RE GARSON REAL PROPERTY AGENCIES (H.K.) LTD (IN CREDITORS’ VOLUNTARY LIQUIDATION)

HCCW 342/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 342 OF 2014

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D E C I S I O N

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1.  I have before me a summons dated 9 June 2015 issued by a creditor of the Company, Madam Zhang Huixiong, for an order overturning the decision of the Official Receiver at the 1^st meeting of creditors of the Company on 20 May 2015 admitting a proof of debt by Madam Ho Pui Fong in the sum HK$3,458,128.71, and reversing the resolution of creditors passed at that meeting appointing Mr Kenny Tam as liquidator and replacing that decision by an order appointing Mr Wong Sun Keung and Ms Tsui Mei Yuk Janice as joint and several liquidators of the Company. The challenge to the Official Receiver’s decision arises in the following circumstances.

2.  The Company was established in November 2011.  As its name suggests, it carried on business as a property agency.  It had one shareholder and director, Madam Ho.  Ms Zhang worked for the Company as an agent.  She acquired an entitlement to HK$602,410.00 in respect of commission.  The commission was not paid, she commenced proceedings in the District Court and obtained a judgment in that sum dated 18 June 2014. 

3.  On 29 July 2014 the Company held an Extraordinary General Meeting and passed a special resolution putting itself into creditors’ voluntary liquidation.  On 18 November 2014, Ms Zhang filed a petition for the Company to be put into compulsory winding up.  On 25 March 2015, a winding-up order was made.

4.  It appears from the audited financial statement of the Company for the period commencing with its incorporation on 25 November 2011 to 31 March 2013 that the business was in fact profitable.  The revenue for its first 17 months of operation was HK$30,197,589.00. According to note 8 to the financial statement, Ms Ho’s remuneration for this period was HK$12,553,856.00.  The income statement and the balance sheet report however a loss at the end of the first 17 months of HK$550,711.00. This in itself might be unsurprising given the fact that the Company had one shareholder.  It may well be that Madam Ho took the view with the intention of paying tax on the profits of the Company at the lower personal rate of tax, namely 15%, rather than the Company pay corporation tax, 16.5%, that any profit the Company might make should be distributed to her in the form of salary and bonus.  However, what is unsatisfactory is that the way in which she chose to operate the Company resulted in a number of individuals including Ms Zhang not being paid in respect of commission that they had earned during the period ending 31 March 2013.

5.  The proof of debt that was submitted by Madam Ho was for a total sum of HK$5,779,611.82 which was made up of 190 separate items, some of which related to the period after 31 March 2013.  The approach of the Official Receiver in adjudicating the proof of debt for voting purposes at the 1^st meeting of creditors is explained in paras 14-15 of the Official Receiver’s report. 

6.  The Official Receiver explains that she focused on checking the nine comparatively significant sums, which exceeded HK$100,000.00. There were nine of these.  The Official Receiver rejected five of them and allowed four.  Three of them were in respect of relatively minor sums where the Official Receiver was satisfied on the basis of the documents provided by Madam Ho that Madam Ho had made payments on behalf of the Company in respect of the items claimed and in those circumstances she was entitled to vote the relevant debt. The larger item was a sum of HK$3,000,000.00 in respect of a bonus.  The Official Receiver took the view that this should also be admitted for the following reasons: Madam Ho had produced a ledger of the Company recording the HK$3,000,000.00 bonus; and she had also produced the Inland Revenue Department Employer’s Return recording the bonus for the period ending 31 March 2013; and in fact the Company had paid the assessed tax on this amount.

7.  It seems to me that as far as it goes the Official Receiver’s reasoning is sensible.  However, for reasons which I will explain later in this decision, in my view it is a decision which I should reverse.

8.  The principles to be applied in dealing with applications of this sort are explained in my decision in Re The Grande Holdings Ltd,HCCW 177/2011 (unreported, 5 November 2014): see paras 5-8.  It is not necessary for me to set out those principles which are not in dispute.

9.  As I have already mentioned, the audited financial statement for the period ending 31 March 2013 indicates that the Company’s business was profitable and that Madam Ho decided to minimise what in effect was her own tax liability by distributing any profit the Company made to her.  In order to do this properly it would be necessary for Madam Ho, I would anticipate with the assistance of experienced accountants, to prepare the accounts and carefully monitor the sums available for distribution with a view to ensuring that her own remuneration was calculated to reflect accurately the profit made by the Company and available for distribution.  Such exercise was particularly necessary given the fact that it would appear that Madam Ho decided that the Company should pay her personal income tax.  It was necessary that the Company’s own accounts and tax returns were consistent with the Employer’s Return in respect of Madam Ho, and the calculation and assessment of how her tax liability should be dealt with would have been sufficiently technical that I would anticipate it was a matter that needed professional assistance.

10.  As it is, it seems to me that looking at the financial statement and the ledgers, they indicate that rather than Madam Ho ensure that the debts of the Company including the commission due to Ms Zhang were properly paid and the amount available for distribution to her by way of salary and bonus properly calculated, she adopted a cavalier approach which explains why the bonus item is a round figure which almost certainly would have been inappropriate if the accounts were calculated with any precision.

11.  Indeed there are some reasons to think that Madam Ho’s approach to the preparation of accounts was unsatisfactory by virtue of the fact that it is the unchallenged evidence of Ms Zhang that the Company in 2014 was subject to investigations by the Inland Revenue Department for tax evasion.  Ms Zhang suggests that this may well have been the proximate cause of Ms Ho’s decision to put the Company into creditors’ voluntary liquidation.

12.  It seems to me that there is, at the very least, a credible reason for suggesting, as indeed Ms Zhang does, that any arrangement to pay herself a bonus by Ms Ho was bogus.  Clearly it would be of questionable propriety if Madam Ho decided to declare that she was entitled to a bonus at a time when she knew that the Company had already distributed to her a significant proportion of its assets and had not retained sufficient to pay its employees.

13.  As I explain in my decision in Re Grande,the approach to be taken both by a liquidator considering the proof of debt submitted for the purpose of voting and the court reviewing any such decision is a broad macroscopic one.  Generally, I would expect a liquidator, or as in this case the Official Receiver, to focus on the ledgers, bank records and any other contemporaneous documents that are provided by a creditor and if on their face they record the debt claimed then to allow that debt to be voted.

14.  As I have already explained the Official Receiver relied on accounting and other records in reaching their conclusion that Ms Ho should be allowed to vote the amount of the debt represented by the bonus.  However, it seems to me having regard to the information that the audited financial statement provides, the better view is that there is sufficient reason to question whether or not Madam Ho is entitled to prove for the amount of the bonus, to reverse the Official Receiver’s decision which I do.

15.  The consequence of this is that the decision of the meeting to appoint the liquidators, proposed by the Official Receiver which were the next liquidators on the Panel A list, should not have been reached because Ms Ho’s admitted debt should have been less than Ms Zhang’s.  It is perhaps a little unfortunate that this application was advanced as although technically Ms Ho proposed the liquidators, the names were proposed by the Official Receiver and indeed as it transpires the original nominee has become unavailable, and instead the Official Receiver has proposed two accountants from FTI.  However, as I understand it from Mr Chan, his instructions are that having come as far as she has Ms Ho would like her preferred liquidators to be appointed and I will therefore so order. 

16.  There will be no committee of inspection.  The liquidators’ costs will be in accordance with the Panel A rates or such order as the court shall make.  The applicant’s costs shall be paid out of the assets of the Company.  There will be no order in respect of the Official Receiver’s costs.