BEATRICE TSANG SAU HING AND ANOTHER v. YEUNG MAN LOONG MAXLY AND OTHERS

HCCW 49/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 49 OF 2006

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D E C I S I O N

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1.  This is a summons by the petitioners who have presented a winding-up petition against Gold Pleasure Industrial Company Limited (“Gold Pleasure”) on just and equitable grounds as its contributories.  The summons was made under section 121 of the Companies Ordinance, Cap. 32 and the inherent jurisdiction of the court.  The matters giving rise to the application may be stated as follows.

2.  Provisional liquidators were appointed for Gold Pleasure and 3 related companies on 17 February 2006.  In respect of the 4 companies, all of which were incorporated in Hong Kong (collectively “the Hong Kong Companies”), the provisional liquidators were empowered to preserve assets and to investigate their affairs.  Paragraph 3 b of the order of appointment in respect of Gold Pleasure provides specifically that the provisional liquidators are empowered:

“to ascertain and investigate the affairs of the Company, or such joint ventures, associate companies or other entities both incorporated in Hong Kong and in other places in which the company holds an interest, including, without prejudice to the generality of the foregoing, the power to see, review, secure, take possession of and copy all books, records and documents of the Company, or such joint ventures, associated companies or other entities in which the Company holds an interest, or relating to its accounts and audits of such accounts, located at offices of the Company, its accountants, auditors and other advisors or agents, or any other person both in this jurisdiction and in any other jurisdiction”.

3.  Gold Pleasure holds 75% interest in a joint venture in Dongguan, the PRC, called Dongguan Boville Plastic Products Factory Company Limited (“the joint venture”).  The other 25% is owned by a PRC investor.  The PRC investor is an entity independent of the Hong Kong Companies.  The joint venture operates a large factory in Dongguan.  It is governed by a joint venture agreement and a memorandum and articles of association.  It is a PRC corporate entity and is subject to PRC law.

4.  On 8 May 2006, the petition came before Deputy Judge Poon.  He ordered the petitioners and the 1^st to 4^th respondents to file and serve their respective lists of documents within 28 days thereof, with inspection of documents 14 days thereafter.  The 5^th respondent is Gold Pleasure.  No order of discovery was made against Gold Pleasure.  The provisional liquidators were not present at the hearing.  According to the 1^st respondent’s affirmation, the court indicated that it would like to hear from the provisional liquidators before making any order for discovery against Gold Pleasure.

5.  On 15 June 2006, the present summons was issued by the petitioners.  Although this is not a summons for discovery in the petition, it was issued in the winding-up proceedings.  By the summons, the petitioners seek to exercise their rights, as directors of Gold Pleasure, under section 121 of Cap. 32 and at common law, to have inspection of the documents listed in the schedule to the summons (“the Schedule”).  They seek an order that the provisional liquidators do forthwith give to them inspection of all the documents listed in the Schedule that are in the possession, control or custody of the provisional liquidators.  Most, if not all, of the documents in the Schedule relate to the joint venture.

6.  A lot of evidence has been put in by the petitioners, the 1^st to 4^th respondents and by the provisional liquidators.  A lot of it is repetitive, and much of it is immaterial.  I do not propose to go into the correspondence before and after the issue of the summons, save to say that I have read them and noted them.

7.  The provisional liquidators exhibited to his affidavit a list in which he sets out against the documents in the Schedule, whether any of the documents are kept in the Hong Kong office of the Hong Kong Companies (in column 2), and whether any of the documents are available to the provisional liquidators at the factory of the joint venture in Dongguan (in column 3).

8.  The provisional liquidators have no objection, if the court sees fit, to allow the petitioners to inspect the documents in column 2 in his list, if they are kept and are available at the office in Hong Kong.

9.  For the documents in column 3, where they are made available to the provisional liquidators in Dongguan, these documents are not in the sole or exclusive possession of the provisional liquidators.  As the provisional liquidators do not have the same kind of control over the joint venture as they have over the Hong Kong Companies, they express concern that it is important they should maintain the co-operation of the management of the joint venture, to enable them to discharge their duties properly and smoothly, and as economically as possible.  The provisional liquidators say they should consider and respect the views of the PRC investor, as under the joint venture agreement, the PRC investor has power to appoint a vice-chairman to the joint venture and for important issues involving the interests of both parties to the joint venture, decisions should be made only after unanimous agreement.  The co-operation of the management of the joint venture is vital to the preservation of the assets of Gold Pleasure.

10.  All this, I would venture to say, is plain good sense.

11.  The provisional liquidators have sought the views of the PRC investor regarding an abortive attempt to inspect the documents in the factory by the petitioners’ representatives on 30 May 2006.  The PRC investor gave a written reply on 19 June 2006, stating that they do not agree to the removal of any documents of the joint venture from the territory.

12.  The provisional liquidators therefore proposed, if the court is minded to allow the petitioners inspection of the documents in column 3, the court should give them an opportunity to clarify with the PRC investor if such documents could be made available to the petitioners for inspection within the factory.  It seems that the written response of the PRC investor was given before it was made aware of the present summons.

13.  Again, this seems to me to be a sensible suggestion.  It is important to the provisional liquidators in the discharge of their duties that they should have the goodwill and co-operation of the other party to the joint venture.  The provisional liquidators would be able to do a lot more, in a quicker way, and at far less expense, if things required to be done outside the jurisdiction of this court are done in a consensual manner.

14.  The 1^st respondent in his latest affirmation says that if the court should order inspection by the petitioners, in respect of the documents in column 3, inspection should be given only on these bases: (1) the provisional liquidators should first obtain the consent of the PRC investor; (2) the petitioners should pay the costs of the inspection; and (3) the provisional liquidators should give an undertaking that they would only use the documents inspected for the purpose of the winding-up proceedings regarding the Hong Kong Companies and should otherwise keep the documents confidential.

15.  The only question that remains is whether the petitioners, as directors of Gold Pleasure, should be allowed to exercise their right of inspection of documents in the possession, custody and control of Gold Pleasure, or whether the petitioners would have lost that right once provisional liquidators are appointed for Gold Pleasure.

16.  The petitioners claimed that notwithstanding the appointment of provisional liquidators, they would still have a duty to discharge as directors of Gold Pleasure.  They are required to submit a statement of affairs in respect of Gold Pleasure to the provisional liquidators.  Although this was done within 28 days of the appointment of the provisional liquidators, the statement of affairs was made without the benefit of the documents requested in the Schedule.  Mr Alfred Liang submitted on behalf of the petitioners that they should examine and review the documents in the Schedule, provide the provisional liquidators with their views on the financial position of the joint venture and of Gold Pleasure, as this would assist the provisional liquidators in preserving the assets of Gold Pleasure.  I note that in the supporting affidavit of the 1^st petitioner, she went much further in deposing to the purposes why the petitioners would wish to inspect the documents.  The provisional liquidators may well wonder whether what the petitioners are trying to do is to perform the duties that the provisional liquidators are charged with in their appointment order.

17.  The professed purposes of inspection may or may not be the petitioners’ objective; I do not need to express any views on this.  This is not relevant to the question of law, whether a director’s right of inspection of a company’s documents would be revoked automatically once provisional liquidators are appointed.

18.  I do not think the position is as put by Mr Tommy Lo for the respondents, that once provisional liquidators are appointed, a director’s right of inspection would have gone to the provisional liquidators, as all the powers of directors are to be exercised by provisional liquidators and directors would only have a residuary power to instruct lawyers to oppose a winding-up petition or act in interlocutory matters in the winding-up proceedings.  Ms Mona Chhoa for the provisional liquidators, made a similar submission that once provisional liquidators are appointed, the director’s right of inspection is “displaced”.  None of the authorities cited by her support this proposition directly.

19.  In my view, there is no reason why a right of inspection of documents should be exercised by the provisional liquidators alone, so that the right should either vest in the directors or in the provisional liquidators.  There is no inconsistency and no conflict of powers for both a director and the provisional liquidators to exercise this right of inspection.  So long as the director’s right of inspection is not exercised in such a way as to jeopardise or adversely affect the provisional liquidators’ work, which should be the paramount consideration, there is no objection in principle for a director to exercise such right after provisional liquidators are appointed.

20.  I find some support for this in the decision cited by Mr Liang, Re Geneva Finance Limited 7 ACSR 415.  This is not a case where provisional liquidators were appointed, but the company was put into receivership by a debenture holder.  I appreciate that where a receiver is appointed under a debenture, directors may still have certain powers with regard to the management of the company, insofar as these powers are not inconsistent with the exercise by the debenture holder of his rights under the debenture, and that directors are not relieved of their normal statutory duties.  I do not think these matters should make any material difference, as I have said, there is no apparent inconsistency or conflict for the power of inspection to be exercised by both.  The relevant holding of Owen J is set out at 432 as follows:

“1. The directors have a statutory right to inspect the accounting records of the company, although query whether the right is exercisable against a third party properly in possession of the records and query also whether the court has a discretion to grant or refuse access.

2. The directors have a common law right to inspect books and records generally and the court has a residual discretion whether or not to order that access be given.

3. In a pre-receivership situation, the right of access is not conditioned on the directors demonstrating a ‘need to know’, although access may be refused where there is clear proof of a misuse of power, the onus of which lies on those asserting it.

4. The appointment of a receiver alters the position to the extent necessary to recognise the receiver’s pre-eminent position in realising assets for the benefit of the debenture holder.

5. A receiver is entitled to possession of the books and records of the company by virtue of the proprietary interest of the debenture holder and the receiver has no legal title to the documents.

6. The receiver’s entitlement to possession is purposive.  It exists to enable him to fulfil the role for which he was appointed, namely, to administer the company and realise the assets so as to repay or reduce the debt owing to the debenture holder.

7. Because the entitlement to possession is purposive, it is not necessarily exclusive.  Third parties who would otherwise have a right of inspection may still be able to insist on access.

8. The subject of inquiry should be the role and function of the receiver rather than the identity of the residual duties which remain with the directors.  The receiver would be justified in refusing to grant access to the documents where to do so would impede the receiver in the proper exercise of his functions or would impinge prejudicially upon the position of the debenture holder by threatening or imperilling the assets which are subject to the charge.”

21.  By analogy, I hold that the possession of provisional liquidators of the documents of a company is not exclusive; their possession of documents is to enable them to discharge the duties for which they are appointed, such as to preserve assets and to carry out investigation.  A director may still exercise his right to inspect documents where to do so would not impede the provisional liquidators in the proper discharge of their duties or would not cause prejudice or injury to the company.

22.  I will exercise my discretion to allow inspection in this instance.  There is no cogent evidence before me at present that inspection would occasion harm to Gold Pleasure or hinder the provisional liquidators’ work.

23.  As mentioned earlier, I share entirely the provisional liquidators’ concern about documents of the joint venture not in the sole and exclusive possession of the provisional liquidators and are located outside this jurisdiction.  It is far better to approach this in a sensitive way, allowing the provisional liquidators the opportunity to ascertain the views of the PRC investor and addressing any concern that the latter may have.  I would only make an order that the provisional liquidators are to give inspection of the documents in column 2 of the provisional liquidators’ list, on the undertaking of the petitioners, that they are only to use the documents inspected for the purpose of the winding-up proceedings of the Hong Kong Companies, and that they should otherwise keep the documents confidential.  I would adjourn the summons relating to the documents in column 3, with liberty to restore.  I direct the provisional liquidators to file an affirmation to update the court on the latest position not less than 3 days before the hearing.  The petitioners should bear the costs of the provisional liquidators occasioned by the exercise of inspection.

24.  I will hear the parties on the costs of this application.