THE OFFICIAL RECEIVER v. CHAN HING TO

HCMP 925/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 925 OF 2005

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J U D G M E N T

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The application and the law

1.  This is an application of the Official Receiver for a disqualification order under section 168H of the Companies Ordinance against the respondent Mr. Chan, who was the director of the 18 wound-up companies as listed in para. 1 of the 1^st Report [A/20-21].  Mr. Chan opposes the application.  He has filed his 1^st affirmation [A/95-100] and 2^nd affirmation [A/104-107] on 18 July 2005 and 4 August 2005 respectively.

2.  Section 168H(1) of the Companies Ordinance provides “The Court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied:-

(a)  that he is or has been a director of a company which has at any time become insolvent whether while he was a director or subsequently; and

(b)  that his conduct as a director of that company, either taken alone or taken together with his conduct as a director of any other company or companies, makes him unfit to be concerned in the management of a company.”

The sections in this Judgment refer to the Companies Ordinance unless otherwise stated.

3.  The burden is on the Official Receiver to prove the 3 elements provided under section 168H, namely: directorship during the material periods; insolvency of the companies within the meaning of section 168H(2)(a) and Mr. Chan’s conduct making him unfit to be a director of a company.  The standard of proof is on the balance of probabilities.  Re Copyright Ltd. [2004] 2 HKLRD 113 at 123J.

The 8 allegations

4.  Mr. Chan does not dispute that he was at the material time the director of the 18 companies mentioned in the 1^st Report [page 23].  The second element mentioned above is also not in dispute.  Mr. Chan disputes that his conducts made him unfit to be a director of a company under section 168H.

5.  The Official Receiver relies upon 8 allegations against Mr. Chan in support of her application.  They are set out in the 1^st Report as follows:

(1)  breach of section 190 (failing to submit statement of affairs) in respect of 10 companies;

(2)  breach of section 121 (failing to keep books and accounts) in respect of 15 companies;

(3)  breach of section 274 (failing to keep proper books and records 2 years before winding-up) in respect of 15 companies;

(4)  breach of section 122 (failing to lay out profit and loss account and balance sheets in annual general meetings) in respect of 18 companies;

(5)  non-cooperation and breach of duties in respect of 4 companies;

(6)  non-compliance with statutory filing obligation in respect of 3 companies;

(7)  transactions liable to be set aside under section 182 in respect of Farm House;

(8)  misuse of bank accounts in respect of Farm House.

6.  Allegation 1: Mr. Chan does not dispute that he had not submitted the statement of affairs of the 10 companies.  He is therefore in breach of section 190.  His failure to do so has hindered the administration of the estates of those 10 companies by the Official Receiver.  This allegation is proved.

7.  Allegations 2 and 3: Mr. Chan does not dispute that he was convicted of the offences under section 121 and section 274, for which he was fined by the magistrate.  He was fined $100 for each of the summonses (15 summonses for section 121 and 15 summonses for section 274).  Section 121 requires a director to take reasonable steps to keep and preserve proper books of account of the company.  Section 274 requires a director to keep proper books of account to exhibit and explain the transactions and financial positions of the trades or business of the company throughout the period of 2 years immediately preceding the commencement of the winding-up.  The purposes of these sections are obvious.  Mr. Chan is clearly in breach of those sections. Mr. Chan’s 2 affirmations filed in opposition to this application have not raised justifiable reasons for the breaches.  I find that allegation 2 and 3 are proved.

8.  Allegation 4: Section 122 requires Mr. Chan to make out and lay before the general meetings of his 18 companies at the annual general meetings profit and loss accounts and balance sheets for the periods set out in paragraph 16 of the 1^st Report spanning over 1997 to 2000.  In Mr. Chan’s 2 affirmations in opposition, there is no reason for non-compliance of the requirements under this section.  Mr. Chan’s assertion that he was a responsible person throughout does not assist him to explain his failure of complying with the law.  I find that this allegation is proved.

9.  Allegation 5: Mr. Chan admits his non-cooperation with the liquidator in respect of the 4 companies as stated in the 1^st Report. He gives the reasons for doing so.  He had to struggle for his livelihood after liquidation of his businesses.  He was not satisfied with the lack of compassion and sympathy attitudes of the officers of the Official Receiver, though they were discharging their duties properly.  Obviously, Mr. Chan was under immense pressure consequent upon the falling of his business empire.  This is understandable.  However, I consider that Mr. Chan is still under an obligation to accede to the legitimate requests of the liquidator for the proper liquidation of his companies.  I find that Mr. Chan has not been able to raise legitimate reasons to refute this allegation.  Accordingly, this allegation is proved.

10.  Allegation 6: Mr. Chan does not dispute this allegation that he had failed to file the annual returns within the specified time limits in respect of the 3 companies: Citrend, Leader Team and Telefortune for the respective periods as stated in the 1^st Report between 1999 to 2001 [para.34].  I find that this allegation is proved.

11.  Allegation 7: This allegation refers to the cheques issued by Mr. Chan as the sole signatory of Farm House drawn upon Hang Seng Bank, Kincheng Bank Corporation (now Bank of China (Hong Kong) Limited) and First Pacific Bank (now Bank of East Asia) respectively after the service of the Petition of Winding-up of Farm House, which was on 3 January 2000.  There are numerous cheques and the amounts involved are $460,974.20, $797,088.07 and $985,706.88 respectively. [A/ 72-78]  The Official Receiver alleges that Mr. Chan was at the material time the sole signatory of those cheques and he had notice of the petition of winding-up of the Farm House. Nevertheless, he had issued those cheques, which are void under section 182.  Mr. Chan does not dispute all these facts in his affirmations.  His explanation for issuing those cheques was that he was trying to save the company from being wound-up and at that time, the petitioning creditor’s debt only amounted to about 2 million dollars, which was not a very big sum.  I can understand that Mr. Chan is trying to say that he issued those cheques with the intention of savaging his company, not deceiving any parties.  The law provides that those transactions are void. Mr. Chan had issued the cheques with the knowledge of the petition of the winding-up of the Farm House.  I consider that Mr. Chan’s explanations do not constitute a lawful reason for doing so. I find this allegation proved.

12.  Allegation 8: The Official Receiver refers to the dishonoured cheques issued by Mr. Chan on behalf of the Farm House.  There are 10 cheques drawn on Hang Seng Bank and 38 cheques drawn on First Pacific Bank (now Bank of East Asia), total amount over 1.3 million dollars. [A/ 30 & 87]  The exhibits can be found in bundle [A/ 79 and 80].  This allegation against Mr. Chan is that he has misused Farm House’s bank account by causing or allowing it to issue cheques without due regard to the likelihood of their being dishonoured on presentation.  Mr. Chan defends this in his affirmation [A/ 107] that those were the post-dated cheques, which when issued he had no knowledge of the sudden change of the financial positions of the company.  Mr. Chan said that he was a victim of the Asian financial crisis.  Miss Tsui relies on the judgment of Re Hitco 2000 Ltd. [1992] BLC 161: “Whatever the reasons for poor cash flow, regularly drawing cheques in the hope that the account will be within limits when they are presented is a misuse of bank account and is conduct which is certainly capable of evidencing unfitness.”166E-F.  From schedule 8 in the 1^st Report, it can be seen that those 48 cheques were issued between October 1999 to February 2000.  I have asked Mr. Chan whether or not he wishes to give further evidence on those dishonoured cheques, such as when they were issued, the amount in the bank account to meet them and the circumstances they were dishonoured.  Mr. Chan says that he does not have the materials as the accountant had already moved to Canada and he has nothing to prove his case.  In these circumstances, I find that the Official Receiver is able to prove this allegation.

Necessity

13.  Mr. Chan raises the question of necessity of making the disqualification order as proposed by the Official Receiver.  He submits in his affirmation [A/ 97] that it is unnecessary to make this order because he considers himself a responsible person, one who has struggled in the past years to be successful in his business and there is no public interest served for such an order.  The Official Receiver relies upon the authorities that the court does not have to be satisfied at the hearing that the protection of the public requires a period of disqualification.  The court is only concerned with whether the person’s past conduct as a director makes him unfit to be concerned in the management of a company; the Court does not have to be satisfied of any propensity of the person to misconduct himself in future. Secretary of State for Trade and Industry v. Gray [1995] BCLC 276 at 284-5.  In that case, the court was construing the provision of the law and decided that it was the duty rather than discretion of the court to impose the disqualification order.  In Re Lo-Ling Electric Motors Limited [1998] BCLC 698 at 703e-f, Browne Wilkinson VC took the view that the primary function of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others.  The determining factors are the past records of the director concerned.  Therefore once the past records are found against Mr. Chan, it will be incumbent upon this court to make the disqualification order in accordance with section 168H and the guiding principles laid down by the Court.

The adjournment

14.  At the end of the hearing, I adjourned this matter for the Official Receiver to submit authorities on whether this court should consider the period of Mr. Chan’s bankruptcy to determine the length of the disqualification, if the court should make such order and the tariff for disqualification.  I also ordered that parties might apply for further submission after considering the authorities within 7 days from the receipt of the authorities by Mr. Chan. By a letter dated 11 January 2006, the Official Receiver enclosed the authorities and a draft order to me.  I have also received a written submission from Mr. Chan in response to the authorities.  No application has been received from the parties for oral submission in court.

Finding and quantum

15.  Having found those 8 allegations against Mr. Chan proved, I consider that they are serious misconducts that this court should make a disqualification order under section 168 H.

16.  As to the quantum of disqualification, the Official Receiver submits that the guiding principles laid down in Sevenoaks Stationers (Retail) Ltd, Re [1991] BCLC 325, which have been adopted by the local courts in this jurisdiction should apply.  Taking those allegations cumulatively, the Official Receiver takes that view that the appropriate period of disqualification should be 4 years.  I agree that this case should fall within the lowest bracket of disqualification, which is between one to five years.

17.  Mr. Chan further submits for his mitigation that he had used up all his personal wealth and the savings of his wife and other relatives to meet his financial commitments before the companies were wound-up.  He has been forbidden to be a director of a company for the past years during his bankruptcy under section 156.  He asks me to take into consideration of the bankruptcy period if this court is minded to impose a disqualification order upon him.

18.  Miss Tsui has helpfully supplied me with the relevant authorities on the question of bankruptcy period and the tariffs for disqualification for similar cases.  Although each case should be considered individually on its own merits, I find these cases very useful as the sentencing guidance generally.  This is especially of assistance for someone who has seldom handled this type of cases like myself.

19.  In Re Transoft [1991] BCLC 339 at 358, Warner J. was also faced with the same issue of considering the bankruptcy period in his determination of the disqualification period of the director.  He took the view that he should give no weight to this factor.  Master Kwang in another case of The Official Receiver v. Lai Kwok Ying and Lai Kwok Man HCMP 4813 of 2003 (unreported) considered that the bankruptcy period might be relevant mitigating factors in assessing the appropriate period of disqualification, he did not agree to discount the bankruptcy period from the disqualification period.  He declined to give a substantial discount to the respondents in that case.  In that case, the respondents did not dispute the facts.  They only made mitigations for the disqualification period.

20.  Having considered the above cases, I consider that whilst this court is entitled to take into consideration the bankruptcy period, very little weight should be given to it.  For this case, I also take into consideration of the following matters, namely that there is no provision under section 168H that such period should be taken into account; the Official Receiver has made the application within the statutory period of 4 years of the winding-up of the companies under section 168 I and that Mr. Chan did not agree to the facts and put the Official Receiver to proof.  I adopt the broad brush approach as recommended in Re Westmid Packing Services Ltd. (No.3) [1998] BCC 836 at 846D.

Orders

21.  Taking the above factors and Mr. Chan’s mitigations into consideration, I agree with the Official Receiver that a period of 4 years’ disqualification is appropriate in the circumstances.  Mr. Chan also disputes the application of costs against him saying that he has no money to pay.  I am unable to accept that as a good reason for ordering costs not following the event.  Accordingly I make the following orders:

(1)  Pursuant to section 168H of the Companies Ordinance, Mr. Chan shall not, without leave of the court, (a) be a director of a company; (b) be a liquidator of a company; (c) be a receiver or manager of a company’s property; or (d) in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company for a period of 4 years effective from the beginning of the 21^st day after the date of this order;

(2)  Costs of this application, including any costs reserved, to be paid by Mr. Chan to the Official Receiver, to be taxed if not agreed.