RE CHINO INDUSTRIES LTD

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. Petitions for the compulsory winding up. of Texxan Industries Limited (Texxan) and Chino Industries Limited (Chino) were presented on behalf of John Koon (the petitioner) on the 22nd May 1990

2. Both companies are insolvent and are in voluntary liquidation.

3. The facts are similar in both cases so that the petitions have been heard together.

4. The companies were incorporated on the 27th March 1981 with Texxan having a paid-up capital of $5,001,000 and Chino a paid-up capital of $201,000. As a result of a restructuring of the companies in June 1988, the two companies 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 (the Yue Xiu group).   The Yue Xiu group is a group of companies established by the Guangzhou Municipality of the People's Republic of China which is engaged in a wide spectrum of financing and trading activities in Hong Kong, China and overseas.

5. The Yue Xiu group claims that Texxan is indebted to four companies within the group for a sum of about $157,000,000 whilst a claim is also made that Chino is indebted to seven companies in the group for about $95,000,000.  The petitioner also claims that Texxan is indebted to him for a sum of over $836,000 and that Chino is indebted to him for a sum of about $136,000.

6. The petitioner has also referred in the petitions to various personal guarantees that he intends to challenge for sums due by Texxan to the Hongkong & Shanghai Banking Corporation Limited for a sum of over HK$28 million, Security Pacific Asian Bank Limited for a sum of over HK$1.3 million and US$1.4 million, Yue Xiu Finance Company Limited for a sum of over HK$68 million and the Nanyang Commercial Bank Limited for HK$1.4 million and US$1.8 million. In respect of Chino, the guarantees relate to a sum of over HK$6.5 million due to the Hongkong & Shanghai Banking Corporation Limited, HK$7.3 million to Security Pacific Asian Bank Limited and HK$92.8 million due to the Yue Xiu Finance Company Limited. It is also alleged that debts are owed by Texxan and Chino to a supporting creditor Texxan Sealand Transportation Company Limited, a company which is controlled by the petitioner.

7. As at the 7th March 1990, the board of both companies ocnsisted of nine directors, five having been nominated by the Yue Xiu group and four, including the petitoner, who had been nominated by the petitioner. On the 7th March 1990, the five Yue Xiu directors made statutory declarations that the companies by virtue of their liabilities could not continue in business and that 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 & Co. should be appointed joint provisional liquidators of the companies.

8. At the first creditors' meeting of Texxan on the 3rd April 1990, Yue Xiu Enterprises Limited proposed and Yue Xiu Finance Co. Ltd. seconded Messrs. Nacson and McMillan as joint liquidators while Security Pacific Asian Bank Ltd proposed and Nanyang Commercial Bank Ltd. seconded Mr N.P. Etches and Mr J.L. Lancaster, partners in KPMG Peat Marwick to be liquidators. The Yue Xiu companies' aggregate value of debts amounted to HK$128,046,790 as against the opposition of 25 other creditors whose aggregate ,value of debts amounted to HK$28,445,095 with the result that Messrs Nacson and McMillan were appointed to be the joint liquidators. Messrs Nacson and McMillan. were also appointed joint liquidators at the first creditors' meeting of Chino on the 11th April 1990 when the Yue Xiu companies' aggregate value of debts voted by them amounted to HK$117,745,274 as against the opposing creditors whose aggregate value of debts voted amounted to $5,689,115.

9. The basis for the petitioner's application that the companies be wound up compulsorily by the court relates to the conduct of Messrs Nacson and McMillan as partners of Arthur Andersen & Co. that they are neither unbiased nor independent and are not seen to be unbaised and independent due to the heavy involvement of their firm as advisers of the Yue Xiu group and the part that their firm played in advancing the interests of the group to the detriment of the other creditors. It is therefore alleged that the liquidators are not capable of dealing fairly and objectively with matters that require their investigation and action.

10. Specific allegations are then made by the petitioner that Arthur Andersen & Co. were retained as professional advisers of the Yue Xiu group of companies in relation to the affairs of Texxan and Chino and included assisting the Yue Xiu group prior to the making of the statutory declarations under s. 228A which resulted in the Yue Xiu directors obtaining de facto control of the affairs of the two companies, that prior to the making of the statutory declarations they assisted the Yue Xiu group to procure payments by the companies trade debtors of sums owing to the companies to be made to creditor banks, in particular the Sanwa Bank and the Bank of Tokyo which enured to the benefit of the Yue Xiu group and to the detriment of the general body of creditors. These payments also give rise to a belief that they may have amounted to fraudulent preferences under s.266 of the Companies Ordinance. It is also alleged that Arthur Andersen & Co. assisted the Yue Xiu group in respect of a debt restructuring proposal in relation to banking facilities obtained or guaranteed by members of the group and made available to the two companies. Complaint is also made that investigations were made on behalf of the Yue Xiu group with regard to certain trade debts of the companies and in particular those owed by the Rigging Group in Taiwan after the joint liquidators had been appointed.

11. On the 21st March 1990,, the petitioner's solicitors wrote to the joint liquidators enquiring whether there would be a conflict of interest in acting as liquidators for Texxan and Chino having regard to the fact that they had previously acted for the Yue Xiu group of companies. The liquidators' solicitors replied that they were surprised at this enquiry. On the 2nd April 1990, the peititioner's solicitors wrote to the liquidators' solicitors setting out the reasons as to why Messrs Nacson and McMillan should step down. This letter reads as follows :-

           

(a)	The said Carol Yu had taken part in searching for and collecting all cheques, letters of credit and bills of lading of Texxan and Chino and handed them over to the Yue Xiu team.
(b)	Arthur Andersen & Co. had certified certain board minutes of Texxan Consolidated Limited' ('concerning incomes of the Texxan Group to be put into, inter alia, Texxan's bank account with Sanwa Bank) for Yue Xiu to distribute to the debtors of Texxan and Chino.

2              Duty to act in the best interests of the creditors

In the premises, we strongly urge your clients to step down at their own accord at the First Meetings of Creditors of Texxan and Chino. If they seek to be appointed as Liquidators and are so appointed, we have firm instructions from our client to take legal proceedings to apply for their removal.

13. It has been emphasized on behalf of the petitioner that the joint liquidators' former solicitors Lovell White Durrant, who had also acted for some of the Yue Xiu companies, had expressed the opinion that although there was no apparent conflict between the interests of the Yue Xiu group and the liquidators, it would be preferable if the liquidators were advised by another firm which resulted in a change of solicitors. A reply to this letter was sent by the liquidators' solicitors on the 11th April which reads as follows .-

                "Dear Sirs,

Texxan Industrial Ltd. (In Voluntary Liquidation) Chino Industrial Ltd. (In Voluntary Liquidator) ("the Companies")

 

                1.             Setting aside of fraudulent preference

However, as evidenced by the Notice of Appointment, both gentlemen were ultimately to report to the Financial Controller of the Texxan Group. The Financial Controller at the date of the appointment, Mr Michael Chan, had no connection with the Yue Xiu Group of Companies whatsoever.    By virtue of a resolution passed at an Extraordinary Meeting of Members of Texxan Consolidated convened on 7th February, 1990, the said Paul Wu was (following his aforesaid   appointment) to be held responsible for all the import and export documents of the Texxan Group, including letters of credit, bills of lading, etc.   At the request of several directors, Carol Yu, Patrick Wong and Gary Lui, professional accounting staff below the grade of managers, were seconded from our client's firm to assist Messrs Li and Wu in discharging their said appointments with the Texxan Group.   At all material times, Miss Yu and Messrs. Wong and Lui reported directly to Messrs. Li and Wu whose principal was Texxan Consolidated Ltd.   We enclose for your attention minutes of the said Extraordinary Meeting of members of Texxan Consolidated Ltd. dated 7th February, 1990. We also. enclose a copy of the minutes of an Extraordinary General Meeting of the members of Texxan Consolidated Ltd C held on or about February 15, 1990 the effect of which was to amend the resolution referred to in paragraph 2 of the minutes dated 7th February, 1990.   As you may note, the meeting was attended by the two shareholders of Texxan Consolidated Ltd., namely Simister Investment Ltd. and Goldstars Enterprises Inc. who were represented by a nominee of Yue Xiu and Your client respectively.   The following resolutions as amended were passed at those meetings:

           

1.	With the exception of the transactions listed in (2) below, all revenue arising from transactions of the Group as a whole have to be deposited into the following accounts:-

 

(a)	Chino Industries Ltd. Bank of China US$ Savings Account - A/C No.01287590040315
(b)	Texxan Industries Ltd. Sanwa Bank Ltd. Account No.06891311498910
The revenue mentioned above are to be applied to repay the various debts of the Group. The Board of Directors will be held responsible for all the details of the implementation procedures. The aim of this resolution is to protect the interests of all creditors.

 

2.

In view of the overdue debts due to Dai-Ichi Kanyo Bank and Bank of Tokyo are well over US$1.2 million and the 2 banks have pressed vigorously for the settlement of the debts, failing which actions will be taken to recover the debts. Accordingly, all shareholders unanimously agreed to amend the resolutions passed at the EGM held on 7th February, 1990. Instead of depositing in Sanwa Bank and Bank of China, the following sales proceeds will be deposited with Bank of Tokyo and Dai-Ichi Kanyo Bank for the settlement of debts. Revenue arising from the following transactions will be applied to repay the Group's liabilities due to Sanwa Bank Ltd.

Customer	Invoice No	Amount	For Repayment
Ssangyong (Hong Kong) Ltd.	TX/90201	US$254,250.00	Bank of Tokyo
	IX/90202	US$254,250.00	Bank of Tokyo
	TX/90203	US$343,508.00	Bank of Tokyo
ZhuhaiSesDevelopment Imp. &  Exp. (Group) Co.	TX/801208	US$199,898.00	Dai-Ichi Kanyo
	TX/891209	US$249,849.84	Dai-Ichi Kanyo
	TX/891210	US$200,440.00	Dai-Ichi Kanyo

 

3. Mr Koon Kin Chung will contact Ssangyong (Hong Kong.) Ltd. to arrange the sale proceeds to be remitted to Bank of Toky

Simister Investments Ltd.

Represented by:

 

_____________________

Li Hai Chao

Goldstar Enterprises Inc.

Represented by:

_____________________

Koon King Chung'

Yours faithfully

Alsop Wilkinson"

16. A specific complaint by the petitioner is that Mr Meocre Li who is a partner with Arthur Andersen & Co. represented to him in February 1990 that he was an internal auditor of the newly established Internal Auditing Department of the Yue Xiu group. It is also alleged that Mr Meocre Li and Miss Carol Yu who worked for Arthur Andersen & Co. went to Taiwan as representatives of the Yue Xiu group to investigate certain disputed trade debts owed by the Rigging group to the Texxan group.

17. It is further alleged in  the petition that it is necessary for the liquidators to investigate as to whether there has been any fraudulent preference in favour of the Yue Xiu group and whether payments made for the benefit of the group are voidable under s.266 of the Companies Ordinance, and whether certain loans made by Yue Xiu Finance Co. Ltd. and other members of the group to the companies are unenforceable by virtue of s.18 of the Money Lenders Ordinance.

18. Mr Nacson and Mr Meocre Li have filed evidence in response to the allegations made in the petitions and the answers that  they have given are uncontradicted. Further, both Mr Nacson and Mr Li made themselves available for cross-examination upon their affidavits, but counsel for the petitioner and supporting creditors declined to avail themselves of this opportunity. It emerges from Mr Nacson's affidavit of the 7th June 1990 that none of the Yue Xiu directors took any active part in the management of the affairs of the two companies until February 1990 and were not appointed to the board of directors of the companies until the15th January 1990. Accordingly, until February 1990, the petitioner as the managing director and his nominee directors were in de facto control of the two companies. In paragraph 4 of his affidavit, Mr Nacson sets out the role of the Yue Xiu group as follows :-

"The Yue Xiu Group's principal role was to provide and procure for the benefit of the Company and Chino credit and trade finance facilities in connection with their trading activities and businesses. In most instances finance facilities were extended by banks to various members of the Yue Xiu Group as primary obligors subject however to a mandate which enabled either the Company and/or Chino to utilize the facilities as beneficiaries. In those instances where finance facilities were extended directly to the Company and/or Chino directly by their bank creditors, the same were guaranteed by the Yue Xiu Group either solely or jointly with the exception of two facilities extended by Security Pacific Asian Bank and the Nanyang Commercial Bank respectively."

19. It is significant to observe from Mr Nacson's affidavit that at the first meeting of the creditors of the companies, he invited those bank creditors who opposed his appointment and that of Mr McMillan as liquidators together with a representative of the employees to serve on the committee of inspection and also to nominate either Mr Etches or Mr Lancaster. Both committees of inspection include representatives from the Security Pacific Asian Bank Limited, Hongkong & Shanghai Banking Corporation Ltd., Yue Xiu Finance Ltd., Miss Lui Siu Mei, the representative of the employees whilst there is representative of KPMG Peat Marwick on the Chino committee, and a representative of the Nanyang Commercial Bank Ltd. on the committee of Texxan.

20. Mr Nacson has referred in his affidavit to the total exposure of the Yue Xiu group with regard to liabilities incurred by the companies as at the 8th March 1990 which amounted to over HK$192 million and that the petitioner's liabilities under his personal guarantees without taking into account the additional security held by Security Pacific Asian Bank and Nanyang Commercial Bank amounted to over HK$18 million Accordingly, as the bulk of the financial support was provided by the Yue Xiu group to the companies and the liabilities incurred by them, it would therefore be difficult to envisage a situation where any payment by a trade debtor to reduce either of the companies liabilities would not enure to the benefit of the group. In fact all the facilities provided amounted to an aggregate of over 90% a of the liabilities of the companies having been underwritten by the Yue Xiu group either as primary obligor or as guarantor.

21. With regard to the allegation of conflict, Mr Nacson in his affidavit states that it is quite common for liquidators to be appointed who are partners in the firm that carried outan internal audit at the request of directors who are doubtful as to the solvency of their company and are considering whether to resolve to cease trading and put their company into voluntary liquidation. In those circumstances, he states that he is careful to ensure that the liquidation is carried out fairly to all the creditors and that a clear distinction is drawn between the firm, acting as advisers to the companies directors and liquidators who happen to be partners in the firm. With regard to the two companies, he said that Mr Meocre Li has provided the liquidators with information, gained in the course of the internal audit of the companies and as a result of his visit to Taiwan which was upon the liquidators' instructions, but the liquidators have not provided Mr Meocre Li with any information.

22. Finally, he deals with the work that has been carried out following the appointment on the 7th March which has included the investigation of. the affairs of the companies by taking appropriate action to recover assets for the benefit of the creditors, investigation of numerous files and documents and the consideration of claims and admissions of proofs of debt.

23. Mr Kotewall, counsel on behalf of the liquidators, commented that it was not clear in view of the allegations that have been made by the petitioner as to why the more convenient and less expensive mode of proceeding for the removal of the liquidators had not been taken under s.252(2) of the Companies Ordinance whereby "a court may, on cause shown, remove a liquidator and appoint another liquidator". The words "due cause shown" were considered by Bowen L.J. in Re Adam Eyton & Co. (1887) 36 Ch.D.299 at 306 where he had this to say :-

"In many cases, no doubt, and very likely, for anything I know in most cases, unfitness of the liquidator will be the general form which the cause will take upon which the Court in this class of case acts, but that is not the definition of due cause shown. In order to define 'due cause shown' you must look wider afield, and see what is the purpose for which the liquidator is appointed. To my mind the Lord Justice has correctly intimated that the due cause is to be measured by reference to the real, substantial, honest interests of the liquidation, and to the purpose for which the liquidator is appointed. Of course, fair play to the liquidator himself is not to be left out of sight, but the measure of due cause is the substantial and real interest of the liquidation."

In Re Sir John Moore Gold Mining Company (1879), 12 Ch.D.325, Thesiger, L.J. also had to consider these words when hesaid at 332:-

"...whatever be the meaning of the words 'on due cause shown' in sect.141, they cannot mean that it is to be a pure matter of judicial discretion whether a liquidator is to be removed or not. I make this observation because in several cases in this Court it has been held that where the Judge of first instance has a discretion' this Court will not interfere with its exercise unless it is manifest that it has been wrongly exercised. Here it seems to me that a liquidator has a right to say in this Court, as well as in the Court of first instance, that he is not to be removed unless due cause is shown; and if an order has been made by the Court below to remove him, such order can only be sustained on the ground that this Court is satisfied that due cause for his removal has been shown."

Further judicial comment was made by Millett J. in Re Keypak Homecare [1987] BCLC 409, where at 415 he had this to say :-

"The section authorises the court to remove the liquidator 'on cause shown'. That is not the same as saying 'if the court  shallthink fit'. There is a burden on the applicant to show cause why the liquidator should be removed."

And later at p.416 said :-

"... the words of the statute are very wide and it would be dangerous and wrong for a court to seek to limit or define the kind of cause which is. required. Circumstances vary widely, and it may be appropriate to remove a liquidator even though nothing can be said against him, either personally or in his conduct of the particular liquidation."

24. Mr Kotewall went on to submit that even if it may be undesirable for a person connected with a company to be appointed as liquidator, when it comes to removal for cause, the interest of the liquidation must be considered and cited a passage from the judgment of Marks J. in Re TEA (1983) Ltd. (1984)2 ACLC 183 where he had this to say at 188 :-

"It must be conceded that in normal circumstances the Court will not appoint a liquidator who is not thoroughly independent and apparently so. I accept that appearances are important even though they may be deceptive of the true situation.  .... The facts and matters that are detailed by Mr Crawford in para. (5) of the affidavit to which I have referred and his evidence, suggest a degree of absence of complete independence which the Courts ideally would prefer. However, the connections referred are, on the present material, very tenuous and not shown to be of consequence. Such as they are, they must be considered against the background of practical and overall interest of the winding up. Absolute purity in this area is an ideal that may not be reachable. In all cases the realities must be faced. ... The important characteristics of a liquidator are integrity, competence, efficiency, prompt attention to the work of liquidation, readiness to come to Court. when a problem arises and knowledge of the work of the liquidation. There is nothing put before me to suggest that the nominees have other than these characteristics.

 

It has been the experience of the Court in the past that they do. Considered together with the work already done and the. knowledge gained thereby of the company's operations, and the state of its affairs, all these matters in my view outweigh the factors put forward against their appointment.

25. A clear majority in aggregate amount of value of the debts supports the continuation of the voluntary liquidations and the aggregate of debts of the Yue Xiu group, Hongkong &. Shanghai Bank and National Commercial Bank amount to approximately HK$200 million, but even if the debts due to the Yue Xiu group are disregarded, the sum is still in excess of HK$44 million whereas the total aggregate of the debts of the petitioner and his supporting creditors amounts to approximately HK$14 million.

26. Both Mr Nacson and Mr McMillan are very experienced professional men in insolvency work and no grounds have been put forward to impugn their integrity or efficiency in carrying out the present liquidations. Further, no allegation has been made that they are unfit to do so. The liquidators are well acquainted with the liquidations which have now been in process for almost seven months. Quite clearly, if other liquidators are to be appointed, this will result in delay, additional costs and a wastage of time.

27. As was submitted to me on the application by the petitioner for the appointment of a provisional liquidator, the petitioner's complaint is that the liquidators have been too involved with the affairs of the Yue Xiu group with the result that there is a conflict of interest and bias has been shown. However as I understand the case that has been put forward, there are no instances of actual bias. The petitioner has not produced any evidence to show that the liquidators are not likely to investigate all matters thoroughly and complete the liquidations efficiently. Further, no grounds have been advanced that it will be to the advantage of the liquidations to appoint new liquidators.

28. The contentions of bias and conflict of interest are more apparent than real. Certainly no prejudice has been caused to the petitioner or his supporting creditors as a result of the allegations.

29. In my judgment, taking into account the wishes of the majority, the undoubted integrity and impartiality of the liquidators who have to date carried out the liquidations with efficiency,I am quite satisfied that it will not be in the interests of the liquidations to make compulsory winding up orders. The petitions are therefore dismissed.

30. There will be an order nisi for costs to the joint liquidators.