|
CACV000118/1990
| IN THE COURT OF APPEAL |
Civil Appeal
No. 118 of 1990 |
BETWEEN
|
IN THE MATTER of the Companies Ordinance, Chapter 32 of the Law of Hong Kong
AND
IN THE MATTER of Armour Insurance Company Limited
|
|
------------------------------------------------------------
Coram: Hon. Sir Derek Cons, V.-P., Clough J.A. and Barnett, J.
Date of hearing: 19 October 1990
Date of judgment: 23 October 1990
-----------------
JUDGMENT
----------------
Clough J.A. :
1. On the 11th June this year the appellant company Armour Insurance Company Limited ("the company") was the subject of a compulsory winding up order made by Jones J. on the petition of the Insurance Authority under section 177 of the Companies Ordinance (Cap. 32) and section 44 of the Insurance Companies Ordinance (Cap. 41). The petition was based on three grounds, namely (1) under section 177 of the Companies Ordinance and section 44 (1) (a) of the Insurance Companies Ordinance for failure of the company to maintain the statutory margin of solvency required under section 8 (3) (a) and 10 of the latter Ordinance, (2) under section 44 (1) (b) of the latter Ordinance for failure to comply with numerous statutory notices, and (3) under section 44 (3) in reliance upon public interest. It was also claimed in evidence filed on behalf of the petitioner, but disputed in evidence filed on behalf of the company, that the company was commercially insolvent.
2. The petition was presented on the 10th May this year. On the same day the Official Receiver was appointed the provisional liquidator of the company, so that effectively the directors lost control of the management of the company and of its assets from that date.
3. The company does not appeal against the winding up order on the merits, although it does not of course make any concessions in that connection. It claims that the judge erred in law by making the order without permitting the company a proper opportunity to oppose the petition. The basis of this claim is the refusal of the judge to grant the company's application for the adjournment of the petition and for a direction that the provisional liquidator should permit the directors of the company to have access to the books and records of the company for the purpose of filing proper evidence in opposition to the petition.
4. The position before the hearing of the petition on the 11th June was that, in addition to the formal affidavit verifying the petition, a formidable volume of evidence had been filed in the affidavits of an Assistant Insurance officer and an insurance Examiner respectively in support of the petition. On behalf of the company affirmations were made by Mr. S. H. Ong its Chief Executive since the company was incorporated in 1974 and his nephew Mr. T.S. Chan, a Malaysian lawyer who claimed to have experience in insurance company restructuring. Mr. S. H. Ong's evidence, in the main, explained and excused rather than rebutted the petitioner's grounds.
5. His evidence indicated that the company was indirectly owned by himself and members of his family, none of whom were residents in Hong Kong, and that since the company's incorporation its affairs had been successfully managed by its resident General Manager until some time in late 1988 when he had been responsible for the progressive mismanagement of the company's affairs, which Mr. S.H. Ong and Mr. T.S. Chan were anxious to put right. As to the numerous statutory notices mentioned in the petitions, he asserted that the company had complied immediately with "all requirements imposed" upon it by the petitioner but he did not condescend to particulars except in relation to a notice dated the 13th November 1989 given to the company by the petitioner requiring the company to deposit $35 million with a licensed bank in Hong Kong in the name of the petitioner.
6. Mr. Chan's evidence was concerned with his efforts since April 1990 together with Mr. S. H. Ong to ascertain the true financial position of the company and to meet the requirements of the petitioner under numerous statutory notices issued on the 13th November 1989 and thereafter. Failure by the General Manager to Keep proper books and records and up to date accounts had made it difficult to assess the true position of the company. I mention in this respect that the latest available accounts were only management accounts for the 31st March 1990. Mr. Chan contended in his evidence inter alia that the assets of the company were considerably greater than was shown in the management accounts and that, for various reasons, he did not accept that the company was insolvent either in a commercial or statutory sense.
7. Mr. Chan also affirmed that the shareholders were prepared to inject extra capital into the company to ensure that it was solvent on any test, but they were not prepared to write a blank cheque in respect of unlimited funds. He affirmed that without access to the books of the company he could not estimate what the capital injection should be. Attempts had been made by the company's solicitors to persuade the provisional liquidator to allow access to the books but this had been consistently refused. He exhibited copies of the relevant correspondence which indicated that the petitioner had not opposed such access but had left the matter to be resolved between the company and the provisional liquidator.
8. At the hearing of the petition, which was evidently a "Call-over" hearing, Mr. Poon for the company applied for an adjournment and for a direction that the provisional liquidator give the company access to its books. This was opposed by counsel for the petitioner on the ground that the evidence filed on behalf of the company disclosed no defence to the petition. The provisional liquidator also opposed the application and told the judge that his investigation of the records showed that the company was insolvent.
9. After Mr. Poon had submitted inter alia that the directors would be unable to file proper substantive evidence on the issue of the financial position of the company without access to the books and records of the company, which had been refused by the provisional liquidator, the judge adjourned the hearing in order to read the evidence filed on behalf of the company. On the resumption of the hearing the judge raised a number of questions with counsel for the petitioner concerning the state of the company's finances. When asked by the judge to comment on counsel for the petitioner's answers to those questions Mr. Poon for the company declined, saying that he was not in a position to do so unless access as afforded to the company's books. Mr. Poon described the affirmations filed on behalf of the company as holding affirmations.
10. After a further short adjournment the judge gave judgment. He did not deal separately with the company's preliminary application and then hear counsel on the substance of the matter, but dealt with both at once. He outlined the grounds for the petition and the evidence of the company's two witnesses. The judge then said:
|
" From the evidence, it is clear that no defence to the petition has been revealed. However, Mr. Pooh, counsel for the company has sought an adjournment so as to afford his client an opportunity to have access to the documents that are in the hands of the Official Receiver and thereafter to file evidence in opposition to the petition. This application has been opposed and in particular, fir. McInnes for the Official Receiver has said upon his investigation of the records that the company is insolvent.
|
|
In my judgment, in the absence of any semblance of a defence put forward today, the petitioner is entitled ex debito justitiae to an order to wind up the company on the grounds of its insolvency and having regard to its failure to comply with the obligations made by the Insurance Authority. Accordingly, I am unable to accede to the application made on behalf of the company and there will therefore be the usual compulsory winding up order with costs." |
11. The judge was therefore holding that because on the date of the hearing the company's evidence did not disclose any semblance of a defence to the petition and because the provisional liquidator had said that upon his investigation of the records the company was insolvent, a winding-up order should be made and the preliminary application of the company should be refused. For reasons which were not disclose, the third ground upon which the petition was based (public interest under section 44 (3) of the Insurance Companies Ordinance) was not referred to at all in the judgment.
12. In my judgment this decision and the reasons for it cannot be sustained. It is trite law that if a defendant is denied a reasonable opportunity to prepare his defence, then he has been denied fundamental natural justice, and that the mere fact that this becomes apparent as a result of a refusal of an adjournment does not prevent the court from granting relief in respect of the basic cause of complaint: see Reg. v. Thames Magistrates' Court Ex parte Polemis [1974] 1 W.L.R. 1371 (D.C.) applying the dictum of Viscount Haldane L.C. in Local Government Board v. Aridge [1915] A.C. 120 (H.L.) at p.132, and Rex v. Justices of County Clare [1918] 2 I.R. 116 per Sir James Campbell C.J. at p.124.
13. On the facts of the present case it was common ground between the petitioner and the company that the company's records and accounts had not been properly maintained, so that until the books and records had been properly examined it was not possible to say with any degree of probability what the true financial position of the company was when the petition was presented. The provisional liquidator's view that the company was insolvent may or may not have been correct, but there was no evidence before the court in support of that view and he had seen fit to withhold the records of the company from it. The court was not entitled to determine this important issue between the petitioner and the company on the say so of the provisional liquidator. The latter also appeared by one of his officers in his capacity of Official Receiver, but the special position he occupies under section 179A of the Companies Ordinance does not mean that his opinion without supporting evidence can be permitted by the court to resolve a disputed issue of fact which it is the court's duty to deal with on the evidence.
14. The fact that, as Mr. Clifford Smith for the petitioner rightly stressed, the directors of the company were responsible for the disarray in the company's records and that they were alleged to have taken no or insufficient measures to remedy the situation for several months when they were being investigated by the petitioner, does not mean that they should be denied access to whatever records exist in order to obtain material to substantiate their defence to the petition on material matters, namely the degree (if any) of the statutory or commercial insolvency of the company when the petition was presented.
15. Mr. Smith for the petitioner contended that the exhibited correspondence since the presentation of the petition, much of which he read to the court, indicated that the company was seeking access to its books in the custody of the provisional liquidator solely for the purposes of those who might be prepared to inject capital into the company and improve its management, and not for the purpose of contesting the issue of statutory and commercial insolvency. However this proposition was clearly destroyed by the following opening paragraph of the company's solicitor's fax letter to the provisional liquidator dated the 30th May 1990:
|
" We refer to your fax of 24th May 1990. Our clients are obviously disappointed that you are not prepared to permit access by our clients to the books and records of the Company. The petition for winding up is based upon two Major concerns: firstly the solvency of the Company both in commercial and insurance terms and secondly the management and control of the Company and you will obviously appreciate that such access is necessary if our clients are to have the opportunity of establishing the true position of the Company to the satisfaction of the Court and the Insurance Authority and formulating proposals for the restructuring of the Company." |
16. The judge's reliance upon what he termed the absence of any semblance of defence to the petition discernible in the company's evidence cannot be prayed in aid to sustain the refusal of the company's preliminary application, because we are here concerned not with the question whether justice has been done but whether it has been seen to be done. I respectfully adopt the dictum of Lord Widgery C.J. When, in Reg. v. Thames Magistrate's Court he rejected an argument in a Similar context based on lack of merit, saying at p. 1375H:
|
" I reject that submission. It is again absolutely basic to our system that justice must not only be done but must manifestly be seen to be done. If justice was so clearly not seen to be done, as on the afternoon in question here, it seems to me that it is no answer to the applicant to say: 'Well, even if the case had been properly conducted, the result would have been the same.' That is mixing up doing justice with seeing that justice is done, so I reject that argument," |
17. Mr. Smith for the petitioner, supported by Mr. Lewis for the provisional liquidator, pressed us with the argument that the authorities cited above, where the principles of natural justice were applies, were not in point on the facts of this case. Emphasis was placed on the second ground under section 44 (1) (b) of the Insurance Companies Ordinance upon which the petition was based, namely breaches by the company of statutory obligations under the Ordinance. The argument was in effect that no defence had been disclosed to this ground in the company's evidence and none could be disclosed. The breaches were indisputable, it was said, in the case of all or almost all of the statutory notices. Accordingly it was contended that the company could have no real need for an adjournment in relation to this ground because an adjournment could not affect the eventual outcome, namely the making of a winding up order, at least on this ground. I emphasise, however, that counsel never confined the petitioner's case to the second ground of the petition and the winding up order was made in respect of both the first two grounds.
18. Be that as it may, Mr. Smith put his argument on the footing that the court might or might not have a discretion under section 44 (1) (b) whether or not to make a winding up order once it had been established that the company had failed to satisfy an obligation under the Insurance Companies Ordinance. Mr. Lewis for the provisional liquidator went further and contended that, in effect, once the statutory breach had been established the petitioner was entitled to a winding up order ex debito justitiae.
19. On this point Mr. Poon for the company was, in my opinion, right when he contended that the court had a discretion under all three paragraphs of section 44(1) of the Ordinance. It is well settled that the court has an overriding discretion whether to make a winding up order under section 177 of the Companies Ordinance, even in the case of a creditor's petition where an unsatisfied debt of the company is proved: see McPherson on the Law of company Liquidation, 3rd edition, p.61.
20. Section 44 is expressly linked with the companies Ordinance. It authorises the Insurance Authority to present a petition "... in accordance with the companies Ordinance," for the winding up of an insurance company ".... being a company which may be wound up by the court under that Ordinance...". The petition may be presented on grounds (a), (b) or (c) in section 44(1). The combined effect of sections 8 (3) (a), 10 and 42 (1) is that statutory insolvency comes within section 44(1)(a) as a ground for a winding up order on the basis that the company is deemed to be unable to pay its debts within the meaning of sections 177 and 178 (or section 327) of the companies Ordinance. There is clearly an overriding discretion in the court here whether to make a winding up order, because the jurisdiction is ultimately exercisable under section 177 or section 327 of the Companies Ordinance.
21. I am quite unable to accept that the legislature intended to make a winding up order mandatory under section 44(1)(b) or (c) but not under section 44(1)(a). It is significant that section 44(1) is so framed as to authorise the Insurance Authority to present a petition and is not expressed in terms to confer jurisdiction on the court to make a winding up order. The reason for this seems to me to be (as clearly indicated by the reference to section 177 of the companies Ordinance in section 44 (1) (a)) that section 44 is intended merely to enlarge the jurisdiction of the court to make winding up orders in respect of insurance companies which are already companies within the general winding up jurisdiction of the court, a jurisdiction which is discretionary, albeit discretionary in the sense that the jurisdiction is to be judicially exercised.
22. In my judgment the court has an overriding judicial discretion when exercising its jurisdiction under the combined powers conferred on it under the Companies Ordinance and section 44 (1) of the Insurance companies Ordinance. I accept that if statutory insolvency is established under section 44 (1) (a) the petitioner would ordinarily have a prima facie right to a winding up order and likewise where a breach of statutory duty is established under section 44 (1) (b). However each case must be considered on its own facts. I am by no means satisfied that in the present case it would necessarily follow that it would be futile to grant the company an adjournment and access to its books to enable it to prepare a defence to the second ground (or any of the grounds) upon which the petition is based.
23. The true state of the company's finances (and the consequential amount of capital injection and reorganisation which might be proposed by its directors) must necessarily be highly material to the court when considering whether or not a winding up order should be made under paragraphs (a), (b) or (c) of section 44(1). It seems to me to be not beyond reasonable contemplation that, if the company were given a reasonable adjournment and access to its books, it might be able to show that the latest management accounts do not accurately represent the true state of the company's finances and that it is not statutorily or commercially insolvent. Alternatively it might reasonably come about that the directors, after obtaining further access to the books, might accept that the company is either statutorily or commercially insolvent but offer to inject sufficient capital and reorganise the company's business so that it can be safely run off for the benefit of its creditors and policy holders to the satisfaction of the petitioner and the court.
24. Accordingly, whilst I refrain from expressing any firm view, one way or the other, regarding the likely outcome if the present petition were to be adjourned I am unable to accept that such an adjournment would necessarily be futile and would not afford to the company, whatever the past breaches of duty by its directors, a fair and realistic opportunity to oppose the petition.
25. I conclude therefore that the judge erred in the present case by allowing himself to determine the company's preliminary application by reference only to what he saw as the absence of merit in the company's evidence as it stood, and by reliance on the bare assertion of the provisional liquidator that the company was in any event insolvent. In so doing the judge wrongly denied the company a reasonable opportunity to prepare its case in opposition to the petition and prematurely determined the issue of insolvency against the company. In my judgment justice clearly required that the provisional liquidator should have been directed to give the company access to its books and records and that there should have been an adjournment of the petition for a reasonable time to permit the company to examine those books and records and to file such further evidence as it might be advised. This was particularly so in the present situation where the petitioner will not be prejudiced by a reasonable adjournment because the company's assets have been under the control of the provisional liquidator since the presentation of the petition and sections 182 and 184 of the Companies Ordinance further protect those assets from dissipation.
26. I would therefore allow this appeal.
Sir Derek Cons, V.--P. :
27. I agree with what all my Lord has said and I too would allow the appeal. I would only add that, in my view, even if it would have been futile to adjourn the hearing with regard to the section 44(1) (b) ground, as long as the section 44 (1) (a) ground remained in issue natural justice entitled the company to an adjournment on that score.
Barnett, J.:
28. For the reasons which have already been given I too agree that the appeal should be allowed. There is nothing I can usefully add.
|
(Sir Derek cons)
Vice President
|
(P.G. Clough)
Justice of Appeal |
(N.J. Barnett)
Judge of the High Court
|
Representation:
Winston Poon (J.S.M.) for Appellant/Company
Kevin Lewis for (Official Receiver)
Clifford Smith (Crown Solicitor) for Insurance Authority/Respondent
|