THE OFFICIAL RECEIVER v. CHAN KIN HANG DANVIL

CACV 202/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 202 OF 2011

(ON APPEAL FROM HCMP NO.1202 OF 2010)

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REASONS FOR JUDGMENT

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Hon Yuen JA (giving the reasons for judgment of the Court):

1. This is an appeal by Chan Kin Hang, Danvil from an order of Harris J made on 7 September 2011 disqualifying him under s 168G Companies Ordinance, Cap 32 from being a director or liquidator, or being a receiver or manager of the property, or being concerned with the promotion, formation or management, of any company for a period of 7 years with effect from 28 September 2011. The application for disqualification was made by the Official Receiver (“OR”).

2. Section 168G CO (which is based on s 4 of the Company Directors Disqualification Act 1986) provides, amongst other things, that the court may, in its discretion, make a disqualification order against a person, if in the course of the winding up of a company, it appears that he has been guilty, while a liquidator of a company, of any breach of his duty as such liquidator.  The maximum period of disqualification is 15 years.

3. The appellant has challenged only the period of disqualification, not the order for disqualification itself.  At the conclusion of the hearing, we dismissed the appeal with costs.  Our reasons appear below.

Background

4. The appellant is a Certified Public Accountant and a member of the Hong Kong Institute of Certified Public Accountants.  He is a director of Honest Joy Accounting Services Ltd (“HJ Ltd”).  Pursuant to a tender submitted to the OR by HJ Ltd, the appellant was appointed provisional liquidator or liquidator of a number of companies (in these Reasons for Judgment, the term “liquidator” will be used, irrespective of whether he was provisional liquidator or liquidator at the time). 

Grounds for application for disqualification

5. The grounds on which the OR sought the appellant’s disqualification included the following (in brief):

(1)  making a false declaration in HJ Ltd’s tender to the OR;

-   in relation to acting as liquidator of Action Industrial International Ltd (“AII”) in HCCW35/2007,

(2)  failing to provide security upon his appointment as liquidator, in breach of s 195 CO;

(3)  failing to remit to the Companies Liquidation Account a sum of about $387,000 and to report the receipt of that sum to the OR;

(4)  failing to report on the progress of the liquidation;

-   in relation to acting as liquidator of Wah Ying Electronic Co Ltd (“Wah Ying”) in HCCW498/2006,

(5)  failing to remit to the Companies Liquidation Account a sum of about $1,864,000 and to report the receipt of that sum to the OR;

-   in relation to acting as liquidator of Etech Control Co Ltd (“Etech”) in HCCW65/2006,

(6)  failing to provide accounts to the OR, in breach of s 203 CO;

-   in relation to some other companies,

(7)  failing to proceed with the liquidations with due expedition;

-   in relation to Court orders made to remove him as liquidator of 7 companies (including AII and Wah Ying),

(8)  failing to pay (or at least, delay in paying) interest on sums he had failed to remit to the Companies Liquidation Account, and the costs of the court proceedings;

-   generally,

(9)  being uncooperative with the OR and failing to respond to his inquiries.

False declaration in Tender

6. On 24 January 2006, HJ Ltd submitted a tender to the OR for appointment as provisional liquidators and liquidators (“the 2006 tender”).  It was signed by the appellant.  It stated that Tang Man Ching, a solicitor, was also a director of HJ Ltd.  It was on that basis that the OR accepted the tender.  It later transpired that Mr Tang was not a director (or shareholder or employee) of HJ Ltd.

7. Although there is a dispute on the evidence as to whether the appellant and Mr Tang had agreed that if the OR should accept HJ Ltd’s tender, Mr Tang would join HJ Ltd as a director, the indisputable fact was that Mr Tang was clearly not a director of HJ Ltd when the 2006 tender was submitted and it is important to note that after his appointment as liquidator, the appellant failed to inform the OR about the falsity in the tender.

8. In mitigation the appellant said in his affirmation that there was another Recognised Professional (Miss Tso) in HJ Ltd at the time of the 2006 tender.  On 2 January 2008, in another tender submitted by HJ Ltd, Miss Tso is said to have 5 years post-qualification experience and to have been in the service of HJ Ltd for 2 years. 

9. However these were obviously round numbers, and there was no explanation why (if Miss Tso were indeed in HJ Ltd’s service at the time of the 2006 tender), her name was not listed as a Recognised Professional who performed insolvency work in the form which accompanied the 2006 tender.  That list only named 2 persons as Recognised Professionals “of” HJ Ltd - the appellant and Mr Tang.

Breaches of duty

10. More importantly, the appellant was guilty of a number of serious breaches of duty as liquidator, the more egregious of which are as follows.

AII - HCCW35/2006

11. In April 2007, the appellant and Chan Man Yiu (“CMY”), an employee of HJ Ltd who was not professionally qualified, were appointed joint and several provisional liquidators of AII.  They were made joint and several liquidators in May 2008. There was no committee of inspection.

12. AII had a property which was sold by its mortgagee, resulting in surplus proceeds of about $387,000.  In November 2007 those proceeds were paid to the appellant and CMY as the joint and several provisional liquidators of the company.  This sum should have been paid into the Companies Liquidation Account “forthwith” under s 202(2) CO. 

-  However those proceeds were not remitted to the Companies Liquidation Account. 

-  In March 2008 (some 4 months after they had received the proceeds), the appellant and CMY reported to the OR that the mortgagee’s solicitors were only “prepared to remit” the proceeds. 

-  In April 2009 (some 17 months after they had received the proceeds), the appellant and CMY submitted a report and account to the OR. Neither the report nor the account showed receipt of the proceeds. 

-  On 21 August 2009, the OR asked the appellant and CMY (the latter having ceased to be employed by HJ Ltd in June 2009) whether the proceeds referred to in the March 2008 report had been received.  It was only then, on 27 August 2009 (21 months after the proceeds had been received) that the appellant caused an employee of HJ Ltd to write to the OR enclosing a sum of about $377,000 and an “amended” account.  The letter said the late remittance was “regretted” and an offer was made to pay interest. 

-  However no explanation was given for the shortfall between the sum received (about $387,000) and the sum remitted (about $377,000).  This shortfall was subsequently remitted. 

-  More importantly, no explanation was proffered at all for the failure to remit the sum to the Companies Liquidation Account in the first place, and no account given at all as to who had the use of the funds, or to what purpose they had been put. 

Wah Ying - HCCW498/2006

13. In December 2006, the appellant and CMY were also appointed joint and several provisional liquidators of Wah Ying.  In October 2007 they were made joint and several liquidators. Again there was no committee of inspection.

14. Wah Ying was the creditor of a company called Teamsing Electronic Co Ltd which was itself wound-up.  On 15 December 2008 Teamsing’s liquidators distributed a dividend amounting to about $1,864,000 to the appellant and CMY as joint and several liquidators of Wah Ying. 

-  However those proceeds were again not remitted to the Companies Liquidation Account. 

-  In February 2009 (2 months after they had received the dividend) the appellant and CMY submitted an account (Wah Ying’s 4^th account) to the OR.  It did not disclose receipt of the dividend.

-  In July 2009 (some 7 months after the dividend had been received), the appellant submitted Wah Ying’s 5^th account to OR. Again he did not disclose the receipt of the dividend.

-  In November 2009 (a month after the court had made an order removing the appellant as liquidator of Wah Ying and some other companies) the OR discovered that the dividend paid by Teamsing had not been remitted to the Companies Liquidation Account and pursued the appellant for it. 

-  It was only then, on 23 November 2009 (nearly a year after the dividend was received) that the appellant caused the remittance to be made.

-  However no explanation was given for the failure to remit the sum to the Companies Liquidation Account before the OR launched his pursuit of those funds, and no account given at all as to who had the use of the funds, or to what purpose they had been put. 

Etech - HCCW65/2006

15. In November 2009, after the Court had removed the appellant as liquidator of 6 companies, the OR proposed to undertake a field audit of this company’s liquidation accounts. For this purpose the OR asked the appellant to provide him with the company’s certified bank statements and certified breakdown of the liquidation account pursuant to s 203. 

16. HJ Ltd delayed providing the OR with the required documents, at first saying that its staff were on leave, then finally alleging that as a police case was in the course of investigation, “we assume that it is not appropriate to give you the bank statements and breakdown in the meantime because we do not want to bring out any misunderstanding”.  No explanation was given as to what “misunderstanding” could have been caused.

Other grounds

17. The OR has also relied on other grounds, such as the fact that the appellant had failed to comply with court orders for payment of interest on the sums referred to above, and the costs of proceedings to remove him as liquidator.  No explanation was given by the appellant as to why he did not comply with orders for payment until statutory demands were served on him.

Harris J’s judgment

18. Before Harris J, the appellant argued 3 points, that: (1) there was an unresolved dispute as to whether Mr Tang had agreed to become a director as at the date of the false declaration; (2) the appellant’s failure to comply with court orders related only to his conduct as a litigant, rather than as a liquidator; and (3) the OR’s complaints related to only 7 of the 80 cases for which he had been appointed liquidator.  Not surprisingly Harris J did not consider these to be strong mitigating factors in the context of the case as a whole, and commented that the appellant had “very few answers, and no substantial ones” to the OR’s complaints. 

19. In considering the period of disqualification, the learned judge took into account the relevant legal principles and applied the approach laid down by Kwan J (now Kwan JA) in Re Well Bond Group Ltd [2008] 5 HKLRD 147 who had in turn followed the approach of the English Court of Appeal in In re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164.

20. Sevenoaks was concerned with s 6 CDDA (similar to s 168H CO) which provides, amongst other things, that the court must disqualify directors of insolvent companies whose conduct make them unfit to be concerned in the management of a company. However the underlying purposes of both sections are the same ie to protect the public from dealings with persons who have a reprehensible history in their conduct of company affairs, and to act as a deterrent to the person in question and also to other persons concerned in the management of companies.  For that reason Sevenoaks was applied in Re Samuel Sherman plc [1991] 1 WLR 1070 which was concerned with s 8 CDDA (similar to s 168J CO) where the court also has a discretion to order disqualification of a person whose conduct (after investigation instigated by the Financial Secretary) is found to make him unfit to be concerned with the management of a company.  The maximum period of disqualification in all 3 sections (i.e. s 4 CDDA/s 168G, s 6 CDDA/s 168H, and s 8 CDDA/s 168J) is the same.

21. The court in Sevenoaks divided the potential 15-year disqualification into 3 brackets:

(i)  the top bracket of disqualification for periods over 10 years, reserved for particularly serious cases, including “repeat” disqualifications;

(ii)  the minimum bracket of 2-5 years for “relatively not very serious” cases;

(iii)  the middle bracket of 6-10 years for “serious cases which do not merit the top bracket”.

22. Harris J considered the appellant to be in the middle bracket in terms of the seriousness of his misconduct and ordered that the appellant be disqualified from undertaking the offices and acts set out in s 168G for a period of 7 years. 

Grounds of appeal

23. On appeal, counsel for the appellant submitted that:

(1)  the learned judge failed to take into account (or failed to give appropriate weight) to matters which were relevant to the determination of the period of disqualification i.e.:

-  all sums have been repaid;

-  there were ongoing police investigations which influenced the appellant’s decision to remain silent;

-  the OR had not taken steps to remove the appellant as liquidator in other cases (over 80) to which he had been assigned;

-  in the other cases, the appellant had achieved substantial recovery for the creditors;

(2)  the learned judge should not have ordered a period of disqualification of 7 years, as:

-  that exceeded the period of disqualification for the liquidator in Well Bond (6 years); and

-  CMY was disqualified for a period of 3 years only.

Discussion

24. It is important to note first of all that this is an appeal from the exercise of the judge’s discretion in imposing a period of disqualification.  As such, an appellate court would not interfere unless the period imposed “was too great to a significant extent, or where the appellate court considered that appropriate factors were not or could not have been taken into account” (Re Deaduck Ltd [2000] 1 BCLC 148, per Neuberger J (now Lord Neuberger MR).

25. We found no ground to interfere with the learned judge’s decision which, with respect, was clearly right.  First, it is clear from Harris J’s Decision that he was well aware that the companies’ funds (together with interest) and the costs of the removal proceedings have been paid, albeit late (see eg paras 7, 10, and 11). 

26. Secondly, the argument that the appellant decided not to proffer explanations because there were police investigations does not hold water.  He did not proffer any explanations during the proceedings to remove him as liquidator at a time when police investigations had not begun, nor has he applied for leave to adduce fresh evidence now to explain his failures, even though (as this court was told) police investigations have come to an end without his being charged.

27. Thirdly, the OR cannot remove liquidators without issuing proceedings in court, and a decision to do so cannot be taken lightly.  Before deciding to do so, he must consider a number of factors, including the stage which the liquidation has reached, what funds are or may be involved in the particular liquidation, whether substitute liquidators are available and the costs of removal proceedings.  In any event it would appear that the appellant himself has consented to being removed as liquidator in respect of more than 20 companies. 

28. Fourthly, there is no evidence whatsoever that in the other cases, the appellant had “achieved substantial recovery” for the creditors.  In any event, recovering a company’s assets in a winding-up is no more than a liquidator’s professional duty for which he receives fees in return.

29. The liquidator’s role is crucial in the orderly management of a failed company’s affairs.  He is required by law to examine the company’s affairs, collect its assets, declare a dividend and distribute them to creditors.  Creditors look to him for the honest and professionally conducted collection of the company’s assets and a fair distribution of the dividends.  Especially in cases where there is no committee of inspection, the liquidator may be the only person who is aware of the company’s real financial position.  Creditors may not have the resources to follow up on a liquidation and even if they did, they would not be inclined to “throw good money after bad”.  As for the OR’s Office, in the aftermath of a poor economic climate causing large numbers of companies to be wound up, there is often insufficient manpower to examine a liquidator’s management of a company’s affairs in great detail.  Left without scrutiny, it is essential that the liquidator performs his fiduciary duties with the integrity and probity that is required of his office. 

30. In the present case, the appellant received 2 sums of money which he was required by statute (s 202(2) CO) to pay into the Companies Liquidation Account “forthwith”.  He did not do so, and in one case, kept the funds for 21 months, and in the other, for nearly a year.  He misled the OR in the accounts and reports he rendered for those companies.  In both cases, it was the OR who discovered that these sums had not been remitted into the Companies Liquidation Account.  It was only after the OR’s repeated inquiries that the appellant eventually remitted the sums to the Companies Liquidation Account.  No explanation has been proffered at all by the appellant for keeping the funds for so long, even now that police investigations have ceased.  There are none of the mitigating features which led the court to impose a shorter period of disqualification in Re Citrend Services Ltd [2008] 5 HKLRD 279 (see paras 20, 30 and 38).

31. The appellant not only failed to protect the interests of the creditors, but took advantage of his position for his own ends.  Had it not been for the awareness and persistence of the OR’s Office, the appellant’s breaches might not have come to light, and the creditors would have been deprived of the dividends to which they were entitled.

32. In our view the learned judge was clearly entitled, and with respect, correct to impose a period of disqualification of 7 years.  The sums involved in the present case are larger than those in Well Bond and there is the further aggravating feature of the false declaration (which was maintained after the appellant’s appointments as liquidator).  As for the argument based on a comparison with the period of disqualification imposed on CMY (3 years), the judge was entitled to take into account the fact that he was an employee of the appellant and was not professionally qualified.  The judge accepted that CMY “found himself in an awkward position, namely, working for somebody whose conduct was irresponsible and lacking in probity”.  There was no evidence that CMY personally had anything to gain, and his fault lay in failing to stand up to his employer, the appellant.  In any event CMY’s employment was terminated in June 2009 and he was not in a position thereafter to rectify his previous defaults.  His culpability was far less than that of the appellant.

Order

33. For those reasons, we dismissed the appeal with costs to be paid by the appellant to the OR.