RE KING'S DYEING & WEAVING FACTORY LIMITED

IN THE SUPREME COURT OF HONG KONG

COMPANIES WINDING UP

No. 217 of 1986

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JUDGMENT

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1. King's Dyeing & Weaving Factory Limited (King's) was wound up compulsorily by the court on the 26th August 1986 on the grounds that it was insolvent and unable to pay its debts. The Official Receiver who had been appointed to be the provisional liquidator of the company on the 25th July was confirmed in this appointment whilst Mr E. Johnstone and Mr N. P. Etches, partners in the firm of Chartered Accountants, Peat Marwick Mitchell & Co. who had been appointed to be Special Managers on the 30th July were confirmed in this appointment. By a Regulating Order made on the 15th September, Mr Johnstone and Mr Etches were appointed to be the joint liquidators of King's.

2. Pursuant to an application by the Official Receiver I made an order ex parte on the 28th August for the three applicants, Mr Francis Young (F. Young), Mr Benedict Joseph Young (B. J. Young) and Miss Cecilia Mary Young (C.M. Young) of the firm of accountants K. K. Young & Co. to be summoned under section 221 of the Companies Ordinance to attend on the Registrar to give information concerning the company in the winding--up and to produce documents relating to King's, Kazan Properties and Investment Ltd. (Kazan) and Hyperion Corporation (Hyperion).

3. Section 221 of the Companies Ordinance provides:

"         (1) The court may, at any time after the appointment of a provisional liquidator or the making of a winding--up order, summon before it any officer of the company or person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs, or property of the company.

 

            (2) The court may examine him on oath concerning the matters aforesaid, either by word of mouth or on written interrogatories, and may reduce his answers to writing and require him to sign them.

 

            (3) The court may require him to produce any books and papers in his custody or power relating to the company, but, where he claims any lien on books or papers produced by him, the production shall be without prejudice to that lien, and the court shall have jurisdiction in the winding-up to determine all questions relating to that lien.

 

            (4) If any person so summoned, after being tendered a reasonable sum for his expenses, refuses to come before the court at the time appointed, not having a lawful impediment (made known to the court at the time of its sitting, and allowed by it), the court may cause him to be apprehended and brought before the court for examination. "

 

4. Megarry J., in In Re Rolls Razor Ltd. (No. 2)⁽¹⁾ at p. 536 explained the procedure under S. 268 of the Companies. Act 1943 which is the equivalent of s.221 as follows:

"         What .......... is before me now is a written statement of facts by the liquidator in support of his application. This statement has not been, and will not be, disclosed to the applicants. This departure from normal legal procedure has long been sanctioned by the courts in view of the purpose of section 268. As Bowen L. J. observed in In re North Australian Territory Company (1890) 45 Ch.D. 87, 93, this is an extraordinary section giving an extraordinary power of an inquisitorial nature, enabling the court to direct the examination of a person who is not a party to any litigation. Further, as Jessel M.R. said in In re Gold Company, 12 Ch.D. 77, 82, in the passage I have already read, the liquidator comes ex parte and makes no affidavit so that the files of the court will not disclose anything to the person against whom the application is made. He pointed out, at p.84, that it is not necessary for the liquidator "to make out a prima facie case - the probability of a case is enough. "

5. After I made the order the Official Receiver issued summonses for the attendance of the applicants before a Master on the 1st September which were served on the same day at 2.15 p. m. When the applicants attended before Master Woolley on the 1st September, counsel on their behalf made an application for an adjournment in order to take steps to discharge the order. However, the application was refused, but as the applicants had not brought with them the documents required to be produced, the examination was adjourned until the 4th September. On that day, evidence was given by the applicants.

6. By a notice of motion dated the 11th September, the applicants applied for an order to discharge the order and for the transcript of the evidence taken before the Master to be delivered up to the applicants or to be destroyed, or in the alternative for a variation of the order together with consequential directions and for other orders made by Master Woolley to be reversed.

7. When the motion came before me for hearing, at the request and with the consent of the parties, I heard the application in chambers, having regard to the secret nature of the proceedings. Mr Hamilton who appeared on behalf of the applicants abandoned the application to discharge the order and for the orders sought in respect of the transcript of the evidence, and confined the application to a variation of the order.

8. Following his appointment as provisional liquidator on the 25th July, the Official Receiver considered that it was in the best interests of the creditors to carry on the business of King's with a view to a sale of its principal business as a going concern. During the course of the negotiations for the sale, the Special Managers ascertained that King's had executed a debenture on the 17th June 1986 in favour of Kazan charging the assets of the company. It is significant that in a report dated the 26th June prepared by Ernst & Whinney; chartered accountants, on behalf of the directors of King's for the purposes of a proposed reconstruction, no reference was made to this debenture. The shareholders of Kazan were Hyperion, a Panamanian company which held 999 shares and Wong Che Keung, one of the directors of King's who held one share. Wong Che Keung was also a director of Kazan, but resigned on the date of the execution of the debenture. On the same day, two companies, Ephfra Limited (Ephfra) and Anclar Limited (Anclar) were appointed to be directors of Kazan. Two of the directors of these companies were B.J.Young and C.M. Young whilst B.J. Young was the holder of one share in each company. B.J. Young is also one of the directors of Hyperion. As a result of these facts, it became apparent that the ownership and. control of Kazan might be the same as that of King's which could cast doubt upon the validity of the debenture created in favour of Kazan by amounting to a fraudulent preference under section 266 of the Companies Ordinance. Further enquiries revealed that as at the 16th June 1986, the day before the debenture was executed, the balance owing to Kazan by King's was approximately $12,400,000.00 and that between the 17th June 1986, the date of the debenture, and the 24th July 1986, the day before the Official Receiver was appointed as provisional liquidator, King's received from Kazan approximately $9,530,000.00 whilst during the same period King's paid to Kazan approximately $11,200,000.00. As negotiations were now well advanced for the sale of King's principal business as a going concern, it was necessary to give an assurance to the purchaser that the assets were to be sold free from any debentures. Accordingly, the Official Receiver considered that it was necessary to investigate the beneficial ownership of Kazan through Hyperion and for this purpose to obtain access to all books and records that were not in his possession which related to the affairs of King's. The Official Receiver then made the application for an examination under section 221.

9. At a meeting of the board of directors of Kazan on the 2nd September which was chaired by B. J. Young who also represented Ephfra and when C.M. Young was in attendance representing Benta Nominees Ltd., the board approved an agreement entered into by the Official Receiver as provisional liquidator of King's in respect of the debenture given by King's to Kazan. The agreement which was signed by B.J. Young as director on behalf of Kazan provided for the business of King's to be sold free from the rights of the debenture holder provided that the Official Receiver retained the sum of $11,000,000.00 out of the proceeds of sale to be held by him for three months and to be released to Kazan if no proceedings are commenced within this period either on behalf of King's or Kazan in which the validity of the debenture is challenged. After this agreement had been executed, the business was sold as a going concern on the 4th September.

10. The principles to be applied in deciding whether an order should be made for an examination under section 268 of the Companies Act 1948 were averted to by Megarry J. in In re Rolls Razor Ltd. (No. 2)⁽¹⁾ , where he had this to say at p. 591:

"The process under section 268 is needed because of the difficulty in which the liquidator in an insolvent company is necessarily placed. He usually comes as a stranger to the affairs of a company which has sunk to its financial doom. In that process, it may well be that some of those concerned in the management of the company, and others as well, have been guilty of some misconduct or impropriety which is of relevance to the liquidation. Even those who are wholly innocent of any wrongdoing may have motives for concealing what was done. In any case, there are almost certain to be many transactions which are difficult to discover or to understand merely from the books and papers of the company. Accordingly, the legislature has provided this extraordinary process so as to enable the requisite information to be obtained. The examinees are not in any ordinary sense witnesses, and the ordinary standards of procedure do not apply. There is here an extraordinary and secret mode of obtaining information necessary for the proper conduct of the winding-up. The process, borrowed from the law of bankruptcy, can only be described as being sui generis.

 

In such a process, it seems to me that the court must give great weight to the views of the liquidator, with his detailed knowledge of the problems that exist in relation to the affairs of the company and the information that is required. At the same time, the court must be astute to prevent any oppressive, vexatious or unfair use of this extraordinary process, especially as the liquidator's report is kept hidden from the examinees. Indeed in In re Greys Brewery Company, 25 Ch.D. 400, 408, Chitty J. said that the section had been called the Star Chamber clause. These circumstances seem to me to point at least to the desirability of the examinees having the right to have the unfettered discretion of the judge brought to bear upon any exercise of this extraordinary jurisdiction. "

11. I will now come to the three applicants. F.Young is a chartered accountant having qualified in 1973. He is a partner in the firm of K. K.Young & Co. and employs his father B. J. Young and his sister C.M. Young. K.K. Young & Co. were the auditors for King's from 1975 until the 31st March 1986. B. J.Young was employed by Lowe Bingham & Matthews as a senior audit and tax manager for over 28 years before he joined his son's firm. C. M. Young appears to be employed as a book-keeper.

12. It was submitted on behalf of the applicants that the validity of the debenture had been the subject of correspondence between the Official Receiver and the applicants' solicitors, and that as the validity of the debenture will almost certainly have to be determined by the Court, it was therefore an abuse of the process of the Court for the official Receiver to seek to obtain an advantage which would not be available to a litigant in the ordinary course by seeking to examine the applicants under section 221.1 do not accept this argument for, upon a perusal of this correspondence, it is clear that it does not refer to the validity of the debenture, but whether the liquidator can sell the business when there is a debenture in existence.

13. It was also argued on behalf of the applicants that the summons was oppressive, vexatious and an abuse of the process of the Court for the order was not limited to King's but also related to the documents of Kazan and Hyperion. However, it is abundantly clear that the intention of the order so far as Kazan and Hyperion is concerned, is that it is restricted to documents that relate to the affairs of King's having regard to the close relationship that has been revealed between the companies. Any documents that have no connection with King's would not be the subject of production or investigation. A further complaint made with regard to the undertaking required to be given to the Master by each applicant at the conclusion of the examination on the 4th September that they would not discuss the facts of the case either amongst themselves or with their lawyers until after a transcript of the evidence had been signed was neither unreasonable nor objectionable.

14. The thrust of Mr Hamilton's argument was to the effect that his clients are professional people who have every intention to co-operate with the Official Receiver that there is no evidence of any misconduct on their part and having regard to the principles set out in the case of Rolls Razor⁽¹⁾, the applicants should be given an opportunity in the first instance to answer the Official Receiver's questions by way of a questionaire after a preliminary meeting between the applicants and the Official Receiver to narrow the issues. With regard to this submission Mr Hamilton relies upon a passage of Megarry J. in Rolls Razor⁽¹⁾ at p. 595, where he said:

"In my judgment the exercise of the court's discretion ought not to be fettered in any such way. There may well be some cases in which it would plainly be oppressive or unreasonable not to submit written questions first. There will also be other cases in which there plainly ought to be an oral examination without the prior submission of any written questions. Between these two categories there may be many cases in which the court must determine which course is best suited to discover the relevant facts without being oppressive, vexatious or unfair. In order to do this, the court must, I think, look at the facts of the case as a whole, without yielding to preconceptions; and in doing this, the court should give all proper weight to the views of the liquidator without, of course, abandoning the proper exercise of its discretion, or treating the liquidator's views as being in any way decisive of the matter. The prior submission of written questions will sometimes aid and speed the ascertainment of the relevant facts; but sometimes it may hamper or delay the process. There may be a marked difference between the information obtained from unsworn written answers which may have been drafted by lawyers and that obtained from viva voce answers on oath. "

15. It is clear from the authorities including In re Spiraflite Ltd.⁽²⁾ that the Court must ensure that the section is not used oppresively or unfairly. However great weight is placed upon the views of the liquidator who, at the time of the application, is obviously limited with regard to the information in his possession. There appears to be a close link between King's and Kazan whilst Hyperion is a major shareholder. B.J.Young is both a director of Kazan and Hyperion and also a director of Ephfra and Anclar which companies are also directors of Kazan. The circumstances surrounding the execution of the debenture by King's in favour of Kazan cries out for a full investigation.

16. Mr Hamilton asserted that by the issue of the summonses, inferences might be drawn that the applicants had not co-operated with the Official Receiver and had something to hide so that their reputation would be affected. However, I am unable to agree with this submission. The proceedings are, by their nature, secret and inquisitorial. The mere requirement for an examination does not mean that the person summoned has been guilty of any impropriety whilst the question of motive is not relevant. In the instant case, the requirement for the examination was clearly one of urgency having regard to the impending sale of the business. There was clearly no obligation on the part of the official Receiver to approach the applicants first before issuing the summonses.

17. The complaints that were levelled at the refusal of the Master to grant an adjournment of the examination were wholly unjustified because the Master was acting under an order of the Court. He was under no obligation to accede to the adjournment, for, if the applicants were dissatisfied with the ex parte order, they should have immediately taken steps to set aside or vary that order. Indeed it is significant to observe that the motion was not filed until the 11th September, although counsel for the applicants had given an undertaking to the Master that if he was granted an adjournment, it would be issued forthwith.

18. Mr Hamilton went on to submit that the issue of urgency has now gone with the result that the enquiry should now follow the principles set out by Vinelott, J. in In re Norton Warburg Holdings Ltd.⁽³⁾ whereby the joint liquidators after inspection of the documents should submit written questions to be answered by the applicants who should be given a reasonable time in which to answer them, but that if the applicants prove to be evasive or uncooperative, then an application can be made to the Court. In In re Norton Warburg Holdings Ltd.⁽³⁾, Mr Gillett, the auditing partner in the firm of auditors who had acted for Norton Warburg and Mr Bailey, his principal assistant, were ordered to appear for an examination before the Registrar and to produce documents in his possession relating to the affairs of the company which was placed in a creditors voluntary winding-up. Vinelott J. decided that as there was no question of misconduct or any motive for concealing relevant information, that after completion of the inspection of any relevant documents, the joint liquidators and receiver should prepare a written questionaire specifying questions to which they needed an answer and when this had been done an oral examination should be arranged and the liquidators and receiver should prepare in as much detail as possible, the questions they proposed to ask and solicit comments on them with a view to narrowing the field of oral examination.

19. In the instant case, it is not clear what exactly were the roles of B.J. Young and C.M. Young with regard to the management and affairs of Kazan or indeed the beneficial ownership in Kazan. It is pertinent to observe as was submitted by Mr Litton who appeared on behalf of the liquidators why B.J. Young signed the agreement on behalf of Kazan when he is in fact supposed to be a neutral person. Again the matter of B.J. Young's fiduciary duty will arise by virtue of his directorships of Kazan and Eplifra. F. Young has been the auditor of Kings so he is legally obliged to give such information with regard to the affairs of Kings, whilst his firm also audits the accounts of Kazan. Accordingly he owes a fiduciary duty. C.M. Young has been the book-keepes of Kazan and also represented a nominee company as secretary. Although Mr Hamilton described the applicants to be professional people in fact only F. Young appears to be qualified professionally.

20. Whilst it is clear that the urgency of this matter has now gone since the sale of the business, nevertheless, the obligations of the applicants in connection with the winding-up of the company have not changed. It is true that there may, in due course, be litigation to determine the validity of the debenture, but such litigation is not so imminent as to result in a misuse of section 221. In any event, there is at the present time, no suggestion of any proceedings being taken against any of the applicants or against K.K. Young & Co.

21. The object of s.221 is to provide assistance to the liquidator to try and ascertain the truth about the affairs of the company as expeditiously and economically as possible. This is a large liquidation for the liabilities exceed $170 million whilst it involves issues of some complexity. It is incumbent upon the court to assist the liquidator in carrying out his duties but at the same time to ensure that the order is not oppressive, vexatious or an abuse of the process of the court. There are cases as in In re Norton Warburg⁽³⁾ where it is appropriate for written questions to be submitted in the first instance. However, there is no requirement to adopt this practice for each case must depend on its own. individual circumstances whilst the court has an unfettered discretion to make an order. By adopting the course suggested by Mr Hamilton, there may be delay and any answers given will not have been given on oath. Having regard to the positions held by B. J. Young and C. M. Young in the companies mentioned and their close relationship with King's, it is of vital importance that the liquidator is able to continue with the private examination of the applicants. I am, therefore, satisfied that this is not a proper case to invoke the procedure for the submission of a written questionnaire.

22. In my judgment, the allegations made by the applicants that there has been oppression are completely without foundation. Two of the matters that were contended to be oppressive related to the production of documents and the signing of the transcript which are statutory requirements under the section whilst the reference by Hr Knos who represented the Official Receiver at the examination before the Master to collusion by the examinees with Kazan was a perfectly valid comment. In fact, I agree with the argument submitted by Mr Litton that the applicants have felt a sense of outrage in view of the fact that they were served with the summonses a short time before the hearing before the Master, and suffered inconvenience as a result. The Official Receiver did not act oppressively or unfairly in carrying out his statutory duties nor has there been any abuse of the process of the court.

23. Mr Hamilton cited In re Milton Hindle Limited⁽⁴⁾, a decision of Pennycuick J. as authority that an examinee is entitled to a copy of the transcript provided that it is supplied at his own expense. At page 1035 Pennycuick J. said: -

"So far as the first complaint is concerned, it is true that a copy of the transcript was not and cannot be supplied to a person examined except at his own expense. "

It would appear in that case that the examinee had not seen the transcript before he was required to sign it. Whether or not it was intended that an examinee should be supplied with a copy of a transcript in every case upon payment of the costs, is not wholly clear. In any event, this decision is only persuasive. If it is authority for Mr Hamilton's proposition, I do not propose to follow it for in my opinion, an examinee must have good reasons why he or she should be entitled to have a copy of the transcript. The proceedings are confidential and in the circumstances of this case where no reasons have been put forward, I am not prepared to make such an order in favour of the applicants.

24. The applicants complained that they were not awarded an appropriate sum by way of expenses as they had claimed their usual professional charges, but were only allowed $200 for each day of their attendance. However, an examinee is only entitled to a reasonable sum for his expenses. He is not entitled to be reimbursed for a possible loss of income which has not been proved. No grounds were advanced to persuade me that the award of the Master was not correct.

25. In all the circumstances and in the exercise of my unfettered discretion, the motion will be dismissed.

(1) [1970] Ch. 576

(1) [1970] Ch. 576

(1) [1970] Ch. 576

(2) [1979] 1 W.L.R. 1096

(3) [1985] B.C.L.C. 235

(3) [1985] B.C.L.C. 235

(4) [1963] 1 W.L.N. 1032