THE OFFICIAL RECEIVER v. TONG HING SUN & OTHERS

HCMP 878/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 878 OF 2003

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REASONS  FOR  JUDGMENT

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1. This is an application taken out by the Official Receiver pursuant to s. 168I(2) of the Companies Ordinance, Cap. 32 seeking an extension of time for the Official Receiver to commence proceedings under s. 168H for disqualification orders against the 1st and 2nd respondents in relation to the following companies within eight months from the date of the order or such period as the court thinks fit:

(1) Tse Yu Hong Limited ("TYH") - the 1st and 2nd respondents;

(2) Tse Yu Hong Textiles Limited ("Textiles") - the 1st and 2nd respondents;

(3) Tse Yu Hong Metal Limited ("Metal") - the 1st and 2nd respondents;

(4) Tongz Trading Company Limited ("Tongz") - the 1st and 2nd respondents;

(5) Youngary Development Limited ("Youngary") - the 1st and 2nd respondents; and

(6) Denis Drycleanings Limited ("Denis") - the 1st respondent only.

2. The originating summons was issued on 27 February 2003 against three respondents. On 31 March 2003, the Official Receiver filed a notice of discontinuance of proceedings against the 3rd respondent. On 9 April 2003, the 1st respondent filed an Acknowledgement of Service stating that he does not intend to contest the proceedings. The 2nd respondent has not filed any Acknowledgement of Service but has appeared at the hearing and made no submission to the court.

3. At the conclusion of the hearing, I have granted leave to the Official Receiver to commence proceedings for disqualification orders against the 1st and 2nd respondents within eight months from the date of the order and I have ordered that the costs of this application are to be costs in the intended disqualification proceedings. These are the reasons for my judgment.

4. It is provided in s. 168I(2) that except with the leave of the court, an application for a disqualification order shall not be made after the end of the period of four years commencing with the date of commencement of the winding-up of the company concerned.

5. The dates of commencement of the winding-up of the six companies mentioned above are as follows:

TYH	2 March 1999
Textiles	2 March 1999
Metal	2 March 1999
Tongz	13 March 1999
Youngary	13 March 1999
Denis	5 August 1999

Thus, in respect of three of the companies, the time for bringing proceedings for disqualification orders had expired on 1 March 2003; for two of the companies, the time had expired on 12 March 2003; and for the remaining company the time will expire on 4 August 2003.

6. The court has an unfettered discretion whether to grant leave under s. 168I(2), after balancing the element of public interest with the legitimate interest of the director and the possible prejudice he may suffer if leave is granted. In most situations, four factors are taken into account:

(1) the length of the delay;

(2) the reasons for the delay;

(3) the strength of the case against the director; and

(4) the degree of prejudice caused to the director by the delay.

See Re Copecrest Ltd [1993] BCC 844 at 852B; Re Probe Data Systems Ltd (No. 3) [1992] BCC 110 at 118G; Secretary of State for Trade and Industry v Davies [1997] BCC 235 at 247H - 248A; The Official Receiver v Mak Wing Hung [2002] 4 HKC 344.

7. I turn to consider each of the four factors.

The Length and Reasons for the Delay

8. The Official Receiver has given an explanation why he has not been able to commence proceedings against the 1st and 2nd respondents within the four year period.

9. Most of the books and records of the five TYH Companies had been seized by the Commercial Crime Bureau of the police ("CCB") on 12 March 1999 following a complaint that Metal had presented forged bills of lading and some supporting documents to a bank for negotiation of letters of credit. The investigation by CCB took quite some time. Eventually, the 1st and 2nd respondents and the general manager of the TYH Group were charged with making entry in record of bank by deception. The criminal trial in the District Court was adjourned several times from 17 October 2001. In July 2002, charges against the 1st respondent were dropped. The trial against the 2nd respondent and the general manager commenced on 3 October 2002 and the verdict was given on 21 October 2002 acquitting the 2nd respondent and the general manager.

10. Pending the criminal trial, the Treasury Accountant of the Official Receiver had inspected the books and records of the five TYH Companies that had been seized and kept by CCB and found that the books and records were incomplete. Further, it would appear from the accounts of Metal that this company had incurred a huge loss of HK$209.9 million in the short period from 1 May 1998 to 31 January 1999.

11. The Official Receiver took the view that it would be prudent to await the result of the criminal trial and conduct further investigation thereafter before arriving at a decision whether it would be in the public interest to commence proceedings for disqualification orders against the 1st and 2nd respondents, as evidence given by the witnesses for the prosecution and the defence might be of use to the Official Receiver's investigation. Further, a disqualification order might be made by the judge in the criminal trial against the 2nd respondent in the event of a conviction pursuant to s. 168E. Lastly, the Official Receiver had intended to apply for a private examination of the 1st and 2nd respondents under s. 221 upon the completion of the criminal trial, as by then the private examination would not have affected the position of the 2nd respondent in the criminal proceedings.

12. After considering the verdict of acquittal given on 21 October 2002, on 28 October 2002 the Official Receiver issued a summons seeking an order for private examination of the 1st and 2nd respondents. An order was made on 15 November 2002 and the examination was scheduled to be conducted before a Master on 10 April 2003.

13. In respect of the 6th company, Denis, in which the 1st respondent was a director, no books and records were recovered or delivered by the directors to the liquidator and no Statement of Affairs was submitted. The Official Receiver considered it appropriate that the conduct of the 1st respondent as a director of Denis shall be taken into account together with his conduct as a director of the five TYH Companies, if it should be decided to bring disqualification proceedings against him in relation to one or more of the five TYH Companies.

14. To conclude, the reasons for the delay of the Official Receiver in commencing proceedings against the 1st and 2nd respondents are due to incomplete accounting records of the six companies under investigation; that no Statement of Affairs has been submitted in respect of any of these companies; that the criminal trial was adjourned several times and it was concluded only in October 2002; and that the private examination of the 1st and 2nd respondents was scheduled to take place only on 10 April 2003.

15. I am satisfied that an adequate explanation has been given for the delay.

Strength of Case against the Respondents

16. The reference to the strength of case against the director is not a reference to the strength or credibility of the evidence to be filed by the Official Receiver against the director but a reference to the gravity of the charges made against the director (Secretary of State for Trade and Industry v Davies, supra. at 242A-B; Mak Wing Hung, supra.).

17. The charges of the Official Receiver against the 1st and 2nd respondents have not yet been formulated. However, it would appear from the supporting affirmation that the Official Receiver's investigation has covered, inter alia, the huge loss incurred by Metal within a short period of eight months as mentioned above, and the involvement of the respondents in the letters of credit transactions which formed the subject of the criminal trial. It would seem that if proceedings are commenced by the Official Receiver, serious charges would be made against the 1st and 2nd respondents, apart from the accounting records offences in respect of the failure to keep proper books and records and the failure to submit a Statement of Affairs.

Prejudice

18. Other than the inherent prejudice arising from the pendency of possible disqualification proceedings, there is no evidence of any specific prejudice suffered by the 1st or 2nd respondents which may outweigh the public interest in bringing proceedings for disqualification orders against them.

Conclusion

19. Having considered each of the above factors, I am satisfied that the Official Receiver has shown a good reason for an extension of time and that in balancing the public interest and possible prejudice that may be suffered by the respondents, the discretion should be exercised in favour of the Official Receiver in granting the extension sought.