LUEN TAT WATCH BAND MANUFACTURER LTD v. STEPHEN LIU YIU KEUNG DAVID YEN CHING WAI

HCMP 1071/2018

[2020] HKCFI 2610

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1071 OF 2018

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J U D G M E N T

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1.  This is an application by Luen Tat Watch Band Manufacturer Limited (“the Plaintiff”) by an amended originating summons (“the AOS”) dated 26 September 2018 for an order that Stephen Liu Yiu Keung (“Liu”) and David Yen Ching Wai (“Yen”) (collectively “the Defendants”) hand over the documents set out in Schedule 1 to the AOS. At the conclusion of the hearing, judgment was reserved which I now give.

Background

2.  The Plaintiff was part of the Luen Tat Group of companies (“the Group”) founded by the late Lee Sai Nam (“Lee Senior”) in the 1970s. Within the Group was a company called Pak Tat.

3.  Prior to his death in 2014, Lee Senior was the sole beneficial owner of the Plaintiff and the Group including Pak Tat. However, from about 2008, his eldest son (“Ken”) started disputing Lee Senior’s ownership resulting in 2 sets of proceedings:

(1) In HCCW 497/2009 commenced on 5 July 2009, Lee Senior sought to wind up the Plaintiff on the just and equitable ground. He obtained a winding-up order on 6 July 2010 and, consequently, the Defendants were appointed joint and several liquidators of the Plaintiff in October 2010; and

(2) On 6 August 2009, Lee Senior commenced HCA 1711/2009 (“the HCA action”) for a declaration that he was the sole beneficial owner of all the shareholdings in the Plaintiff and Pak Tat. On 9 December 2015, the judge decided in his favour. Ken’s appeal (CACV 2/2016) was dismissed by the Court of Appeal on 19 January 2017.

4.  The proceedings above resolved all ownership dispute issues, confirming Lee Senior’s ownership of the entire Group.

5.  On 27 November 2017, DHCJ To (“the judge”) permanently stayed the winding-up, removed and discharged the Defendants as liquidators of the Plaintiff and ordered Ken and the Defendants to personally pay the Plaintiff’s costs on an indemnity basis (“the Removal Decision”).

6.  On 7 December 2017, solicitors for Lee Senior’s other children, namely, Lee Shu Hang (“Richard”) and Li Sin Man (“Seline”) requested the Defendants to release and deliver the documents kept by them in their capacity as liquidators of the Plaintiff.

7.  On 13 December 2017, the Defendants indicated that they would return the books and documents relating to the Plaintiff’s affairs which are the Plaintiff’s property in phases. Implicitly, the Defendants considered that not all the documents they have retained relating to the Plaintiff’s affairs are the Plaintiff’s property.

8.  On 22 December 2017, Richard and Seline were appointed directors of the Plaintiff.  

9.  The Defendants’ initial indication was that all documents that are the Plaintiff’s property (which they referred to as “Luen Tat Documents”) would be prepared for delivery by 28 February 2018. However, documents returned as of that date did not include a single item generated after 6 July 2010, the date of the winding-up order.

10.  From an initial study of the documents delivered and the lists prepared by the Defendants, by 20 April 2018, the Plaintiff became aware of missing documents: see §22 below.

11.  The following exchange of correspondence took place between the respective solicitors for the parties:

(a) On 20 April 2018, the Defendants’ solicitors were specifically asked to specify “the categories (or nature) of documents which [the Defendants] have withheld and refuse to release to the Company” within 7 days.

(b) On 4 May 2018, the Plaintiff’s solicitors repeated their earlier request at §13[1] . For good measure, §15 read:

“We invite your clients to be honest and state categorically which category(ies) is/are not going to be released or returned to the Company …”.

(c) In their reply on 15 May 2018, after referring to Gomba Holdings UK Ltd and Others v Minories Finance Limited [1989] 1 All ER 261 and Hanley v JC & A Solicitors Ltd (Case No: SCCO REF JJ 1706056), the Defendants’ solicitors stated[2] that the general principles in Hanley apply to liquidators including that

“working papers and other documents intended solely for the liquidator’s (sic) own use to enable them to fulfil their duties are the property of the liquidators themselves.”

(d) On 28 May 2018, the Plaintiff’s solicitors sought confirmation within 3 working days that the working papers described in (c) above constitute “the only category of documents which the [Defendants] have withheld or refuse to release”.

(e) The Plaintiff’s solicitors’ letter of 5 June 2018 recorded that “the letter dated 4 June 2018 received in reply did not provide an unequivocal answer as requested”.

12.  Meanwhile the Defendants continued with batch deliveries of Luen Tat Documents but more than 7 months after the Plaintiff’s initial request, in relation to email correspondence, at least another 5 years’ worth of emails had yet to be returned to the Plaintiff.

13.  Despite the Plaintiff’s repeated requests[3] , apart from a reference to working papers in the 15 May 2018 letter, at no stage did the Defendants specify or list the categories of documents withheld.

14.  On 12 July 2018, the Plaintiff commenced the present action for the return of the “Schedule 1 Documents”.

15.  Prior to its commencement, between 26 February and 5 July 2018, the Defendants caused 8 batches of Luen Tat Documents to be delivered to the Plaintiff followingrepeated requests from the Plaintiff.

16.  After the issuance of the Originating Summons, 3 further batches[4] were delivered to the Plaintiff.

Schedule 1 Documents

17.  The documents sought are described in Schedule 1 as documents

“generated in the course of the liquidation of the [Plaintiff] and/or in the course of acting as the liquidators of the [Plaintiff] … but excluding documents subject to legal professional privilege that are solely in respect of the Defendants’ personal liabilities (if any)”.

The Plaintiff’s case

18.  Mr William Wong SC leading counsel for the Plaintiff submitted that the relationship between a company and its liquidators is essentially that of principal and agent, citing McPherson & Keay, The Law of Company Liquidation, 4^th Ed., §9-003[5] :

“[u]pon winding up, the directors of the company are displaced and their functions assumed by the liquidator, who, in exercising his or her powers, acts as the agent of the company. All the normal consequences incidental to the agency relationship are therefore present: the acts and transactions into which they enter bind the company, not the liquidators personally, and this is so whether the company is being wound up voluntarily or compulsorily.”

19.  It was submitted that the Plaintiff has a broad entitlement to the documents or records retained by the agent in the course of the agency in so far as such documents or records concern or relate to the principal’s affairs.

20.  Fox LJ considered as correct in general terms the statement of principle that

“as between principal and agent, all documents concerning the principal’s affairs which have been prepared or received by the agent belong to the principal and have to be delivered up on the termination of the agency”: see Gomba Holdings Limited v Minories Finance Limited [1989] 1 All ER 261 at 263a.

21.  A similar view is stated in Bowstead and Reynolds on Agency, 21^st Ed at §6-093. Further, it is not necessary for the principal to prove that he owns the documents or records in question: Bowstead & Reynolds at §§6-090 and 6-093.

22.  The 2^nd and 3^rd affirmations respectively dated 7 January 2019 and 8 May 2019 filed by Seline on behalf of the Plaintiff highlighted certain categories of “missing documents” following a review of the documents delivered to the Plaintiff.

23.  For example, omitted from delivery are (a) the 1^st, 3^rd, 5^th and 7^th drafts of the liquidators’ report[6] ; and (b) missing documents in the adjudication files[7] , specifically “Adjudication Summaries” in relation to proofs of debt (“PODs”) 45, 46, 49-51.

The defence

24.  Mr Anson Wong SC leading counsel for the Defendants took issue with the formulation in Schedule 1, namely, documents “generated in the course of the liquidation … and/or in the course of acting as the liquidators …”. It was said to be problematic in that it is premised on everything done by the liquidator being done in his capacity as agent.

25.  It was submitted that as a liquidator also performs other functions, the Plaintiff is only entitled to documents generated when the liquidator is acting as agent for the company and not when he is performing another function, and that it is wrong for the Plaintiff to say that everything done in the course of liquidation is done by the liquidator qua agent.  

26.  The Defendants submittedthat the Plaintiff has 2 hurdles to surmount: first, a liquidator does not always act as agent for the company; and second, even when he is acting as agent, the principal is not entitled to all the documents brought into existence by the work in question and it is necessary to see for what purpose the documents had been brought into existence.

(1) The first hurdle

27.  It is common ground that a liquidator is a creature of statute and on assuming office, he assumes the functions of the board and acts as the company’s agent. Hemust carry out the duties imposed on him by statute to give effect to the statutory scheme for the realisation of the company’s assets and the distribution of the proceeds among the creditors. The liquidator’s fiduciary obligations are owed to the company and the body of creditors.

28.  As stated in McPherson & Keay at §8-038:

“In general one can say accurately that the liquidator is a hybrid composite with elements of fiduciary trustee, agent, and (in some instances) officer of the court”.

The learned authors noted the difficulty of categorising what a liquidator is but had no difficulty in stating that “he or she is a fiduciary with all of the accompanying duties”.

29.  The Defendants referred to Tanning Research Laboratories Inc v O’Brien (1987) 11 ACLR 778 (NSWSC) where Cohen J analysed the role of a liquidator (when considering and dealing with PODs). He held (at p 791) that

“when he considers each proof of debt … he is not the company; he is acting as an officer of the court in carrying out a duty to ascertain the creditors, a duty which is of an administrative nature … He is exercising a quasi-judicial position. It is because he is not, for that purpose, the company, that he can go behind a judgment or a stated account which, before the winding up, would have been binding upon the company.”

30.  The Defendants submitted that it is therefore necessary to focus on the specific activities of the liquidator and that Tanning is authority for the proposition that not everything done by the liquidators in the course of liquidation is done in the capacity as the agent of the company.

31.  That is all very well but the first hurdle is a statement of fact rather a test to be applied. It is unclear if it is the Defendants’ contention that the company is only entitled to documents generated when the liquidator is acting exclusively as the company’s agent[8] but not otherwise despite being a “hybrid composite” and that it is not entitled to documents generated when the liquidator is performing a dual role, wearing 2 hats (as it were) at the same time.   

32.  While the liquidator when adjudicating a POD is not acting as the company’s agent inasmuch as he is not bound by the company’s account stated but may go behind it, an adjudication when made binds the company and plainly relates to the company’s affairs. It affects the company’s assets and the amount available for creditors generally.  

33.  That aside, Tanning was not concerned with the question whether upon the discharge of the liquidators from office, the liquidators are entitled to retain all documents generated in relation to the PODs. Tanningis not an authority on that issue.

34.  The other authority relied on was In re Southern Pacific Personal Loans Limited [2014] Ch 426 where (at §17) David Richards J opined that

“Some of the duties of a liquidator are undertaken by him as principal in that capacity and not on behalf of the Company of which he is the liquidator. For example, where he receives and adjudicates on proofs of debts submitted by those claiming to be creditors of the company, he does so as the liquidator and not as an agent of the company.”

35.  But in that case the issue was whether property of the company was delivered to the liquidators as principal rather than as agent. It did not concern the adjudication of PODs or the company’s entitlement to documents so generated.

36.  The purpose for which a liquidator exercises his powers is to give effect to the statutory scheme and in an insolvent winding up the liquidators are primarily acting in the interests of creditors. In In re Southern Pacific it was held (at §33) that in exercising his powers and fulfilling his duties in respect of the property of the company, the liquidator does so as agent for the company, in whose ownership the property remains vested, albeit not for the benefit of the company but in order to give effect to the statutory scheme.

(a) PODs in the present case

37.  As earlier noted[9] , documents relating to PODs 45, 46, 49-51 (“the missing PODs”) were missing from the documents delivered. The list of proofs filed by the Defendants under Rule 101 showed 51 PODs and a dividend of over $34 million distributed to creditors. The missing PODs are of particular concern to the company in view of §§43-64 of the Removal Decision where the judge was highly critical of the admission of debt made in respect of 3 of the missing PODs.

38.  It is clear from the evidence that except for the missing PODs (including their adjudication summaries), the Defendants had returned to the Plaintiff all documents relating to the remaining PODs. At the hearing, the Court sought an explanation from the Defendants for their rationale in withholding documents pertaining to the missing PODs since, prima facie, it defied all logic.

39.  Mr A Wong’s reply was: “We are not withholding them. They are all there.” When asked specifically about the adjudication summaries in relation to the missing PODs, the reply was “there is (sic) no such documents”, notwithstanding the fact that they do exist in respect of all the remaining PODs.

40.  To assuage the Court’s near-exasperation, Mr A Wong referred to Yen’s 3rd affirmation dated 4 March 2020 which, inter alia, stated as follows:

“6. … I confirm that all the documents relevant to those PODs to which the Plaintiff is entitled have been provided to it by the Defendants.

7. Secondly …

(a) I specifically confirm that the Defendants have provided to the Plaintiff all the documents the subject matter of paragraphs 21-23 to which the Plaintiff is entitled, and that the defendants have nothing further to provide to the Plaintiff.” (Emphasis added)

41.  That evidence is as unhelpful as the earlier answers from counsel. The Defendants’ stance remains that the decision as to what documents are to be returned to the Plaintiff is entirely a matter for the Defendants. In other words, the Defendants have arrogated to themselves the exclusive power to make that decision.

42.  In my view, the Defendants’ stance is wrong and unsustainable in law.

43.  In the course of the hearing, there was some suggestion that the inclusion of the remaining PODs in the batch deliveries should not be taken as any recognition or acknowledgment of the Plaintiff’s entitlement to them.

44.  That approach is undermined by the Defendants’ own evidence throughout which is that documents delivered to the Plaintiff are Luen Tat’s property, ie they belong to the Plaintiff. That is a clear admission that the Plaintiff is entitled to them.

(b) Working papers

45.  The Defendants relied on the general principles stated in §47 of the Hanley case (concerning solicitors retained on a professional basis to provide services) as equally applicable to liquidators such that working papers and other documents intended solely for the liquidators’ own use to enable them to fulfil their duties are the property of the liquidators themselves.

46.  Pausing here, as noted in §23 above, several of the draft reports have been delivered to the Plaintiff. The same absence of logic infects the retention of 4 of the 12 drafts as with the retention of the missing PODs.

(2) The second hurdle

47.  The Defendants submitted that the fact that a document was brought into existence in connection with work done for a principal is not a sufficient basis for the Court to draw the conclusion that the principal is entitled to it citing, inter alia, the Gomba case.  

48.  In Gomba the company was put into receivership by the debenture holder. Afterthe receivership was discharged, the receivers were ordered to deliver up documents belonging to the plaintiff. The issue was whether the receivers were entitled to decline to deliver up various categories of documents set out in a letter[10] .

49.  The relationship set up by the debenture and the appointment of the receiver was not simply between the mortgagor and the receiver but tripartite, involving also the debenture holder.

50.  The Defendants submitted that by parity of reasoning, when a liquidator is discharging his duties as an officer of the court, the company is not entitled to the work product unless he is also doing it as the company’s agent. Hence it was said that it is important to consider the circumstances in which the document was brought into existence: see Bowstead & Reynolds (at §6-093).

51.  I do not consider the authorities concerning the position of a professional (such as an auditor or a solicitor) and client is of assistance in this regard. In those cases, the auditor/solicitor is engaged to act as principal. The liquidator’s composite role as agent, fiduciary and officer of the court is not a principal in any true sense.

The Defendants’ proposal

52.  Headwinds encountered during the hearing gave rise to a written proposal from the Defendants in the following terms:

“1. The Defendants to file an affirmation within 14 days hereof verifying a list of categories of documents generated in the course of the liquidation of the Plaintiff and/or in the course of acting as the liquidators of the Plaintiff (in whatever form) that remain in the possession, power or custody by the Defendants and not previously supplied to the Plaintiff.

2. In respect of each of the categories of documents set out in the said list, the Defendants would give a description of the nature of the documents and the circumstances in which those documents were brought into existence.”

53.  The Plaintiff rejected the proposal as being made far too late.

Conclusion

54.  The chronology relating to the Defendants’ deliveries of the Plaintiff’s documents speaks for itself. It is now coming on to 3 years since the removal and discharge of the Defendants as liquidators of the Plaintiff and 33 months since the initial request for documents was made.

55.  Despite their reliance on Gomba, it is noteworthy that in Gombaitself, within 2 months of the court’s order[11] to deliver up to the plaintiffs documents belonging to the plaintiffs, the receivers delivered up some 268 files of documents and at the same time by a letter of 12 June 1987 to the plaintiffs’ solicitors set forth various categories of documents relating to the affairs of the companies which came into existence or received by or on behalf of the receivers during the receivership but which the receivers declined to deliver up on the grounds that such documents were not the property of the companies. That gave rise to the motion for delivery up culminating in the appeal.

56.  In the present case, by the time of the hearing, the Defendants had not even made such an offer, much less produce a list of the categories of documents retained.

57.  Moreover, as stated in Hollander, Documentary Evidence in Hong Kong, 2^nd Ed.:

Ҥ6-041 During the course of the agency, the agent is a fiduciary and owes duties of loyalty to the principal. This will give rise to an obligation to keep records of transactions entered into on behalf of the principal and to make records available.

§6-042 once the relationship has terminated, the fiduciary obligation of loyalty is at an end. But there is still an obligation to provide records in respect of the transactions entered into on behalf of the principal, and the affairs of the principal … Otherwise the principal would be left in a state of ignorance as to his affairs and the transactions entered into on his behalf.”

58.  In the circumstances, the Plaintiff was clearly entitled to reject the belated offer. The offer should have been forthcoming at the latest by May 2018, over 2 years ago.

59.  It will have become apparent that I do not regard the so-called hurdles put forward by the Defendants as entitling the Defendants to retain documents generated in the course of liquidation and/or in the course of acting as liquidators of the Plaintiff.

60.  Even if there are documents that arguably the Defendants are entitled to retain, it would not affect the ultimate outcome given the facts of the present case in view of the fact that the Defendants (unlike the receivers in Gomba) have not discharged their burden of showing what categories of documents they should not produce.

61.  Accordingly, I will make an order in terms of Schedule 1 of the AOS.

Costs

62.  The Plaintiff seeks costs on an indemnity basis in view of the manner in which the Defendants have conducted themselves since the initial request. The Defendants submitted that given the very unique role of a liquidator, they are entitled to have the legal point argued and should not be visited with indemnity costs.

63.  The Defendants were office-holders. The production of documents in dribs and drabs over a nine-month period and a ‘further’ delivery[12] made some 7 months after that is not conduct commensurate with that to be expected of office-holders. It is inexcusable. It inevitably casts doubt on their suitability for appointment as liquidators.

64.  The Defendants are the only persons with knowledge of what documents have been generated during their time in office which spanned over 7 years and in respect of which they have been handsomely remunerated[13] .

65.  It defies belief that they had the temerity to submit that “it would be incumbent upon the Plaintiff to identify the documents to which it claims to be entitled with some precision such that this Court can determine the issue in accordance with the evidence[14] .”

66.  That submission reflects badly on the Defendants who, as officeholders, should adhere to higher standards. In my view, they have conducted themselves disgracefully in this saga, and deserves sanction.

67.  Accordingly, the Defendants are ordered to pay the Plaintiff’s costs on an indemnity basis.