NINA KUNG v. TAN MAN KOU AND OTHERS

HCMP 2108/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2108 OF 2003

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(Heard Together)

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J U D G M E N T

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1. I have before me three originating summonses in expedited form, they are heard together because the evidence is in common.

2. The first originating summons issued in time is in HCMP No. 2108 of 2003. This was issued on 19 May 2003. The applicant is Mrs Nina Wang. The 1st respondents of the summons are Mr Tan Man Kou and Mr Cheung Yat Ming who are the Joint Administrators pending suit (the "JA") of the estate of Mr Wang Teh Huei. The other three respondents in the summons are the companies affected by the application.

3. In that originating summons, Mrs Wang seeks orders under section 131(2) of the Companies Ordinance, Cap. 32, firstly to appoint WM Sum & Co. ("WM Sum"), certified public accountants, as auditors for Lewin Investments Ltd ("Lewin") from the date of the order to the next annual general meeting convened by Lewin, and secondly to appoint WM Sum as auditors for Talbot Investments Ltd ("Talbot") from the date of the order to the next annual general meeting convened by Talbot.

4. The next originating summons, issued on 21 May 2003, is that in HCMP No. 2162 of 2003. The applicants are the JA. There are 41 respondents. The first 39 respondents are the companies affected by the application. The 40th respondent is Mrs Wang, the 41st respondent is Mr Siu Yat Nam Peter. In that summons, the JA seek orders under section 131(2) for RSM Nelson Wheeler ("Nelson Wheeler") to be appointed auditors of the 1st to 33rd respondents with immediate effect and for Moores Rowland to be appointed auditors of the 34th to 39th respondents with immediate effect.

5. The last originating summons, issued on 27 May 2003, is in HCMP No. 2248 of 2003. The applicants are Mrs Wang and Mr Peter Siu. The 1st respondents are the JA. The 2nd to 39th respondents are the companies affected. These are the same companies as in the originating summons of the JA in HCMP No. 2162 of 2003. In this originating summons, the applicants seek orders under section 131(2) as follows:

(1) to appoint WM Sum as auditors for the 3rd to 19th respondents from the date of the order to the next annual general meeting convened by each of the said respondents;

(2) to appoint WO Lo & Co. ("WO Lo"), certified public accountants, as auditors for the 20th to 38th respondents from the date of the order to the next annual general meeting convened by each of the said respondents; and

(3) to appoint WM Sum as auditors for the 39th respondent from the date of the order to the next annual general meeting convened by the 39th respondent.

6. The total number of companies affected in these 3 summonses is 39. Of these 39 companies, WM Sum had been appointed as auditors to 9 companies in previous annual general meetings, WO Lo had been appointed as auditors to 19 companies, and 11 companies, which have been inactive, did not have auditors appointed previously. It has now been agreed that the accounts of these inactive companies need to be audited and auditors should be appointed for that purpose.

7. Section 131(2) provides as follows:

"Where at an annual general meeting of a company no auditors are appointed or re-appointed, the court may, on the application of any member of the company, appoint a person to fill the vacancy."

8. The relevant evidence may be stated as follows.

9. In all the affected companies, the shareholdings of Mrs Wang (either by herself, or through Mr Peter Siu and her nominees) and the JA are equal. WM Sum were appointed auditors of the majority of the companies in the Chinachem Group, which comprises 600 companies. In a number of instances, WM Sum were chosen as auditors by Mr Wang. They have been appointed a long time and have knowledge of the systems and procedures of the Chinachem Group, which, according to Mrs Wang, uses a treasury company to provide administrative services for the Group.

10. After the JA were appointed, they have become registered as shareholders in respect of 112 companies in the Group, including the 39 companies involved in these applications. The JA after their registration as shareholders proposed to change auditors in respect of most of the companies. They succeeded in doing so in respect of 10 companies in which the JA are the only shareholders or the majority shareholders. The companies being the subject of these originating summonses are companies in which the shareholdings of Mrs Wang and the JA are held equally, so there is a deadlock. At the annual general meetings of these companies concerned, none of the resolutions proposed by Mrs Wang or by the JA for the appointment of auditors were passed.

11. There is some urgency to resolve the deadlock as two of the companies, Lewin and Talbot, cannot finalise the audit of their 2002 accounts and cannot submit the tax returns by the due date. An extension of time has been granted by the Commissioner of Inland Revenue to these two companies to file their returns by 31 August 2003.

12. The JA have rejected the proposal of Mrs Wang to appoint WM Sum for the limited purpose of completing the audit of the accounts to enable some of the companies to submit tax returns by the due date.

13. From the fee proposals circulated, it would appear that the new auditors would be more expensive.

14. Mrs Wang has asserted that the appointment of new auditors would give rise to "delay, disruption and inconvenience", as they would need to familiarise themselves with the affairs, system and procedures of the companies and the Chinachem Group.

15. Her point is the existing auditors have performed well for many years, it would be a pointless exercise to replace them unless for good reason.

16. Mr Poon SC submitted on behalf of Mrs Wang that the interest of the individual company concerned is the main and indeed the only factor the court should take into account. I agree. I am not concerned with the interest of Mrs Wang as shareholder or the JA as shareholders. I should not be preferring the interest of one over the other, despite the submission of Mr Brock for the JA that the JA are court appointed officers and "not ordinary litigants" with no personal interest in the litigation.

17. I turn to the JA's grounds for appointing new auditors. These are neatly set out in the JA's letter to Mrs Wang dated 6 March 2003. 3 points were made in that letter. Firstly, the JA and Mrs Wang are involved in litigation over the businesses of the Chinachem Group in which the beneficial entitlement to the Group's assets and the way the Group has been managed are central issues. Secondly, it was alleged that Mrs Wang has a long association with both WM Sum and WO Lo. Additionally, WM Sum audit parts of the Chinachem Group that Mrs Wang claims to in her outright ownership and therefore outside the estate of Mr Wang. Thirdly, it was stated that it is the duty of the JA to get in and preserve the assets of the estate and "the audit process is a vital check on the management of the companies, a preservation of the value of its shares and, therefore, the assets of the Estate. It is therefore incumbent upon us [i.e. the JA] to ensure that the auditors of the Companies are not only wholly unassociated with either ourselves or yourself [i.e. Mrs Wang], but are also publicly perceived to be so." (Emphasis supplied.)

18. These reasons are repeated in the statement of reasons for proposals to appoint alternate auditors read by the JA to the annual general meetings of the various companies on 13 March 2003.

19. The above matters were supplemented in the evidence filed in these proceedings. Regarding the litigation between the JA and Mrs Wang, it is stated that WM Sum are auditors to Chinachem Agencies Ltd ("CAL") in which Mrs Wang claims she holds 100% of the shares and the JA have concern regarding the movement of funds between CAL and the companies in which the estate has an interest. These are matters of existing or contemplated litigation between the JA and Mrs Wang.

20. Regarding the association of Mrs Wang with WM Sum, it is stated that Mr Andrew Wong, a partner in WM Sum, had made an affirmation on behalf of Mrs Wang in HCMP No. 3454 of 1999 opposing the appointment of receivers over the assets of the estate. According to his affirmation dated 6 September 1999, Mr Wong was a close personal friend of Mr Wang who had confided in him and he would appear to be a friend of Mrs Wang as well. Further, Mr Wong and Mr WM Sum had made witness statements as witnesses for Mrs Wang in the Probate Action (HCAP No. 8 of 1999), although they were not called to give evidence.

21. I should point out that in the letter of the JA to Mrs Wang and others on 23 April 2003, the JA have stated clearly that they make "no express or implied allegation of actual lack of independence of WM Sum & Co. or WO Lo & Co.". I also add that there is no suggestion that WM Sum and WO Lo have not discharged their duties as auditors properly in the past.

22. On the issues of the additional expense and additional time required for the new auditors to familiarise themselves with the affairs of the companies concerned, these are not matters that are of material importance to me in the weighing exercise. It does not seem on the available evidence that the additional time the new auditors may take to familiarise themselves with existing procedures is a formidable difficulty. Certainly, in respect of the companies in which the JA have successfully appointed auditors of their choice, there is no suggestion on the part of the Mrs Wang that this has created great problems in the audit exercise of these companies. As for the additional expense, Mr Brock submitted that in the context of the Chinachem Group, the difference in expenditure is de minimis. I agree.

23. The nub of the matter is a question of perception. It was submitted by Mr Poon that there is no question of public perception or interest involved in determining who should be appointed auditors, as the court should be concerned only with the interest of the individual company concerned. Public perception, which was raised in the letter of the JA dated 6 March 2003, is perhaps not an apposite expression here.

24. The issue is not so much the auditors should be "publicly perceived" to be independent, but whether they should be "objectively perceived" to be independent. As asserted in the 1st affirmation of Mr Tan Man Kou in HCMP No. 2108 of 2003 filed on 28 May 2003, "looking at the appointment of auditors objectively and independently, the auditors must be objectively independent."

25. I should not approach this on the basis of how likely is the risk that the auditors previously appointed may not act independently, or assess their potential for acting partially towards Mrs Wang. Whether these professional accountants would risk their professional integrity in carrying out their audit for the companies is neither here nor there. It may even be entirely speculative that WM Sum and WO Lo would act other than independently.

26. Two camps of shareholders are involved in existing or contemplated litigation. Of central importance in the litigation is the way business has been conducted in some of these companies which form part of the Chinachem Group. As far as the companies are concerned, they should be distanced from the disputes of the shareholders and it would be in the best interest of the companies that they are seen to be so distanced. An auditor appointed to carry out an audit is an officer of the company concerned whilst holding office, he has statutory duties to perform under sections 141(1) to (4) of Cap. 32. He will need to carry out such investigations as will enable him to form an opinion whether proper books of accounts have been kept and whether the balance sheet and profit and loss accounts are in agreement with the books of accounts and returns (s. 141(4)). Professional independence and objectivity are vital concepts to the audit exercise. In view of the disputes between the shareholders, it is patently desirable that the audit exercise should be performed by an auditor objectively independent of both camps, so there can be no question of the reliability of the information provided in the audit to enable any shareholder to scrutinise the affairs of the company concerned.

27. In coming to the above conclusion, I am mindful of the fact that an auditor appointed to hold office under s. 131 is an officer of the company, not an officer of the court, a distinction Mr Poon was at pains to emphasise. I have also been referred by Mr Brock to a line of authorities on the appropriate test for apparent bias in respect of those exercising judicial or quasi judicial function (Porter v. Magill [2002] AC 357; In re Medicaments and Related Classes of Goods (No. 2) [2001] 1 WLR 700; Phoon Lee Piling Co. Ltd v. The Hong Kong Housing Authority CACV No. 303 of 2002, 20 May 2003) and to In re L (Minors) (Care Proceedings: Solicitors) [2001] 1 WLR 100, in which the court's supervisory jurisdiction over solicitors, who are officers of the court, was invoked to remove a solicitor from the record where there was an apprehension of bias. I have merely sought to approach the matter on the basis of what is in the best interest of the company concerned in the particular circumstances of this case. Whether the principle of apparent bias should be extended to a situation other than those performing judicial functions or officers of the court is a question I have not addressed here.

28. I should mention one last challenge made on behalf of Mrs Wang to the appointment of Nelson Wheeler and Moores Rowland. Mr Poon handed up to the court print-outs from the web page of these two firms showing that 7 partners of Nelson Wheeler had previously worked in PricewaterhouseCooper, the firm of accountants of one of the JA and that the senior partner of Moores Rowland is a relative of a partner in Deloitte Touche Tohmatsu, the firm of the accountants of the other JA. Mr Poon submitted that Nelson Wheeler and Moores Rowland should not be appointed new auditors because of such connections with the JA. Firstly, this objection is raised literally at the last minute and has all the appearance of a tactical move. Secondly, I agree with Mr Brock that looking at the matter objectively, I am not persuaded that there is a possibility of bias in favour of the JA if Nelson Wheeler and Moores Rowland are appointed.

29. I make the following orders.

30. In HCMP No. 2108 of 2003, the application is dismissed with costs to the 1st respondents.

31. In HCMP No. 2162 of 2003, I make these orders:

(1) Nelson Wheeler be appointed auditors of the 1st to 33rd respondents from the date of the order to the next annual general meeting convened by each of the respondents;

(2) Moores Rowland be appointed auditors of the 34th to 39th respondents from the date of the order to the next annual general meeting convened by each of the respondents; and

(3) the costs of the application be paid by the 40th respondent.

32. In respect of HCMP No. 2248 of 2003, the application is dismissed with costs to the 1st respondents.

33. I make a further order in respect of each of the proceedings that the JA's own costs be taxed on a trustee basis and be paid out of the assets of the estate of Mr Wang.