BEATRICE TSANG SAU HING AND ANOTHER v. YEUNG MAN LOONG MAXLY AND OTHERS

CACV 21/2009, CACV 22/2009, CACV 23/2009 AND CACV 24/2009

CACV 21/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 21 OF 2009

(ON APPEAL FROM HCCW NO. 49 OF 2006)

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BETWEEN

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J U D G M E N T

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Hon Tang VP:

1.  I agree with the judgment of Le Pichon JA and the order which she proposes to make.

Hon Le Pichon JA:

2.  These are appeals by the former provisional liquidators (“the provisional liquidators”) of Gold Pleasure Industrial Company Ltd (“Gold Pleasure”), Boville Industrial Company Ltd (“Boville”), Topville Industrial Company Ltd (“Topville”) and Sunville Investment Company Ltd (“Sunville”) (collectively, “the Companies”) from orders dated 7 January 2009 of Barma J removing them as provisional liquidators of the Companies on the petition of the Beatrice Tsang Sau Hing and Luana Tsang Sau Kuen (“the petitioners”). The judge also had before him for determination four summonses issued by the provisional liquidators to resolve the question as to whom should be appointed liquidators of the Companies which had been wound up by orders made by him dated 21 December 2007. On those applications, persons other than the provisional liquidators were appointed liquidators of the Companies.

3.  At the conclusion of the hearing, judgment was reserved which we now give.

Background

4.  For some 50 years, Mr Tsang Hon Kong (“Tsang Senior”) and Mr Yeung Tung Shing (“Yeung Senior”) had been carrying on the business of manufacturing and selling plastic inflatables used in swimming pools and at the beach. The Companies, set up between 1971 and 1989, took over the business that had been carried on by Tsang Senior and Yeung Senior as a partnership.

5.  In the mid-80s, a second-generation of Tsangs and Yeungs joined the business. Beatrice Tsang assisted her father Tsang Senior while Maxly Yeung assisted his father Yeung Senior. Each family had a 50% interest in the business: the shareholdings and directorships were evenly held.

6.  In 1990, Tsang Senior suffered a stroke and consequently had to reduce his involvement in the business. He focused on finance and administrative matters and left manufacturing and sales to the Yeungs.

7.  The relationship took a turn for the worse when, in April/May 2005, Tsang Senior indicated to Yeung Senior that he wished to retire from the business because he was no longer able to participate meaningfully in the business due to his ill health and advancing age. Disputes arose which led to an impasse and in February 2006, the petitioners (who are the daughters of Tsang Senior) filed petitions for the winding up of the Companies on the basis that there had been a breakdown in trust and confidence between the parties due to the conduct of the Yeungs. The Yeungs cross-petitioned, seeking an order under section 168A of the Companies Ordinance requiring the Tsangs to acquire their shares, or, alternatively, alleging that the Tsangs were responsible for the breakdown.

8.  At the same time as the winding up petitions were presented, the Tsangs applied for the appointment of provisional liquidators which application was not opposed. The provisional liquidators who had been put forward by the Yeungs as candidates for that position were appointed to that office by orders dated 17 February 2006 which, inter alia, empowered the provisional liquidators to carry on any business of the Companies “so far only as may be necessary for the purpose of preserving the Assets”.

9.  The petitions and cross-petitions were heard in May and July 2007 and, on 21 December 2007, the judge ordered that the Companies be wound up. Following the winding up orders, the provisional liquidators continued in that office pending the appointment of themselves (or other persons in their place) as liquidators.

10.  However, by mid-January 2008, the Tsangs were raising questions regarding the manner in which the provisional liquidators were discharging their functions. On 15 February 2008, the Tsangs’ solicitors raised complaints as to the respects in which it was said the provisional liquidators had acted in breach of their duties. The removal summonses leading to the removal orders giving rise to the present appeals were issued on 22 February 2008.

The judgment below

11.  The judge found that following the making of the winding up orders, the provisional liquidators, proceeding under a misapprehension of law as to their powers to carry on the business of the Companies, decided to cease operations by the Companies and to consolidate them through the joint venture manufacturing facility operated by the PRC company known as Dongguan Boville (“the joint venture”) which was a subsidiary of Gold Pleasure so as to preserve the value of the assets.

12.  Prior to the winding up orders, the Companies had funded the joint venture. Once the Companies ceased operations, such funding could not be provided.

13.  This led the provisional liquidators to make the decisions described in paragraph 57 of the judgment:

“first to channel receipts and payments in respect of the operation of the business through the personal accounts of Yeung Senior, and subsequently, at the request of the Yeungs, to operate the business through Long Summer, at a charge to the business in the form of a 5% commission or handling fee based on turnover.”

14.  The judge was critical of the failure of the provisional liquidators to consult the Tsangs before making the decision, particularly given the breakdown in the relationship between the two families. He added (at paragraph 64):

“Moreover, if necessary, an application could have been made to the court for directions.  If it was felt that the exigencies of the situation demanded the adoption of the proposals, it remained possible, and in my view, appropriate, for an application for directions to be made at the earliest convenient opportunity.”

15.  The judge concluded that the provisional liquidators did act in a way which caused the Tsangs reasonably to lose confidence in them, and indeed, to have reasonable grounds for considering them to be biased in favour of the Yeungs. The judge then went on to consider whether it would be in the interests of the liquidation to remove the provisional liquidators and, after reviewing all countervailing factors, he made the removal orders that are the subject of these appeals.

These appeals

16.  Mr Strachan who appeared for the provisional liquidators based his appeals on two grounds: first, that there was no reasonable basis for a perception of bias or loss of confidence and, second, that the judge failed to have any proper regard to the real and substantial interests of the liquidation.

17.  Mr Strachan prefaced his submissions by stating that the orders for removal did not constitute an exercise of judicial discretion and that therefore the stringent conditions for overturning an exercise of judicial discretion do not apply. I do not see how this statement assists his first ground or lessens his burden in making it good. If the judge were correct in his conclusion that there existed a reasonable basis for a perception of bias or loss of confidence, that would dispose of the first ground as it would have been open to the judge to make the removal orders which plainly was an exercise of his discretion.

Reasonable basis for a perception of bias or loss of confidence

18.  The decision to cease operations by the Companies could only have been made after the making of the winding up orders on 21 December 2007. There is no clear evidence as to when that decision was taken except that it must have been prior to 23 January 2008 when the petitioners raised queries concerning the joint venture and confirmation orders.

19.  In their response to the petitioners’ letter dated 29 January 2008, the provisional liquidators stated as follows:

“  …

1.  Following the making of winding up orders in respect of the Companies, funding was no longer provided by those companies to the JV, with the result that controls that had been put in place to monitor the movement of funds from the Companies to the JV were no longer needed in that regard.  However see 2 (iii) below.

2.  (i)  The practice prior to the making of the winding up orders was for customers to place orders with Gold Pleasure or Boville and when those orders were accepted they would be manufactured by the JV.  We are aware that, following the windings up, some orders previously placed with the Hong Kong companies were cancelled and have been placed with the JV, which is a separate legal entity and a subsidiary of Gold Pleasure.

(ii)  We understand that Mr. Maxly Yeung is a director of the JV.

(iii)  We further understand that given the change in circumstances, particularly the absence of funding from the Companies, there is a new temporary arrangement whereby [Yeung Senior], who is the legal representative of the JV, receives on behalf of the JV into a designated bank account in his name in Hong Kong funds from customers of the JV and also makes payments on behalf of the JV…”

The letter then went on to state the monitoring procedures available to staff of the provisional liquidators relating to relevant receipts and payment schedules of the JV, bank statements, copies of JV sales and payment documentation etc.

20.  At the hearing, in response to the court’s question as to the period of that “new temporary arrangement”, counsel for the provisional liquidators stated that it began on 21 December 2007 and ended with the acquisition of Long Summer by the Yeungs on or about 1 February 2008. However, counsel was unable to refer to any evidence that identified the date on which the decision was taken. Nothing in the hearing bundles shed any light on that question. Rather, the response of 29 January was couched in general terms and lacked specificity. In those circumstances, the question of the duration of that “new temporary arrangement” and, certainly, its commencement, albeit at some date prior to 23 January 2008, remain very much at large.

21.  This assumes significance viewed against Mr Strachan’s repeated emphasis on the “urgency” of the situation, “the need to act immediately and to avoid any interruption to the business”. Put differently, according to the provisional liquidators, the “new temporary arrangement” had been in place for at least a month or more. Yet, during this time, no attempt was made to inform, much less consult, the Tsangs; nor was any application made to the court. Had the petitioners not raised questions regarding the conduct of the business, they would have been none the wiser.

22.  So far as the further decision to operate the business through Long Summer at a commission of 5% based on turnover was concerned, again, when and how that decision was taken is opaque. Reference was made to a letter from Maxly to the provisional liquidators dated 1 February 2008 which was in these terms:

“In connection with the operation of Dongguan Boville Plastic Products Factorys Co., Ltd. (the “J”) there is a necessity and urgency to establish a legal entity in Hong Kong to provide services to the JV for the purpose of

a)  marketing and soliciting new business on behalf of JV.

b)  employing some of the staff based in Hong Kong, and carrying out activities in connection with the operations of the JV

c)  employing management staff based in the PRC who manage the operations of the JV

c)  assist in import/export of raw material and merchandise on behalf of JV

d)  purchase of raw material on behalf of JV

e)  arranging miscellaneous items in connection with the JV, its operations or customers etc

d)  If necessary, receive payment from customers on behalf of the JV.

In this regard I wish to inform you as a 75% shareholder of the JV that my father and I will establish (or purchase off the shelf) such a company for the above purpose.

2) The new company is not to be established with an aim to maximise profit, but it will charge 5% commission to the JV on all orders arising from enquiries received on or after 15th Jan 2008 and which result in confirmed orders.  Orders confirmed before 15 January 2008 shall not be subject to a commission payment of 5% (or any other amount).  If the JV considers that a rate of 5% commission is too high, it has a right to seek a lower rate and or not to continue with the commission arrangement.

…”

23.  It is noteworthy that the proposals were, in one respect, retrospective. The 5% commission was applicable to all orders confirmed on or after 15 January 2008 which pre-dated the letter itself.

24.  The evidence is that this letter was handed to the provisional liquidators sometime during the afternoon of 1 February 2008. Not only is there no evidence as to when and how the provisional liquidators accepted Maxly’s proposals, given the terms of the letter, it seems highly unlikely that there had been no prior discussion of the proposals between Maxly and provisional liquidators. All Mr Strachan could do was to submit that the provisional liquidators “assented” to the proposals “at a point after 1 February 2008”. But how the ‘assent’ was manifested is not known save that no written evidence of that has ever been produced.

25.  The absence of any evidence concerning those matters is troubling. They certainly suggest an approach by the provisional liquidators that is less than ‘hands-on’, if not ‘laid back’, which is difficult and impossible, to justify. More importantly, it inevitably puts the alleged urgency of the situation into question. The fact is that the provisional liquidators did not see fit to disclose anything about Long Summer until their letter of 18 April 2008, written in response to questions raised by the petitioners after they had become aware of invoices issued to customers of the joint venture by Long Summer.

26.  The provisional liquidators’ explanation is recorded in paragraph 59 the judge:

“59.  The provisional liquidators say that these decisions were made for good reasons, in that, having come to the view that the business operations of the Companies should be handled through the joint venture after the making of the winding up orders, it was necessary for arrangements to be made to enable the joint venture to carry on the business.  This would have necessitated the setting up of a branch office in Hong Kong, with power to open and operate its own bank accounts.  In view of the need to act immediately, in order to avoid delays and interruptions to the continuation of business, it was decided to accept Yeung Senior’s offer to provide temporary funding and to channel payments and receipts through his personal bank accounts, rather than to apply to the Mainland authorities for permission to set up a branch office with its own financial arrangements in Hong Kong.  As for the later decision to operate the business through Long Summer, this was something that was done because Maxly Yeung had indicated that this was necessary.  The 5% commission was not intended by either the provisional liquidators or the Yeungs to give a profit to the Yeungs, but to cover the costs of operation of Long Summer and was subject to further negotiation if the provisional liquidators felt the charge was excessive.”

27.  Given the time frame of the temporary arrangement and the Long Summer arrangement, the provisional liquidators plainly had ample time and opportunity to consult the Tsangs and/or apply to the court for directions. Given the circumstances of the case, the fact that such a course was necessary cannot be gainsaid. The Long Summer arrangement was not one that precluded any element of profit from accruing to the Yeungs: that Long Summer was not to be established “with an aim of maximise profit” does not exclude the possibility of an element of profit from accruing to the Yeungs under the 5% commission arrangement. Given that the turnover of $134 million and $193 million respectively for 2006 and 2007, potentially, it could involve significant sums. If the sole intention had been that Long Summer should not be out of pocket in respect of work carried out for the joint venture, one would have expected a somewhat different formulation.

28.  The third report appeared to suggest that sales for the period from 21 to December 2007 to 24 July 2008 amounted to approximately $62.6 million. It was unclear whether that reflected the turnover for that period. The third report further recorded that for the period from 1 January 2008 to 28 July 2008 the total value of invoices raised by Long Summer in respect of merchandise and manufactured by the JV amounted to approximately $7.7 million which is somewhat surprising given the turnover for the 7 months. As the two extracts were difficult to reconcile, the provisional liquidators undertook to advise the court in writing on the amount of turnover that would entitle Long Summer to charge its 5% commission.

29.  By letter dated 22 October 2009, the court was informed that the total amount of merchandise sold and invoiced by Long Summer for the period up to 28 July 2008 (presumably from 15 January 2008 to 28 July 2008) was approximately $7.7 million and 5% commission would be chargeable by Long Summer, yielding a commission of $385,000. While accepting that statement, how it is to be reconciled with the 62.6 million turnover for the slightly longer period of 7 months remains unexplained.

30.  The provisional liquidators no longer challenge that, given the circumstances that led to the appointment of the provisional liquidators in the first place, one of their key functions as identified by the judge (at paragraph 69) was

“to enable the business of the Companies to be carried on in a way that enabled both parties to the dispute to be reasonably confident that neither was benefiting at the other’s expense, and that payments and receipts were in the order and properly monitored.”

In those circumstances, I consider the judge’s view that the provisional liquidators did act in a way which cause the Tsangs reasonably to lose confidence in them and to have reasonable grounds for considering the provisional liquidators to be biased in favour of the Yeungs to be unassailable.

Real and substantial interests of the liquidation

31.  The other contention advanced by the provisional liquidators was that the judge failed to have regard to the real and substantial interests of the liquidation. It was said that a majority of the value of the creditors of each of the three insolvent companies, including a majority in number of independent creditors supported the retention of the provisional liquidators in office and that their views should be respected because it is their assets which are in question. Mr Strachan criticised the judge for failing to address the “end question”, namely whether it would be to the general advantage of the persons interested in the winding up to remove the liquidators. See Re Biposo Pty Ltd (1995) 17 ACSR 730 at 734, 740.

32.  The central function of the provisional liquidators identified by the judge in paragraph 69 of his judgment remained unaffected by the winding up orders. In this connection, it is to be noted that Mr Strachan abandoned his original position maintained in his written submissions and conceded that that function did not cease with the order winding up the Companies.

33.  Given that concession, the short answer is that the judge had taken this matter into consideration when weighing up the pros and cons of removing the provisional liquidators. He saw fit to exercise his discretion by making the removal order and I am unable to identify any error of law in his so doing.

Conclusion

34.  I would dismiss these appeals.  I would also propose that there be an order nisi that costs be to the petitioners, with certificate for two counsel.

Hon Tang VP:

35.  There will accordingly be an order in terms of paragraph 34.