RE TEXXAN INDUSTRIES LTD

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HEADNOTE

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                Summonses for the appointment of a provisional liquidator in compulsory winding-up proceedings where voluntary liquidators had been appointed. Matters to be taken into consideration.

IN THE SUPREME COURT OF HONG KONG

COMPANIES (WINDING-UP)

No. CWU 151 OF 1990

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JUDGMENT

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1. I have before me applications by the petitioner in two winding-up petitions that were presented on the 22nd May 1990 for the appointment of the Official Receiver or some other fit person as the provisional liquidator of two companies Texxan Industries Limited ("Texxan") and Chino Industries Limited ("Chino"). The facts are similar in both cases so the applications have been dealt with together. The applications are somewhat unusual as liquidators have been appointed in the voluntary liquidation of the two companies.

2. There is also a summons in each case by the petitioner that seeks to vacate the dates fixed for trial of the petitions in December and for the petitions to be heard during the long vacation. In fact I made a decision at the call over of the petitions on the 25th June when I refused an application by the petitioner. However, these summonses have been held over pending my decision on the applications for the appointment of a provisional liquidator.

3. The facts emerge from the petitions supported by affidavits of Mr John Koon (the petitioner) whilst evidence in reply has been filed by Mr C.M. Nacson, one of the joint liquidators of the two companies who is a partner in the firm of accountants Arthur Andersen and Co., and Mr Meocre Li, an audit partner in the same firm.

4. The companies were incorporated on the 27th March 1981 and in both cases the capital has been fully paid up. In the case of Texxan it is $5,001,000 and Chino $201,000. In June 1988 there was a restructuring of the companies when they became wholly owned by a Bermuda company Texxan Consolidated Limited which is beneficially owned in equal shares by the petitioner and a group of companies called the Yue Xiu group established in the People's Republic of China.

5. In Texxan, the Yue Xiu group claims that the company is indebted to four companies within the group for about $157,000,000 whilst a similar claim is made in Chino that the company is indebted to seven companies in the group for about $95,000,000. The petitioner in Texxan claims a sum of over $836,000 and in Chino of almost $136,000. The petitioner also refers to certain personal guarantees that he intends to challenge for sums due by Texxan to the Hong Kong & Shanghai Bank in a sum of over $28 million, Security Pacific Asian Bank Ltd. (Security Pacific) for a sum over HK$1.3 million and US$1.4 million, Yue Xiu group over $68.5 million and Nanyang Commercial Bank Ltd. (Nanyang) HK$1.4 million and US$1.8 million. In respect of Chino, Hongkong & Shanghai Bank is owed over $6.5 million, Security Pacific $7.3 million and Yue Xiu group $92.8 million. It is also alleged that Texxan owes $654,000 and Chino $86,000 to a supporting creditor Texxan Sealand Transportation Company Limited, a company controlled by the petitioner. Both companies are alleged to be insolvent and unable to pay their debts. Statutory declarations were made on the 7th March 1990 by the Yue Xiu directors who comprise five out of the nine directors on the boards of the companies, that the companies by reason of their liabilities could not continue in business and it was necessary for the companies to be wound up under section 228A of the Companies Ordinance. On the 8th March 1990, the Yue Xiu directors passed a resolution that Mr M.C. Nacson and Mr E.M. McMillan, partners in the firm of Arthur Andersen and Co., should be appointed joint provisional liquidators of the companies.

6. At the first meeting of creditors held on the 3rd April 1990, Mr Nacson and Mr McMillan were appointed to be joint liquidators by a majority in value of the alleged aggregate value of debts of the Yue Xiu companies and its supporters as against two partners in KPMG Peat Marwick who were nominated by the opposing creditors.

7. Complaint is made by the petitioner that the liquidators are neither unbiased nor independent by virtue of the involvement of their firms as advisers to the Yue Xiu group in advancing the interests of the group to the detriment of the other creditors. In particular, allegations are set out in paragraphs 20(a), (b), (c) and (d) of the petitions which read :-

"20.        On a day unknown to your Petitioner, Arthur Andersen were retained as the professional advisers of the Yue Xiu Group in relation to the affairs of the Company (Texxan) and Chino. Since then, Arthur Andersen have provided inter alia the following services and have become professionally involved in the affairs of the Yue Xiu Group as follows :-

8. Particulars of the allegations are then set out which repeat those set out previously in a letter from the petitioners' solicitors to the liquidators' solicitors on the 2nd April 1990 to which a reply was sent on the 11th April 1990.

9. Paragraph 22 of the petitions set out the contentions by the petitioner of conflict between the Yue Xiu group and the companies including allegations of fraudulent preference and the validity of certain loans by the Yue Xiu group to the companies that have been challenged as being unenforceable under the money Lender's Ordinance. These allegations are then particularised. Instances of actual bias by the liquidators have been set out together with allegations that the liquidators have refused to admit the possibility of a conflict of interest and have not been frank and open about the involvement of their firms with the Yue Xiu group. These allegations are then particularised.

10. Both petitions seek winding-up orders on the grounds that the voluntary winding-up cannot be continued with due regard to the interests of the creditors and that it is just and equitable to do so. An affidavit of Mr Nacson, one of the liquidators was filed on the 7th June in which he sets out details of the events leading to the statutory declarations made under section 228A of the Companies Ordinance for the companies to be placed in voluntary liquidation. He makes reference to the fact that the Yue Xiu directors were not appointed to the Board of Directors of the companies until the 15th January 1990 and took no active part in the management of the companies until February 1990 up to which time the petitioner, as Managing Director and his nominee directors were in control of the companies. He states that the liabilities of Texxan amounted to almost $270 million and that the realisable value of the assets amounted to almost $18 million resulting in an overall deficiency of approximately $251 million.

11. In respect of Chino, at the first creditors' meeting on 11th April, 1990, the estimated liabilities as at the 8th March 1990 amounted to over $162 million and the estimated realisable value of assets of almost $19 million, left an overall deficiency of approximately $143 million.

12. Mr Nacson in his affidavit has answered the allegations in the petition with regard to fraudulent preference and has also made allegations against the petitioner to the effect that he may have been engaged in transactions which constitute prima facie fraudulent preferences, contrary to section 266 of the Companies Ordinance. In respect of the debts, Mr Nacson states that except for two credit facilities extended by Security Pacific and Nanyang, all the facilities extended to the companies exceeding 90% of the liabilities of Texxan and Chino were underwritten by the Yue Xiu group either as primary obligor or as guarantors. Mr Nacson makes reference to investigations with regard to the sale of goods by four companies controlled either by the petitioner or his nominees to various Taiwanese purchasers and to which the companies are entitled to proceeds of sale in a sum in excess of $35 million. The liquidators' investigations also revealed that large amounts outstanding to Chino and Texxan's wholly owned subsidaries were owed by various Taiwanese companies in an amount of over $112 million.

13. It has been emphasised for the petitioner that no allegations of misconduct or wrongdoing are made against the liquidators nor is there integrity impugned, although in March of this year, allegations were made in correspondence by the petitioner's solicitors of material misrepresentations and non-disclosure.

14. Essentially, the complaint of the petitioner is that the firm of which the liquidators are partners has been too closely involved or connected with the Yue Xiu group, so that to the petitioner and his supporting creditors, the liquidators do not appear to be independent nor unbiased which is bound to lead to a conflict of interest. As Mr Ching counsel for the petitioner submitted, and he was supported by Mr Poon counsel for a supporting creditor, it is an allegation based upon legal principles.

15. With regard to the allegation of conflict of interest, Mr Nacson deals with this in paragraph 24 and in paragraph 25 he sets out details of the work that has already been carried out by the liquidators during the liquidation.

16. The petitioner has drawn an analogy between the position of the solicitors Lovell White Durrant who had acted for the Yue Xiu group and then later for the liquidators, but ceased to act for the liquidators upon a complaint being made by Deacons who formerly acted for the petitioner. However, Mr Nacson in his affidavit states that Lovell White Durrant in effect erred on the side of caution in doing so having intimated that they did not consider that there was likely to be a conflict of interest.

17. The petitions came before me, as I have said, on the 25th June for callover. At the hearing, an application was made on behalf of the petitioner and supporting creditors for the petitions to be heard during vacation. This application was opposed by counsel on behalf of the liquidators and some opposing creditors while some other creditors adopted a neutral stance. These applications were made from the bar table with no evidence in support with the result that I refused the applications and cited my decision in Re Lawe William Enterprises Limited M.P. 1638/1989, adopting the test in England that for a trial to take place in vacation, the action must be required to be heard immediately or promptly. I then gave directions for the filing of further evidence and dates for the trial were later fixed in December.

18. It is clear that the parties in these proceedings are at loggerheads. On the one hand there is the petitioner supported by several trade creditors and past employees and on the other, the Yue Xiu group, supported by the Hong Kong & Shanghai Bank and the Nanyang Commercial Bank as the main creditors. Mr Ching has in effect asked me to discount the debts due to the Yue Xiu group in view of their close association with the companies and to regard them as internal creditors referring me to Re Lowerstoft Traffic Services Ltd. [1986] BCLC 81, so that greater weight should be given to the petitioner and his supporting creditors. Nevertheless, I consider that weight should be given to the views of Yue Xiu for, as I have said, they did not become directors until January and did not take an active part in the management of the companies until February. In any event, if I am wrong, the wishes of the other opposing creditors to whom I have referred must be given proper consideration, their debts totalling in the region of $50 million, being the total due from both companies. These debts alone exceed the debts owed to the petitioner and his supporting creditors.

19. The issue of jurisdiction was raised by Mr Kotewall, counsel for the liquidators. The application for the appointment is made under s.193 of the Companies Ordinance which where relevant reads :-

Indeed I appointed the Official Receiver to be the provisional liquidator in the case of Re King's Dyeing & Weaving Factory Ltd., CWU 217/1986, after the directors had appointed a voluntary provisional liquidator, but the facts there were vastly different from those in the instant case for the directors in that case had acted deviously in order to flout the jurisdiction of the court. An order was also made in Re P. Turner (Wilsden) Ltd. [1987] BCLC 149, but again the facts were quite different from those in these proceedings. However, I am quite satisfied that the court does have jurisdiction having regard to the provisions of the section despite the appointment of voluntary liquidators.

20. Mr Kotewall argued that I should take into account the matter of delay for the present summonses were not issued until the 28th June, a month after the presentation of the petitions and almost three months after the petitioners' solicitors' letter of the 2nd April that requested the liquidators to remove themselves from their appointments. However, I do not consider that delay is a factor to be taken into account for applications can be made at any time after the presentation of a petition and before the making of a winding-up order. Mr Kotewall submitted that there is no evidence of danger or jeopardy to the assets or any likelihood of any dissipation, nor indeed has any evidence been put forward. Further no evidence of mismanagement or misconduct is alleged against the liquidators. Accordingly Mr Kotewall submitted that I should exercise my discretion on the balance of convenience in favour of the liquidators having regard to the work already carried out and the wastage of time and costs that will be caused if I accede to the applications.

21. Mr Ching referred me to a number of cases dealing with the principles to be followed for the appointment of a provisional liquidator to the effect that he must not only be independent but seen to be independent. That where a conflict arises, the court, in a proper case, may remove a liquidator. These authorities included Re Stewden Nominees No. 4 Pty. Ltd. [1975]1 ACLR 185, Re Intercontinental Properties Pty. Ltd. [1977]2 ACLR 488 and Re Shanks Byrne Industries Pty. Ltd. (1979) ACLR 676. In In Re Keypak Ltd. (1988) PCC 115 was also cited but involved an application for the removal of the liquidator of a company in which his conduct was called into question. The facts were far removed in any event from the present case.

22. My attention was also drawn to Re Five Lakes Investment Co. Ltd. and Multiford Co. Ltd. [1985] HKLR 273, where Clough J., as he then was, considered section 193(1) of the Companies Ordinance and had this to say at 283 and 284 :-

I respectfully adopt this analysis of the law.

23. The Official Receiver has been represented by Mrs Ho throughout these proceedings, and has taken a neutral stance.

24. It is clear upon the undisputed evidence that the companies are insolvent with the result that a prima facie case has been established for winding-up orders to be made. However, the assets are not in danger or jeopardy nor has there been any mismanagement or misconduct by the liquidators. The only evidence adduced for the removal of the liquidators relates to bias in the Osman sense, Civil Appeal 21 of 1989, where the Court of Appeal adopted the test in R. v. Liverpool City Justices Ex-parte Topping [1983]1 WLR 119 at 123 where Ackner L.J., as he then was, said :-

"In our view therefore the correct test to apply is whether there is the appearance of bias rather than whether there is actual bias".

However, whether or not that is the case in these proceedings cannot be determined upon the affidavits, for it is a matter to be decided at the trial.

25. Whilst the petitioner and his supporting creditors perceive bias, it has not been perceived by the opposing creditors, discounting the views of the Yue Xiu group. At the moment, the liquidator's defence to the petition has not been put before the court, but their time for filing further evidence has not yet expired. I am, therefore, at the end of the day, concerned with the exercise of my discretion upon the balance of convenience.

26. The petitioner argues that there is bias and a conflict of interest so that the liquidators should be discharged. These allegations are denied. If I accede to the application, a great deal of time and money will be wasted to enable the Official Receiver or other liquidator appointed to become familiar with the conduct of the liquidations whilst such appointment will be contrary to the resolutions and wishes of the majority of the creditors in value passed in accordance with rule 119 of the Companies winding-up Rules. There is also the likelihood of duplication. In effect by making the appointments, I shall be prejudging the issue for there are factual disputes between the parties that cannot be decided at this stage. Leave has in fact been granted to the parties to cross-examine the deponents upon their affidavits or affirmations.

27. However, the parties agree that the companies are insolvent so that a liquidator will have to be appointed to investigate the affairs of the companies. The issue to be decided is whether the voluntary liquidations should continue or whether compulsory winding-up orders should be made with the appointment of the Official Receiver or other liquidator. My attention was drawn to Re Falcon R J Developments Ltd. [1987] BCLC 437 with regard to the matters that the court will take into consideration in deciding whether to make a winding-up order or to allow the voluntary winding-up to continue. The holding in that case reads :-

"In deciding whether or not to make a winding-up order where there was a voluntary winding up in progress, the court was not obliged to give equal weight to all debts of an equal amount but must also consider the quality of the debts and to have regard to other interests that may influence the views of the creditors and in addition it should take into account the general principles of fairness and morality which underlie the details of insolvency law. On the facts, the debts owed to J and his associated companies should not be taken into account and made determinative of the issue as to whether a winding-up order should be made. The reason why J wished the voluntary winding up to continue was that he was willing to postpone the debts owed to him and his associated companies to the claims of the other creditors so as to minimise the damage to his commercial reputation and this consideration of personal advantage to J should not be allowed to prevail over the views of the majority of the other creditors. In addition, the majority of those creditors would be left with a legitimate sense of grievance if, against their wishes, the winding up was left in the hands of a liquidator chosen and confirmed in office by the use of votes by the person who had control of the company and whom they were entitled to treat as being prima facie responsible for the company's insolvency. Accordingly this was an appropriate case in which a winding-up order should be made."

Each case must necessarily depend on its own facts and special circumstances see Re v. Union Accident Insurance Co. Ltd. [1972]1 All ER 1105. Apart from desiring the removal of the present liquidators on the grounds of bias, which is not actual bias, there is not a tittle of evidence that the assets of the companies will be affected or placed in danger, nor is it alleged, nor will any prejudice be suffered if the status quo is preserved.

28. Having considered the evidence, the very helpful submissions that have been made to me by counsel and the authorities, I am quite satisfied that the balance of convenience lies with the liquidators. Accordingly, in the exercise of my discretion, the summonses for the appointment of a provisional liquidator will be dismissed.