Re C. A. PACIFIC FINANCE LTD. & C.A. PACIFIC SECURITIES LTD.

HCCW 36/1998, 37/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NOS. 36 AND 37 OF 1998

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R U L I N G

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1. In January 1998, C A Pacific Securities Limited and C A Pacific Finance Limited collapsed. Winding-up orders were made against both companies in June 1998.

2. On 19 July 2001, the Official Receiver issued an ex parte summons and filed a report to the court for an order under Section 168IA of the Companies Ordinance.

3. Section 168IA provides at subsection (1) that:

"the court may, on the application of the Official Receiver, by a report stating that that in his opinion, a prima facie case exists against any person that would render him liable to a disqualification order under this part, direct that the person shall attend before the court on the day appointed by the court for that purpose, and be publicly examined as to the conduct of the business of a company or as to his conduct and dealings as a director."

Subsection (2) provides that:

"the court may require a person referred to in [the preceding sub-section] to submit an affidavit to the court containing an account of the conduct of the business of the company or his conduct and dealings as a director of the company, or to produce any documents in his possession or under his control relating to the conduct of the business of the company or his conduct and dealings as a director of the company."

Subsection (3) provides that:

"where an application has been made under subsection (1), the court may require any person, other than the person referred to in subsection (1), whom the court deems capable of giving information concerning the conduct of the business of the company concerned or as to the conduct and dealings of directors of the company to produce any documents in his possession or under his control relating to the conduct of the business of the company or as to the conduct and dealings of directors of the company."

4. On a careful reading of Section 168IA(3), it is clear to me that although it refers to a person being "capable of giving information", those words only define the category of person who is liable to be required to produce documents, and there is no express power for a court order that he attend to be examined.

5. I do not think it would be right to imply that power into Section 168IA(3), when in the same section, the power to require a "disqualification target" to attend for examination is given expressly in clear language under Section 168IA(1). I therefore hold that Section 168 IA(3) is restricted to the production of documents.

6. However, this restrictive scope of Section 168IA(3) seems to have been missed in the Official Receiver's summons and report. The Official Receiver's first report was for orders for the examination of three persons under subsection (1) and orders for the examination of two persons, Mr Lam Kwan Wood and Mr Vincent Hoe, under Section 168IA(3).

7. On 24 July 2001, Chu J gave an order that Mr Lam and Mr Hoe be publicly examined as to the conduct of the business of C A Pacific Finance Limited and as to conduct and dealings of the directors of C A Pacific Finance Limited pursuant to Section 168IA(3) Companies Ordinance. Since Section 168IA(3) does not give a court power to require them to attend to be examined, that order was given without jurisdiction and was not a valid order.

8. That error was continued in September 2001 when the Official Receiver issued another ex parte summons adding two other persons, Mr Alex Wong Ching Ping (whom I shall refer to as "Mr Wong") and Mr Wan Yiu Kwan to the list of persons to be publicly examined. That summons was supported by the Official Receiver's third report.

9. On 18 September 2001, I ordered Mr Wong and Mr Wan to be publicly examined. Although this order did not specify under which section or subsection the examination was ordered, it cannot be denied that this order was also made without jurisdiction because the Official Receiver's third report supporting the summons also referred to Section 168IA(3).

10. At the hearing on 1 November 2001, which was scheduled for the examination of Mr Wong and Mr Wan purportedly under Section 168IA(3), neither Mr Wong, who is legally represented, nor Mr Wan applied for discharge of those orders, but Mr Godfrey Lam, counsel for the Official Receiver, very properly drew the court's attention to the lack of jurisdiction to make those orders for examination. By reason of the lack of jurisdiction under Section 168IA(3) as set out above, I would therefore discharge my order of 18 September 2001 and I would also discharge the orders made by Chu J against Mr Lam and Mr Hoe on 24 July 2001.

11. However, that was not the end of the matter. Counsel for the Official Receiver has submitted that the examination of those four persons may nevertheless proceed (albeit in private, whether in chambers or in camera) under Section 221 Companies Ordinance. This has been disputed by Mr Jimmie Ho, counsel for Mr Wong, who has submitted that the court has no jurisdiction under Section 221 to order examination for the purposes of considering whether disqualification proceedings should be taken. Counsel for Mr Wong has submitted that Section 221 can only be used for the purposes of the winding-up of the Company. He submitted that disqualification proceedings are catered for in Part IVA of the Companies Ordinance and there is no provision in that part for the examination of a third party who is not a disqualification target. Mr Wan has appeared in person and has indicated that he has nothing to say on this issue of jurisdiction. Mr Hoe and Mr Lam, against whom Chu J gave orders for examination, have also been served with the summons for the hearing of this issue. They have appeared in person and they have indicated that they have nothing to say as far as jurisdiction is concerned.

12. Before I deal with the issue whether it is permissible to employ Section 221 in the present circumstances, it is first necessary to analyse it.

13. Section 221 provides that:

"(1) The court may, at any time after the appointment of a provisional liquidator or the making of a winding-up order, summon before it any officer of the company or person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs, or property of the company.

(2) The court may examine him on oath concerning the matters aforesaid, either by word of mouth or on written interrogatories, and may reduce his answers to writing and require him to sign them.

(3) The court may require him to produce any books and papers in his custody or power relating to the company, but, where he claims any lien on books or papers produced by him, the production shall be without prejudice to that lien, and the court shall have jurisdiction in the winding up to determine all questions relating to that lien.

(4) If any person so summoned, after being tendered a reasonable sum for his expenses, refuses to come before the court at the time appointed, not having a lawful impediment (made known to the court at the time of its sitting, and allowed by it), the court may cause him to be apprehended and brought before the court for examination."

14. It is noted from the language of Section 221 that it is couched in very wide terms, such that it has been called the "Star Chamber Clause". As a matter of language, it would be noted that:

(1) there are no restrictions as to the circumstances under which an order may be made;

(2) there are no restrictions as to who may apply for such an order;

(3) there are no restrictions as to the person from whom information may be sought (whom I will refer to as "the Section 221 examinee"); and

(4) there are no restrictions for what purpose an order may be made against the Section 221 examinee.

15. By reason of the width of the language of Section 221, there had come to be developed by case law in England the so-called "Rubicon test" - signifying the point after which the court would not in practice permit the use of Section 236 Insolvency Act (which is the equivalent section of Section 221 Companies Ordinance). That point is reached if the evidence shows that the purpose of the examination was to achieve an advantage beyond that available to an ordinary litigant, where, for example, liquidators have commenced or were definitely contemplating litigation against an examinee. The judge-made Rubicon test applied from 1979 until 1990 when the English Court of Appeal in Cloverbay Ltd v. BCCI [1991] Ch 90 disapproved the Rubicon test.

16. Now in any application under Section 236 Insolvency Act, as the House of Lords has held in Re British & Commonwealth Holding Plc v. Spicer and Oppenheim [1993] AC 426, the court has a wide and general discretion, although the court still has to balance the usefulness of making the order against any oppression to the examinee.

17. It is clear first, from Section 221 itself that it is only available for use after a winding-up order has been made.

18. Secondly, it is clear that by reason of that, the natural applicant for a Section 221 order would be the liquidator, although creditors and contributories may also seek to invoke it . It is also clear that the Official Receiver (where he is not also the liquidator) can also apply for a Section 221 order. Counsel for Mr Wong has not disputed that, save that he submits that the Official Receiver cannot use Section 221 to gather information relevant to potential disqualification proceedings. (This submission will be dealt with later).

19. In my view, Section 221 contains no express restrictions on who can invoke it and I see no reason to exclude the Official Receiver under any implied restrictions. In a winding-up of a company, the Official Receiver does not drop out of the picture on the appointment of private liquidators. The Official Receiver still has many interests in the course of a winding-up. The following are examples: under Section 191, the Official Receiver has a duty to report to the court if fraud is found; under Section 204, the Official Receiver exercises supervision in the course of the winding-up of the company by exercising general control over liquidators; under Section 168P(2)(b), the Official Receiver may apply for disqualification orders against officers of the company if in the course of winding-up, it appears to him that an officer of the company has been guilty of fraudulent trading, fraud or breach of duty (see Section 168G(1)) and where the liquidators of a company being wound up discover that a director's conduct makes him unfit to be concerned in the management of the company and they report to the Official Receiver as required under Section 168I(3).

20. In the light of these extensive interests of the Official Receiver in the winding-up of a company, it is reasonable that there would be no express or implied restrictions excluding him from applying for an order of examination under Section 221. I note that in England, Section 236 Insolvency Act expressly provides that it is the office-holder who may apply for an order of examination but where the winding-up has been ordered by the court, the Official Receiver may apply even though he is not the liquidator.

21. Thirdly, as to who may be an examinee under an order made under Section 221, there are no express restrictions on the category of persons who may be Section 221 examinees and there is no reason to imply any such restrictions. It has been held that it is not limited to employees or officers of a company that is being wound up, and auditors have been subjected to examination under this section (see British & Commonwealth Plc v. Spicer & Oppenheim).

22. Fourthly, I consider the purpose for which Section 221 examinations may be sought. The House of Lords has said that the purpose of Section 236 Insolvency Act is not limited to reconstituting corporate knowledge (see British & Commonwealth Plc v. Spicer & Oppenheim). That case has been applied to Hong Kong by the Court of Appeal in Chark Fung Securities v. Chan Kwok Hung [2001] HKC 335. In British & Commonwealth Plc, the House of Lords held that the court has a general discretion to order examination after balancing the need to get information in the course of a winding-up against any possible oppression against the Section 221 examinee. That the discretion to order a Section 221 examination is general and unlimited is supported by a number of cases quoted in British & Commonwealth Plc at p. 48.

23. The above considerations would reasonably lead to the conclusion that a Section 221 examination order could be made:

(1) at any time after a winding-up order has been made;

(2) on the Official Receiver's application;

(3) against any person; and

(4) for any legitimate purpose of the Official Receiver in a winding-up.

24. Given that in a winding-up, even in a winding-up run by private liquidators, the Official Receiver remains interested in the conduct of ex-directors (for which private liquidators have to report to him), there would appear to be no reason why Section 221, this important weapon in the arsenal of law, should not be made available where the Official Receiver's purpose was to gather information about the conduct of a director to see if he is suitable to hold office or to manage a company.

25. As against this, counsel for Mr Wong has submitted that:

(1) if Section 221 could be used for this purpose, it would have been otiose for the legislature to have enacted Section 168IA;

(2) this court should follow the decision of the English Court of Appeal in Re Pantmaenog Timber Co. Ltd.

I shall deal with his first submission first.

26. Mr Ho has submitted that the fact that the legislature thought it necessary to enact Section 168IA or its predecessor Section 221(1)(b) meant that the Official Receiver did not otherwise have power under Section 221 to examine a target director. I shall examine the substantive provisions in Section 168IA to test this submission.

27. Firstly, it is clear that Section 221 only applies to a company being wound up. Section 168IA is not so restricted. It applies also to disqualification under Section 168F for persistent breaches by a director even though a company is not in winding-up.

28. Secondly, even if consideration is made in the context of a company being wound up, the legislature had good reason to enact Section 168IA to strengthen the Official Receiver's powers, even though Section 221 also applies to a situation where information needed to be gathered for the consideration of disqualification proceedings.

(a) Section 221 requires the court to undertake a balancing test, balancing the need to gather information against oppression to the Section 221 examinee. Even after the Rubicon test was approved, the requirement to consider any oppression to an examinee still remains. This is to be contrasted with Section 168IA which provides that a report by the Official Receiver of his opinion that a prima facie case exists would be sufficient to invoke that section.

(b) The examination under Section 221 and an examination under Section 168IA are different. Section 221 examinations are held in private and the evidence obtained is restricted, whereas Section 168IA provides for the examinations of disqualification targets in public. Section 168IA is therefore a more powerful weapon against a disqualification target than a Section 221 examination.

(c) Although Section 168IA(4) is restricted in the persons from whom information is sought, it requires no application to the court, whereas Section 221 does (when the balancing exercise referred to in British Commonwealth would apply).

29. The only possible overlap that I can see between Section 221 and Section 168IA is in the order for production of documents. But even then Section 168IA gives the Official Receiver greater power because the balancing exercise referred to in British Commonwealth would not require to be satisfied.

30. In my judgment therefore, the enactment by the legislature of Section 168IA does not lead to the conclusion that the court has no jurisdiction under Section 221 to order examination of any person for the purpose of the Official Receiver's consideration of directors disqualification proceedings.

31. I shall then deal with the submission in relation to Re Pantmaenog Timber. The Court was referred to this decision by counsel for the Official Receiver. Re Pantmaenog Timber Co. Ltd [2001] 1 WLR 730 was the decision of Judge Weeks QC sitting as a High Court Judge and was upheld by the Court of Appeal under the name of Official Receiver v. Meade-King (unreported).

32. In that case, the Official Receiver had made a report to the Secretary of State concerning the conduct of a director. An application for a disqualification order was made by the Official Receiver acting on the direction of the Secretary of State.

33. The director sought to strike out the disqualification proceedings for want of evidence. The Official Receiver then applied to Court for a Section 236 Insolvency Act examination against the solicitors and accountants who had acted for the company or for the director.

34. It was held by the judge that Section 236 Insolvency Act cannot properly be used by the Official Receiver if his sole purpose was to obtain evidence to support disqualification proceedings already on foot against a director under the Company Directors Disqualification Act 1986 (see p. 740).

35. In the case before me of course, no disqualification proceedings have yet been brought. This is an important distinction which is relevant to the exercise of the court's discretion (see p. 12 of the Court of Appeal decision).

36. However, the English decision did not turn only on the exercise of discretion; it was primarily based on statutory construction. It was considered that the legislative scheme in England was such that it was not within the jurisdiction of the court to order a Section 236 Insolvency Act examination on the application of the Official Receiver where disqualification proceedings had been commenced. It was held by the Court of Appeal that there were two reasons for this decision.

37. First, the Secretary of State cannot invoke Section 236 Insolvency Act because Section 236 expressly provides that only liquidators could apply (although if the case were a compulsory winding-up, the Official Receiver might also apply). Since Parliament did not allow the Secretary of State to invoke Section 236 Insolvency Act, Parliament could not have intended that he (acting through his agent, i.e. the Official Receiver) could do something which he himself is not entitled to do.

38. That reason does not apply to Hong Kong because Section 221 is drafted differently from Section 236 Insolvency Act in this respect. The legislature in Hong Kong has not restricted the persons who can apply for a Section 221 examination. And for disqualification proceedings in Hong Kong, the Official Receiver can institute them in his own right, unlike in England where it is only the Secretary of State who can institute those proceedings, either directly in the case of a voluntary winding-up or indirectly through the Official Receiver in a compulsory winding-up. So in Hong Kong there is no distinction between the Official Receiver as an applicant in a Section 221 examination application and the Secretary of State (or in Hong Kong, the Financial Secretary) as an applicant in disqualification proceedings.

39. Secondly, under Section 235(3)(c) Insolvency Act, the Official Receiver could get any information from liquidators. Therefore, why should there be the need for that in Section 7(4) of the Company Directors' Disqualification Act? The answer that the English Court of Appeal gave was that Parliament gave the Official Receiver power under Section 7(4) because Section 235 was not intended to be applicable. If Section 235 was not intended to be applicable, Section 236 (which the Court of Appeal considered to be part of the same cluster of powers as Section 235) was similarly not intended to apply.

40. That reasoning also does not apply to Hong Kong because, as accepted by both counsel, there is no equivalent of Section 235 Insolvency Act in Hong Kong.

41. I have dealt above with the Hong Kong statutory regime which does not preclude the use of Section 221 for disqualification purposes. I find that Section 221 examination provisions can be used to gather information for considering disqualification proceedings. That has been recognised by Chadwick LJ in Re Pantmaenog and also by the court in Bishopsgate v Maxwell [1993] Ch. 1.

42. To hold otherwise would mean that in the absence of fraud, the Official Receiver would simply be unable to gather oral information from a third party (say, a contracting party) in his consideration whether a director's conduct renders him unfit to hold office. In the absence of clear statutory provisions to that effect, I am unable to accept that submission which would be against the spirit of good corporate governance, a spirit that has been shown in the legislation which has been consistently strengthened.

43. I will now hear the parties on the exercise of discretion under Section 221 whether to order examination of these four individuals.