WAH YAN PROPERTY LTD v. IDEACTION STRATEGIC INVESTMENT LTD AND AND ANOTHER

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DECISION

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1. This is an application by the Petitioner for the appointment of provisional liquidators. The Petition in the present case was filed on 8 April 1997. Originally the Petitioner was Wah Yan Electronics Ltd. and the Petition was for the repayment of a debt.

2. On 30 April 1997, the present Petitioner, Wah Yan Property Limited was substituted as Petitioner and the Petition was still based on a repayment of debt claim. Then in July 1997, the Petition was further amended and deadlock was pleaded. At the end of October 1997, a further amendment was made whereby the 2^nd Respondent, Ideaction Holdings Ltd. ("Holdings") was joined as an additional respondent. There was one further re-amendment in January this year to delete the allegation of insolvency.

Background

3. Ideaction Strategic Investment Limited ("the Company") was incorporated on 11 June 1991. Prior to that date, the three To brothers knew Cheung Ka-lung, Tom ("Mr Cheung"), Lee Yuk-shan and Ng Kwai-hang, Allister and had been involved in a joint venture with them to develop land.

4. Due to the success of that venture, the parties decided to form the Company for the purposes of developing and holding real property. There are only two issued shares in the Company : one is held by the Petitioner which is controlled and owned by the three To brothers, the other share is held by Holdings, which is a company controlled by Cheung, Lee and Ng.

5. As at. 4 August 1995, the three To brothers, together with Cheung, Lee and Ng, became and remain the six directors of the Company. Sometime in 1995 the relationship deteriorated, with the To brothers through the Petitioner alleging that there were irregularities in the accounts and that they were not provided with access to the accounts or proper accounting information. It is also alleged in the Petition that Cheung. Ng and Lee were responsible for book-keeping and keeping the accounting records of the Company. The Company is itself a holding company and over the last few years, it has acquired a host of subsidiaries. Although I am not too certain of the final count, they appear to be in the region of about 50. It is a very substantial group of companies holding valuable assets, so this is not a case where we are dealing with an insolvent company.

6. The application came on for hearing on 2 February. After half a day's hearing, it was adjourned and I gave directions that Holdings, the 2^nd Respondent, file further evidence relating to the accounts within 14 days. That it has done. In addition, Mr Cheung has sworn a 5^th Affidavit dated 28 February and leave was granted at the adjourned hearing this morning for this affidavit to be admitted into evidence. I should also add that an enormous number of documents has been produced for the hearing of this application. I have several box files of accounts and schedules and a large number of affidavits. Fortunately, leading counsel for the Petitioner was able to identify certain key complaints and it did not become necessary for the court to go through the several thousand pages of documents in order to determine whether or not provisional liquidators ought to be appointed.

The key complaints

7. I now turn to the various complaints that have been made and which are relied upon as grounds for the application.

8. It is common ground that no annual general meetings of the Company were held during the years 1996 and 1997. There are not only no audited accounts for 1996 and 1997, there are simply no accounts at all. Holdings has filed an affirmation from Lau Cheuk-man. Timothy ("Mr Lau"), who is an accountant and who says that he has been engaged by the Company to treview its accounting documents for the years 1995-1996 and 1996-1997 and to pass them on to Messes Deloitte Touche Tohmatsu ("Deloittes") for auditing.

9. The first point to note is of course the Petitioner does not accept that Mr Lau has been engaged by the Company. The Company, it says, is deadlocked : there is therefore no effective board so that this engagement could not have been that of the Company.

10. Be that as it may, the affirmation goes on to say that Mr Lau has been provided with the accounting documents. He says that he has found the books and records to be in order, that he has been able to review the ledgers and prepare management accounts including the profit and loss statement, balance sheet and trial balances, and necessary schedules and breakdowns to enable the auditors (i.e. Deloittes) to audit these accounts.

11. The Petitioner again takes issue with whether Deloittes' appointment is proper. Since the board is deadlocked, the appointment has plainly not been made with the concurrence of the Petitioner.

12. The latest available audited accounts of the Company are for the year 1995. The auditors' report states as follows :

This report is dated 9 October 1995.

13. When one turns to Notes 6 and 7 referred to in this report, one finds the following statement:

"Consolidated financial statements have not been prepared and information concerning the Company's share of the result of the subsidiaries is not provided as in the opinion of the directors, this would involve expense and delay out of proportion to the value to its members."

In Note 6 to those accounts, there is set out a long list of the subsidiaries owned by or in which the Company has an interest. Suffice to say that one cannot really get a true view of the Company's financial state without also knowing the financial position of its subsidiaries. Given that here there are very many subsidiaries, the accounts for the Company are not very meaningful on their own without there being consolidated accounts.

14. Although Mr Lau has prepared documents so that the accounts can now be audited, they relate to the accounts of the Company and not of the subsidiaries. He is still in the course of working on the accounts for the subsidiaries and at this point in time, it is difficult to know when it will be that accounts for the subsidiaries can be audited. However Mr Lau's engagement as well as that of Deloittes are in issue. What is clear is that the absence of audited consolidated accounts is inexcusable.

15. The second complaint of the Petitioner is that the Company owes the Inland Revenue some $1.9 million in respect of unpaid profits tax. One of its directors. Mr To Keung-wa, received a warning letter from the Revenue which is dated 5 September 1997. Attached to the warming letter are details of the unpaid assessment and other charges. That page is reproduced here :

          "File No,: COL/61/4726383

From the printed note at the foot of that page it is evident that a court fee has been paid. There are items referable to execution costs as well as bailiff's expenses. Whilst those sums are not large, and in a sense it is not surprising given that such proceedings would take place in the District Court, there is no reason to doubt that some kind of execution process must have taken place. It would appear that the assessments in question relate to the year 1994 although one cannot be absolutely certain from the face of the document.

16. Although at the hearing in February Holdings said it was not in a position to offer an explanation since the point was taken at a very late stage, it has had an adjournment in order to address this question. Suffice to say that the 5^th Affidavit of Mr Cheung offers no explanation for the unpaid profits tax. All he now says is that the profits tax will be paid shortly. He does not explain quite when he proposes to do so. It has been suggested that what he is intending to do is to negotiate a staged payment agreement with the Revenue. Again quite when such an agreement (if any) is likely to be reached is not known.

17. In his latest affidavit of 28 February, Mr Cheung refers to a sum of just under $1 million deposited with Cheng Yeung & Co. as being 'earmarked' for payment of profits tax. However, it is to be noted that this was not his stance in his 2^nd Affidavit sworn on 17 December 1997, when Mr Cheung referred to a sum of money that had been left with his solicitors Messrs Cheng Yeung & Co. as 'money on account'. This sum of money is in excess of HK$900,000. Then at paragraph 46 of the same Affidavit he refers to these negotiations with the Inland Revenue Department for staged payments and refers to monies having been set aside for this purpose. Nevertheless, there was no reference to the sum of money deposited with Cheng Yeung & Co. being the monies that had been set aside for the payment of profits tax.

18. I should also mention that Mr To has also received a warning letter in respect of unpaid profits tax for two subsidiaries. One letter is dated 1 December 1997 in relation to Grand Ocean Ltd., the profits tax being in the sum of $2.38 million. And on 12 December there was a similar warning letter in respect of Nishida Ltd. in the sum of $2.95 million. According to tha accounts for Grand Ocean for the period from March to October of 1995, a provision appears to have been made for the payment of profits tax. The fact that the tax remains unpaid as at the end of 1997 is therefore doubly disturbing.

19. Counsel for Holdings submits that whilst the non-payment of taxes may be a sin, it is not a crime and that of itself, it is not a sufficient ground for the appointment of a provisional liquidator. I would agree that standing alone, it may not be sufficient although everything would depend on the facts of the actual case. But it is at the very least a very relevant consideration. It gives rise to questions as to the proper management of the Company. Holdings has had the opportunity but has not proffered any explanation, much less acceptable explanation, for the non-payment of taxes both of the Company and of, it would appear, at least two of its subsidiaries. If the Petitioner had not complained about this, one wonders what arrangements would or would not have been made even with regard to staged payments.

20. I now turn to the remaining matters which are related to the manner in which the accounts have been kept. There are three matters in particular and I will deal with these in turn.

Sharp Brave Holdings Ltd.

22. The first is a $16 million loan to Sharp Brave which Mr Cheung sought to explain in paragraphs 14 to 21 of his 2^nd Affidavit. According to Mr Cheung the entry in the accounts of the Company of a liability for $16 million merely reflects a potential liability. But the explanation which he gave in his 2^nd Affidavit had to be 'amended' in his latest affidavit sworn on 28 February. The gist of counsel's submission is that a full explanation is now available to demonstrate that Holdings has not misappropriated any part of these monies and that the whole transaction is reflected in entries in the Company's books and ledgers.

23. I do not propose to set out here the very convoluted series of events that go towards explaining how the $16 million loan to Sharp Brave has been repaid, and that effectively nothing is owing by or to the Company relating to that loan. What is apparent is that one cannot tell from the entries themselves what the relevant payments are for. Without the accompanying explanation or commentary, effectively a detailed signpost to take one through the different entries, it is impossible to even guess that the $16 million loan has been repaid. What this reflect is that the accounts are in a terribly confused and confusing state and that should not be the case with properly kept accounts. Mr Cheung has had to go back and correct various mistakes he made in his earlier affidavit. Even for a person who has been involved in keeping the books and records of the Company, it has not been an easy task to give an intelligible account of the various entries. So how can anyone who was not involved in that capacity be remotely expected to be able to weave his way through the intricacies of the various arrangements which, due to the manner in which the accounts have been written, are not readily apparent?

The Orcades/Polox arrangement

25. The next point relates to the $66 million loan which, under an agreement made between Holdings, the Petitioner and the Company on 9 February 1996, was advanced in respect of what has been described as the Orcades/Polox arrangement. What the Petitioner accepts is that there was agreement to lend some $66 million. The amount now shown to be owing is $78 million. The Petitioner says that it never agreed to any amount beyond the $66 million. In his most recent affidavit, Mr Cheung explained that the difference (of $12 million) between the $78 million now shown to be the amount of the loan and the $66 million represents interest. Interest, according to Mr. Cheung was payable at 12% per annum. This piece of evidence is difficult to reconcile with his earlier evidence which is at paragraph 37 of his 2^nd Affidavit where he said that $76,885 million represented money lent. i.e. the principal amount and the balance of $2 million odd represented interest and bank charges paid on loans for the use of Orcades/Polox. It is not apparent how one is to reconcile those two conflicting pieces of evidence, both of which come from Mr Cheung.

          the sum of $2.27 million

26. Finally, there is the matter of a sum of $2.27 million which, as at the end of December 1997, was unaccounted for in the sense that at that stage, Mr Cheung was unable to come forward with an explanation and was looking into this question. Two months later, he has come forward with an explanation, Many documents have been now exhibited to demonstrate that the sue reprsesented the aggregate of monies expended in relation to a property in Discovery Bay. Also exhibited is a bank statement for Real Faith Ltd for the latter part of 1994 which it is said substantiates each of the items of expenditure. Whether or not this is a sufficient explanation for the $2.27 million, again what is apparent is that it has taken some considerable time before any explanation was forthcoming.

Exercise of the discretion

27. In the circumstances, I have to consider how my discretion ought to be exercised. In Securities and Futures Commission v. Mandarin Resources Corporation Ltd. [1997] HKLRD 405, Godfrey JA stated the relevant principles in the following terms :

" There are no hard and fast rules as to how a judge ought to exercise his discretion when called on to appoint, or discharge, or re-appoint, provisional liquidators. There cannot be any such rules. The judge's decision must, ultimately, depend on the view he forms as to whether, on the material before him, the balance of justice and convenience comes down in favour of granting or refusing the particular application in question....."

Godfrey JA then went on to identify certain relevant considerations and they are as follows:

I pause here to note that 'public interest' is not a consideration in the present case.

28. For Holdings, it is said that the Company is dormant, so are its subsidiaries. In those circumstances, there is really no need for the appointment of provisional liquidators because there would not be anything for them to do. No misappropriation or jeopardy to assets have been shown and therefore no case has been made out for the appointment of provisional liquidators.

29. Leading counsel for the Petitioner, on the other hand, pointed to the fact that as the Company and its subsidiaries are not trading companies, no serious inconvenience would be caused by the appointment of the provisional liquidators. Although there may not have been any misappropriation of the assets of the Company, this group of companies does hold very valuable assets. It has no effective board; it is in deadlock, The accounts are undeniably in an unsatisfactory state and the approacb of the current management, i.e. Holdings to the issue of unpaid profits tax is, to say the least, unsatisfactory.

30. While jeopardy to assets and misappropriation are quite often the reasons for the appointment of provisional liquidators, it is not the case that absent these factors, the court would not exercise its discretion to appoint provisional liquidators. Having regard to all the matters set out above, in the exercise of my discretion, I would appoint provisional liquidators as sought by the Petitioner. If at the end of the day, the Petitioner were to be unsuccessful in the Petition, it will have to bear the costs attributable to the appointment of the provisional liquidators.

31. I will now hear counsel as to the terms of the proposed order.