, was the contract with Young Brothers to acquire the Manderly Gardens property. That constituted a prospective liability involving payment of the balance of the $58.8 million purchase price. As we now know, Goldcone defaulted on the Young Brothers contract and was sued to judgment on it. The Writ served by Young Brothers on 31 March 1998 was apparently an event regarded by the liquidators as tipping Goldcone into insolvency. Mr Poon submits that all of these matters provide a rational, prima facie basis for requiring the question of Goldcone's solvency as at 5 January to be further investigated.

130. Even if it should transpire, after investigation, that Goldcone was not insolvent when making the 5 January payments, Mr Poon argues that there ought to be investigation of possible claims based on legal or equitable principles, other than claims based on unfair preference.

131. He points out that no explanation for the 5 January payments other than that given by Yip Ka Yeung has ever been provided (without supporting documents). If Yip's account is true, then it may be that the issue is properly viewed solely through the lens of unfair preference and, if Goldcone was solvent, rejected as a basis for any claims. However, if Yip's story is not true, then various other possible bases for challenging the 5 January payments may emerge, including claims based on fraudulent conveyance or misfeasance on the part of Goldcone's directors.

132. Yip Ka Yeung's credibility is at least prima facie suspect. His explanation given to the liquidators to justify his receipt of the $5 million deposit was rejected by them. Accordingly, there must prima facie be scope to question the truthfulness of his explanation of the 5 January payments. Given the suspicious timing of those payments, Mr Poon submits that the issue is one which a creditor may rationally seek to have further investigated on the evidence as it stands.

133. In my judgment, while accepting that investigations may ultimately yield no benefit, in the light of the considerations discussed above, I agree with Mr Poon and consider that a sufficient basis has been made out for a rational creditor to call for further investigation of the 5 January payments, whether as possible unfair preferences or as transactions otherwise open to challenge.

G.(a)(vi) Acquiescence

134. As mentioned in section F.(b) above, Mr Yu laid great emphasis on the unusual fact that in the present case, the petition was only presented about a year after the resolution for a voluntary liquidation, with all the implications this carried.

135. Mr Yu submitted that the petitioning creditor should be viewed as effectively, if not as a matter of strict law, having acquiesced in the continuation of the voluntary liquidation during the period prior to May 1999 when the petition was presented. This, in the exercise of the court's discretion, should be regarded as an important factor debarring him from relief.

136. I cannot accept that argument. In my judgment, the submission that the petitioning creditor has so acquiesced simply cannot be made good on the evidence. As I have pointed out, in May 1998, immediately after the provisional liquidators were appointed, Kong Mou wrote to them twice, reminding them of their duties and saying that it was anxious to know the result of their investigations. The anxiousness of Kong Mou to press ahead, putting forward their own candidates as liquidators, was demonstrated at the 1st creditors' meeting in June 1998. Then in July, they wrote asking for the full statement of affairs. They wrote again on 11 August 1998 asking for information as to progress and, having received no substantive answer, sent a "chaser" on 2 September 1998. They got only a holding reply on 18 September and, on 13 October, PCW sent the lengthy questionnaire which was prefaced by a complaint in the following terms:-

137. Perhaps stung by this letter, the first substantive responses were given by the liquidators in November. As I have mentioned above, these responses did not satisfy Kong Mou as they appeared to reveal little progress after the voluntary liquidation had been going for more than 6 months.

138. On 5 March 1999, Kong Mou wrote asserting that they had "grounds to be concerned about the affairs of Goldcone prior to its liquidation as well as about how the liquidation administration has progressed." Given that there appears on the record to have been a continuing lack of progress since the November circular, I do not regard the apparent gap between November and March as constituting acquiescence. The creditors may well have been hopeful that after receiving the November circular, they could expect some results and may have been waiting to see if this would occur. However, with the continued lack of results and information, Kong Mou expressed its disquiet in its 5 March letter.

139. In answer to Kong Mou's complaint, on 16 March 1999, the liquidators wrote saying (erroneously) that, after receiving legal advice "we have commenced legal proceedings against the directors of Goldcone for $5 million concerning payment to Yip Ka Yeung and HK$30,077,992.36 in respect of loans provided to the directors pertaining to the assignment of debts." Kong Mou may have derived comfort from this. If so, the comfort was illusory as no proceedings had been commenced.

140. This was an error echoed in the liquidators' letter to B&McK dated 3 June 1999 when they stated: "We have obtained legal advice which confirms that we should commence legal action to recover amounts due from the directors and we have commenced appropriate action." No proceedings have in fact been commenced to date.

141. In any event, on 25 March 1999, Kong Mou had a meeting with the liquidators raising once more many of the questions it had previously raised but evidently regarded as having been inadequately answered. These included questions relating to the PRC property deal, the use of K&P as the liquidators' solicitors (a matter dealt with further below), the $5 million deposit, the April assignments and loans to the directors and the position of Faith On.

142. It would appear that because they were unhappy with progress and the performance of the liquidators, Kong Mou decided in May 1999 to present the petition now being heard.

143. In my judgment, the picture which appears is one of Kong Mou consistently demonstrating that it was a creditor anxiously seeking to protect its interests and pressing the liquidators to make greater progress. It was clearly initially prepared, if reluctantly, to give the liquidators a chance to run the liquidation. However, over time, a perceived lack of progress and lack of motivation appears to have caused Kong Mou to lose confidence in the liquidators and to seek a compulsory order. In my view, a reasonable willingness to afford the liquidators an opportunity to perform their duties and an application for a compulsory order made only after confidence in them has been lost or seriously undermined after a year of little progress, does not constitute acquiescence in the continuation of the voluntary liquidation.

G.(b)(i) The liquidators must be and be seen to be independent and impartial

144. I assume for present purposes that Messrs Lees and Chiong have in fact acted independently and impartially as between the creditors, the directors and any others interested in the liquidation. However, it is clear from the authorities that a factor given significant weight in the exercise of the judicial discretion is that liquidators must not only act independently and impartially, they must be seen to be doing so, particularly where possible wrongdoing by the directors has to be investigated and possibly pursued in litigation.

145. In In re Palmer Marine Surveys Ltd [1986] 1 WLR 573, the overwhelming majority of the creditors by value favoured a compulsory order and the statement of affairs suggested that if the voluntary liquidation were to proceed, the unsecured creditors were unlikely to receive any dividend at all. However, the petitioning and supporting creditors wanted a compulsory order so that the management of the company by its controlling shareholder (a Mr Davies) could be investigated by the Official Receiver. Hoffmann J commented (at p 578) :-

Hoffmann J went on as follows (ibid.) :-

146. In the circumstances of that case, it was held that continuation of the voluntary winding-up would leave the petitioning creditor with a justifiable feeling of unfair treatment in two respects. First, it had been excluded from the creditors' meeting at which the liquidator was appointed, this being a factor even though the vote would probably have been the same even if he had been allowed to participate. Secondly, there was evidence to suggest that assets had been transferred for inadequate value to an associated company and in such circumstances:-

147. Hoffmann J pointed out that the public is often scandalised at seeing unsuccessful businessmen apparently transferring the assets and business of an insolvent company to a new company where they continue trading as before, leaving the creditors unpaid. He added:-

148. Mr Yu has sought to distinguish this case on the facts, stressing that in the Palmer Marine case, the unsecured creditors had no prospect of a dividend. This feature of the case was noted by Vinelott J in Re MCH Services Ltd [1987] BCLC 535 at 538d, the point being that the opposing creditors could not in such a case argue that they preferred a voluntary liquidation on the basis that it gave a better prospect of recovery. Mr Yu submitted that, in contrast, in the present case, duplicated labour and wasted expense were relevant as they might cut into or eliminate any dividend that may otherwise be payable under the voluntary liquidation.

149. I agree that such a question is relevant, although the extent of any such likely duplication and waste of expenses is questionable. Expense and delay are certainly factors that must be placed in the discretionary balance. I return to this topic later in this Judgment. Nevertheless, the point of principle that a liquidator must not only be, but must be seen to be, independent and impartial so as to avoid leaving any part of the creditors with a justified sense of grievance remains an important separate factor.

150. Re Lowerstoft Traffic Services Ltd [1986] BCLC 81 was another case involving a choice between a compulsory order and a continued voluntary liquidation where there were suspicions that assets had been transferred from a failed company to new entities, at the expense of the failed company's creditors. Hoffmann J (at p 84) stated as follows:-

151. After once again referring to such transfers of assets being a matter of public scandal, his Lordship continued as follows:-

152. There was no criticism of any kind against the liquidator who had been appointed in the voluntary liquidation. Indeed, Hoffmann J noted (at p 83) that soon after his appointment, the liquidator had written to the Department of Trade and Industry drawing attention to what he described as disquieting features which he had discovered in the course of carrying on the liquidation, including disposals of assets away from the company. Hoffmann J added:-

153. A compulsory winding-up order was made, leaving it to the creditors to decide whether they wished to continue with that liquidator or to have him replaced.

154. In Re MCH Services Ltd [1987] BCLC 535, Vinelott J took the same view. He commented that in the Palmer Marine case there had been "very strong grounds for thinking that the petitioning and supporting creditors would have been left with a justifiable feeling of unfair treatment by the refusal of a compulsory order." His Lordship continued (at p 538) as follows:-

155. Vinelott J noted that the overwhelming majority of trade creditors supported the petition as there were matters that appeared to need investigation. He continued (at p 539) as follows:-

156. In Re Falcon R J Developments Ltd [1987] BCLC 437, Vinelott J reiterated the principle and (at p 442e) stressed that a compulsory order might be made in preference to a voluntary liquidation "even though no attack was made on the probity or the competence of the voluntary liquidator."

G.(b)(ii) The perception of impartiality and independence

157. Adopting the guidelines derived from the abovementioned authorities, I have come to the conclusion that if a compulsory order is refused, Kong Mou and the supporting creditors may justifiably feel a sense of grievance which, in the circumstances of this case, is a consideration which should be given weight in the exercise of my discretion.

158. As I have already explained in Section G.(a) above, it is my view that substantial matters remain for investigation and action by the liquidators, including the possible pursuit of claims against Goldcone's directors. However impartial and independent Messrs Lees and Chiong have in fact been, it remains the case that they were appointed by creditors who are, or who belong to the camp of, potential targets for investigation and action.

159. Refusal of a compulsory order would deprive the petitioning and supporting creditors of the chance to ensure that some other liquidator is given conduct of these matters. Because of the events which have happened, in particular involving the liquidators' association with K&P, I cannot be satisfied that the conduct of the liquidation will be seen to be independent and impartial if the creditors are not afforded that opportunity.

160. Before turning to the evidence, my conclusions and findings, may be summarised as follows. K&P were Goldcone's solicitors and had advised the company in its business transactions, many of which require scrutiny by the liquidators and some of which may be thought to involve wrongdoing on the part of the directors.

161. As they had been replaced by the time of the hearing, K&P were not before me in court and I bear it in mind that they have not had any opportunity to address me as to their position. I am therefore not to be taken to make any adverse findings against such solicitors. However, in the absence of explanation (none having been suggested by Mr. Yu), it appears to me prima facie to have been inappropriate that those same solicitors should have taken up the role of advising the liquidators in the voluntary liquidation in the light of their previous association with Goldcone and its directors. This, as the evidence reviewed below indicates, they apparently did for some part of the first six months of the liquidation.

162. For K&P to advise the liquidators would immediately have been seen by Kong Mou to be objectionable since they were the self-same solicitors who had represented Goldcone and Yip Ka Yeung against Kong Mou in the highly contentious Mareva proceedings described above. They had, in other words, taken an adversarial position directly against the largest single creditor in the winding-up on behalf of a client who was obviously perceived by that creditor as guilty of dissipating assets and other unwholesome activities.

163. By acting as legal advisers to the liquidators after their association with Goldcone and its directors, K&P may plausibly be seen by the creditors to have compromised the liquidators' independence and impartiality. In such circumstances, to permit Messrs Lees and Chiong to continue in charge of the liquidation may give rise to a justifiable sense of grievance on the part of the petitioning and supporting creditors.

164. Mr Yu initially submitted that any grievance felt by Kong Mou on the basis of K&P's involvement with the liquidators was based on a misconception since K&P were only advising on property matters. Subsequently, that submission was withdrawn. The evidence of their involvement in the context I have outlined above is, in my view, in fact ample. I now turn to that evidence.

165. I have already indicated the course taken in the Mareva proceedings and the sense of alarm that Kong Mou felt regarding Goldcone's activities and financial condition as disclosed in Yip Ka Yeung's disclosure affirmation. It appears that the ex parte application made on 17 April 1998 was conducted on notice to Goldcone and that Mr Side of K&P appeared on that occasion on the company's behalf. He also seems to have been involved in Goldcone's application on 1 May 1998 before Sears J for a variation and at the hearing of Kong Mou's unsuccessful attempt at obtaining further protective orders.

166. In the course of such litigation, K&P naturally took up positions defending the directors and contending, for instance: "our client has nothing to hide" in a letter dated 16 April 1998 to PCW. They also resisted further disclosures, for instance in their letter of 30 April 1998 to PCW, where they stated:-

167. While such correspondence was perfectly legitimate in the context of that litigation, the fact that K&P had taken such positions in defence of the directors at least prima facie suggests that they would have a serious conflict of interest if they subsequently acted for the liquidators. How could the petitioning and supporting creditors be confident that K&P would advise the liquidators to press investigations with a view to uncovering possible wrongdoing on the part of the directors when K&P may well have been advising those directors on the very transactions in question?

168. Fears of such involvement by K&P in transactions under scrutiny were not a matter of speculation. Thus, the payment to Yip Ka Yeung in respect of the $5 million deposit transaction was actually effected by a K&P cheque. In the letter dated 22 May 1997 from Goldcone's directors instructing them to make the payment, the amount was expressly described as "the deposit received by us on the sub-sale of the Property". It is not clear whether K&P asked about or knew the purpose of such a payment, but clearly, they might be in an embarrassing position in any investigation of the circumstances of such payment.

169. K&P was also involved in advising on the directors' loans and the associated April assignments. Messrs Baker & McKenzie, the present solicitors for Cheung Shuen Lung, stated in their letter of 27 July 1999 as follows:-

170. It will be recalled that some 18 months after K&P is alleged to have given such advice, SKY&S, the firm which replaced K&P, replied (on 2 September 1999) saying that they did not see the relevance of the explanation tendered. This illustrates the difficulty. If K&P had in fact given Goldcone advice that the achievement of the "common intention and practice" made the April transactions valid, they were unlikely to take the sort of line taken by SKY&S on the liquidators' behalf some 18 months later. Creditors may well suspect that any advice on the April assignments given by K&P to the liquidators would have been impaired by their prima facie conflict of interest. This "tainted" advice may be seen to have influenced the liquidators' own views and decisions regarding the transaction in question while they were being advised by K&P.

171. The previous involvement of K&P in sensitive matters does not end there. In his affirmation made on 27 July 1999 in opposition to the petition, Yip Ka Yeung explains that K&P had advised Goldcone as to how the quantum of damages would be calculated if it should default on its contract with Kong Mou and also that the decision to put the company into voluntary liquidation was taken with K&P's advice. Kong Mou could accordingly be forgiven for regarding K&P with suspicion as the firm which may have given advice leading to Goldcone deciding to default on their contract, possibly as the cheapest option.

172. Moreover, since Kong Mou regarded the resolution to put Goldcone into voluntary liquidation as a device to pre-empt Kong Mou's own application for a receiver, to hear that this was a step taken by the directors on K&P's advice must have heightened its doubts as to the ability of K&P to give impartial advice to the liquidators.

173. These suspicions appear to have been keenly felt when, at the 1st creditors' meeting on 16 June 1998, K&P appeared as solicitors representing the provisional liquidators, as recorded by the minutes. The suspicions are likely to have been aggravated when, against the protests of Kong Mou, both Kong Mou and Young Brothers were excluded from voting (whatever the correct technical position may have been regarding their unliquidated claims) and in particular, were excluded from voting to choose the liquidators to be given charge of the winding-up.

174. It is not clear how long K&P retained its role as advisers to the liquidators. However, the evidence suggests that it may have been until as late as October 1998. Thus, in their letter dated 15 July 1998 responding to a query from Kong Mou, the liquidators enclosed a note prepared by K&P setting out completion dates for the properties which Goldcone had contracted to sell. While the liquidators have explained that they considered it beneficial to keep K&P in charge of the outstanding conveyancing transactions, it is not at all clear that K&P's function was so limited. Even if it was, from the viewpoint of the petitioning and supporting creditors, any such limitation on K&P's function would not have been evident.

175. Thus, when on 13 October 1998, PCW on Kong Mou's behalf put a lengthy series of questions about the conduct of the liquidation to the liquidators, the letter was addressed to K&P and was apparently dealt with through that channel, with, for instance, a chaser dated 26 October 1998 similarly addressed.

176. It is only in the circular of 10 November 1998 that the liquidators stated for the first time that they were receiving advice from a different solicitors' firm, namely, SKY&S. Even then however, it was not made entirely clear to Kong Mou that K&P's role had ceased.

177. According to the note (which has not been agreed) of the 25 March 1999 meeting between the liquidators and Kong Mou, the latter raised as a query: "Why FHM [Ferrier, Hodgson & Marfan, the liquidators' firm] are using Koo & Partner which same lawyer with Goldcone" and recorded as part of the answer: "that they are recommend by Koo & Partner." The note also recorded that the connection had since ceased.

178. The affidavit sworn by Mr Chiong on 2 September 1999 explains that K&P were retained to finish off the outstanding conveyancing work. It also states that after questionable transactions were discovered and a potential conflict of interest was recognized, SKY&S were instructed. However, it does not make clear when K&P stopped advising the liquidators on matters other than the conveyancing. I do not read this affidavit as inconsistent with my view that the evidence indicates that K&P continued to advise the liquidators more generally until as late as October 1998 or thereabouts. Mr Chiong who was present in person at the hearing elected not to address the court.

179. That an undesirable association between the liquidators and the solicitors formerly advising the directors may be a significant factor in the exercise of the discretion was recognized by Hoffmann J in Re H J Tomkins & Son Ltd [1990] BCLC 76 at 78-79 where he stated as follows:-

180. I re-iterate that I am not to be taken to be making any adverse findings against the liquidators or K&P. However, I have come firmly to the conclusion that the evidence is such that a refusal of a compulsory order may well leave independent creditors with a strong and legitimate sense of grievance because of the involvement of K&P in advising the liquidators after having been closely associated in the affairs of Goldcone and its directors as their legal advisers. This is an additional and significant factor in favour of a compulsory winding-up.

G.(c) A liquidation process untrammelled by doubts

181. I have mentioned that Mr Yu invited me to adopt Harman J's formulation in Re Rhine Film Corporation (UK) Ltd (1986) 2 BCC 98,949 and to ask whether the class remedy of liquidation is likely to be better satisfied by the continuation of the voluntary liquidation or to be better served by being superseded by a compulsory liquidation. Applied to the present case, it appears to me clear that as a process, a compulsory winding-up followed by the majority independent creditors choosing a liquidator of their choice, would be preferable.

182. Ever since the liquidators were appointed by the votes of Super Kingsun, Cheung Shuen Lung and Faith On at the 1st creditors' meeting, they have been, not through any fault of their own, inevitably been viewed with circumspection and reserve by the independent creditors. They have found themselves in the middle of a battlefield occupied by their appointors on the one hand and the independent petitioning and supporting creditors on the other.

183. All things being equal, liquidators should enjoy the confidence of all the creditors and their own status and position qua liquidators should not have to be an issue in the liquidation. In the present case, the status of Messrs Lees and Chiong as liquidators has already featured in two rounds of expensive, hard fought liquidation.

184. In response to the petition, on 25 May 1999, the liquidators' circularised all the creditors pointing out that the major creditors who had not been allowed to vote on their appointment had now acquired quantified claims and wanted to nominate a different liquidator. Stating that they believed a compulsory winding-up not to be in the interests of creditors on grounds of cost, they had proposed, and the petitioning creditor had agreed, to a meeting on 4 June 1999 to consider resolutions for the liquidators to resign and to be replaced by others.

185. This initiative provoked loud protests from B&McK on behalf of the opposing creditors. Cheung Shuen Lung went to the lengths of issuing proceedings in HCMP 3315 naming the liquidators as Respondents to prevent the suggestion from succeeding. He sought and obtained from Le Pichon J an ex parte order that the liquidators should not submit their resignation until after determination of the Petition or further order, as well as a direction (or perhaps a judicial indication) that it was considered not expedient for liquidators to resign until after the first hearing of the petition.

186. The learned Judge evidently took the view that it would be irresponsible for the liquidators to walk away from the liquidation without having held or reported to the annual meeting of creditors and contributories and without the creditors voting on the matter after having been given the information that the liquidators had so far gathered.

187. From the liquidators' point of view, it would have become evident that the proposal of any step in a direction considered by the opposing creditor to be compliant with the wishes of the petitioning creditors would run the risk of immediate judicial proceedings against them.

188. The second round of litigation raising the question of their status as liquidators is, as is obvious from this judgment, the contested hearing of the petition itself. Evidence was filed by Mr Chiong and, quite understandably, he has in his affidavit occasionally adopted a somewhat defensive tone against complaints made by the petitioning creditor. He finds himself in the unenviable position of being criticised by the one camp for wishing to stop acting as liquidator and being criticised by the other for continuing to act.

189. The voluntary liquidation has therefore given rise to issues over the liquidators' status that must have detracted from the work of advancing the liquidation. Instead of spending time, effort and money arguing about who should be the liquidators, the resources of the creditors and the liquidators should obviously be employed in advancing the liquidation itself.

190. If I were to refuse a compulsory order and to permit the voluntary liquidation to continue, a real risk must exist that the liquidators will continue to be hampered by being caught between the two hostile camps. If, however, a compulsory order is made and if, as is most probable, fresh liquidators are appointed, such liquidators will have been appointed by a vote in which all the creditors will have had the opportunity to take part and the fresh liquidators will not be stigmatised by having been appointed by directors targeted for investigation. Nor would they be seen to be in any way tainted by having been advised by the company's former solicitors. The liquidation process is therefore likely to be more effective and seen to be fair if liberated by a compulsory order from the encumbrances mentioned.

G.(d) The choice of the overwhelming majority

191. Finally, it is clear that the majority in value, representing creditors holding 61.3% of Goldcone's debts, favours a compulsory order. The details are set out in section F.(a) above. While not ignoring it, I treat the opposing vote of Cheung Shuen Lung with considerable reserve because he, as a potential target for investigation and action, may have a personal interest, adverse to the interests of the creditors as a whole, against a new liquidator being put in charge of the liquidation. Faith On's opposition may be similarly influenced and so again, while not disregarded, its vote should be given a diminished weighting.

192. Such a qualitative, as opposed to a purely quantitative approach to the majority is well established. As Vinelott J pointed out in Re Falcon R J Developments Ltd [1987] BCLC 437 at 445 :-

193. It follows that the overwhelming majority of independent creditors favours a compulsory order. This is obviously an important factor to be taken into account in making the choice faced by the court.

194. There is undoubtedly a risk of some duplicated effort and so some wasted expense if new liquidators are brought in. However, the liquidators themselves have advised that if the winding-up is handed over to new liquidators, much of the work will not require duplication. In any event, the question of whether additional expenses should be incurred are usually best left to the majority. Vinelott J, in Re Falcon R J Developments Ltd, at 448, put the point as follows:-

195. In the present case, it was argued that bringing in the Official Receiver would mean incurring substantial ad valorem charges. I note that the opposing creditors in Re Lowerstoft Traffic Services Ltd [1986] BCLC 81 at p 84 also relied on the "substantial additional burden of expense" which involvement of the Official Receiver would add to the liquidation. Hoffmann J held that this was a matter that should be left up to them. He held likewise in Re William Thorpe & Son Ltd (1989) 5 BCC 156 at 158

Conclusion

196. Taking into account all of the abovementioned factors, I have decided, in the exercise of my discretion, to make a compulsory order for the winding-up Goldcone.