RE THE SUN'S GROUP LTD

HCCW 425/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 425 OF 2003

____________

____________

(Heard Together)

_____________

D E C I S I O N

_____________

1. I have before me two applications taken out by the petitioner in each of the winding-up proceedings for the appointment of provisional liquidators for the companies concerned, The Sun's Group Limited ("Sun's Group") and The Sun's Group (HK) Limited ("SGHK")(collectively, "the Companies"). Sun's Group is the holding company of a large number of companies, and SGHK is a subsidiary within the group of companies ("the Group"). The summonses were issued on 31 May 2004, after I handed down judgment in the winding-up petitions. I did not make a winding-up order against each of the Companies, even though I have found the petitioning debts established and that the Companies are unable to pay their debts, as the petitioners have indicated to the court at the hearing of the petitions that in view of the listed status of Sun's Group, they would not seek a winding-up order immediately but would apply for provisional liquidators to be appointed to take charge of proposals for restructuring of the Group. Notice of this application was given to creditors who have filed notice of intention to appear on the petitions. One of the creditors, the Bank of China (Hong Kong) Limited ("BOC"), as the trustee for Umbrella Finance Company Limited ("Umbrella Finance"), has filed evidence in the application and made submissions today. A number of other creditors have indicated what their position is regarding the application.

2. For the background of the Companies and the Group, the matters giving rise to the winding-up petitions, the insolvency of the Group, and the previous attempts at restructuring initiated by the existing management, I refer to my judgment in the winding-up petitions handed on 24 May 2004.

3. The two requirements for the appointment of provisional liquidators are both met. A good prima facie case for the making of the winding-up order is made out, in view of the judgment I gave on the hearing of the petitions. The appointment of provisional liquidators is sought to facilitate a corporate rescue to maximise recovery to creditors, as there is valuable asset, being the listed status of Sun's Group, that may be realised. There may also be improved return to the creditors if the investor is interested in acquiring the Group, or some of the subsidiaries within the Group, with the holding company. The petitioners have indicated that if the new rescue attempt should fail, it is their intention to seek winding-up orders against the Companies. The previous restructuring attempt by the management has come to nothing, as the investor has withdrawn its restructuring proposal in May 2004 and the financial advisor of the Group to the restructuring has resigned. The Companies no longer object to the appointment of provisional liquidators. The only question for determination in this hearing is who should be appointed provisional liquidators.

4. Three groups of candidates have been put forward by various parties to be appointed as provisional liquidators. They are as follows:

(1) Mr Derek Kar Yan Lai and Mr Joseph K C Lo, of Deloitte Touche & Tohmatsu ("the Deloittes candidates"), proposed by the petitioners;

(2) Mr Gabriel Chi Kok Tam and Mr Edward Simon Middleton of KPMG ("the KPMG candidates"), proposed by the Companies and

(3) Mr Cosimo Borrelli and Mr Fan Wai Kuen of RSM Nelson Wheeler Corporate Advisory Services Limited ("the RSM candidates"), proposed by Umbrella Finance.

5. I accept all these candidates, who are from leading firms, have the requisite expertise and experience to carry out the duties of provisional liquidators for the Companies expected of them in this situation. I appreciate there is some urgency in bringing about a restructuring, as trading in the shares of Sun's Group has been suspended since 24 April 2003. Although no announcement for the third stage of delisting has yet been made, once that is announced the listing status would be cancelled if there is no resumption proposal acceptable to the Hong Kong Stock Exchange within six months or so.

6. Mr Bartlett, for the petitioners, submitted there are sound reasons why the Deloittes candidates should be appointed, as they are the only independent candidates with not even the slightest suggestion of any potential conflict of interest or partiality advanced by the creditors who support the appointment of the RSM candidates. As for the Companies, their only objection to the Deloittes candidates is that they may be partial to the petitioners in the execution of their duties because they are chosen by the petitioners, and there are two actions brought by the subsidiaries of Sun's Group against one of the petitioners claiming substantial damages. These actions were relied on by the Companies as genuine cross claims to resist the winding-up petitions and they have been mentioned in my judgment on 24 May 2004. I do not think the court should proceed on the basis that merely because a candidate is proposed by a party as provisional liquidator, he may be partial towards that party in the exercise of his duties. If that were right, no appointment could ever be made for a provisional liquidator where he is proposed by any party. A provisional liquidator is an officer of the court, not the agent of the party who proposed him and he is obliged to act in the interests of all creditors in an insolvent liquidation.

7. The Companies have indicated that in the event their proposed candidates are not accepted by the court, they would support the appointment of the Deloittes candidates.

8. BOC is also a substantial creditor of the Group in its own right, with a claim of $266 million. It has verbally indicated support for the appointment of the KPMG candidates and confirmed in writing that it does not object to the Deloittes candidates being appointed.

9. The petitioners object to the appointment of the RSM candidates and the KPMG candidates, on the basis of their prior professional involvement with the companies in the Group and the capacity in which they were involved.

10. One of the KPMG candidates, Mr Tam and another professional of KPMG, have been appointed in January 2004 by the Liu Chong Hing Bank Limited, a creditor of Super Delight Enterprises Limited, which is a subsidiary within the Group, as receivers and managers of a hotel developed by this subsidiary at No. 304-314 Des Voeux Road West. The hotel is a major asset of the Group and was sold in April 2004 by the receivers for HK$350 million with completion of the sale on 23 June 2004, so KPMG are still acting as the receivers of that property.

11. RSM is in a similar position. One of the RSM candidates, Mr Borrelli and another professional of RSM, have been appointed in January 2004 by BOC as the receivers and managers of the property known as Skyhigh at the Peak, another major asset of the Group and charged to BOC by a subsidiary within the Group, The Sun's International Development (HK) Limited ("SIDL"), which is in compulsory liquidation. This property was sold on 20 April 2004 for HK$320 million. I was given to understand that RSM's appointment as receivers has been discharged. Their appointment was made by BOC as trustees for Umbrella Finance and Umbrella Finance is the beneficial owner of the debt.

12. As I see it, the mere fact that KPMG or RSM had acted as receivers and managers of a major asset of the Group does not necessarily mean that they would have acquired a significant degree of familiarity with the affairs of the Group that would give them a distinct advantage over the Deloittes candidates, who have not been involved professionally in the affairs of any company in the Group. I say this despite an assertion to the contrary in the evidence of Umbrella Finance, that assertion was made without any specific material in support. KPMG and RSM were each appointed over the property of a subsidiary within the Group charged to a particular creditor, not over the entire undertaking of that subsidiary, so I do not regard this as a factor in favour of their appointment. Rather, the fact that KPMG and RSM had acted in such capacity in the past, is a factor against their appointment as provisional liquidators.

13. I was referred by Mr Bartlett to the Rules of the Hong Kong Society of Accountants, Supplement to Statement 1.203, Professional Ethics, Integrity, Objectivity and Independence in Insolvency, issued in August 1994. This provides specific guidance to members of the Hong Kong Society of Accountants on their independence in insolvency appointments. Although provisional liquidators are not specifically mentioned in the insolvency appointments discussed, the provisions must have included provisional liquidators. As stated in paragraph 1, the fundamental principles direct the attention of each member to "the overriding importance in his or her professional life of integrity and objectivity", and in certain insolvency roles, "the preservation of objectivity needs to be protected and demonstrated by the maintenance of a member's independence from influences which could affect his or her objectivity". I set out the relevant extracts:

"	Appointment as liquidator
	6.	Whether has been a material professional relationship ... with a company, no partner or employee of the practice should accept appointment as liquidator of the company if the company is insolvent ...
	Material professional relationship
	8.	A material professional relationship with a client ... arises where a practice or a partner or employee of a practice is carrying out, or has during the previous two years carried out, material professional work for that client. Material professional work would include the following ...
		b.	where a practice or person has carried out one or more assignments, whether of a continuing nature or not, of such overall significance or in such circumstances that a member's objectivity in carrying out a subsequent insolvency appointment could be or could reasonably be seen to be prejudiced.
	9.	A material professional relationship with a company or individual ... includes any material professional relationship with companies or entities controlled by that company or individual or under common control whether the relationship is material in the context of the company or individual to whom appointment is being sought or considered ...
	Appointment as investigating accountant at the instigation of a creditor
	12.	A material professional relationship would not normally arise where the relationship is one which springs from the appointment of the practice by, or at the instigation of, a creditor or other party having an actual or potential financial interest in the company or business to investigate, monitor or advise on its affairs, provided that there has not been a direct involvement by a partner or employee of the practice in the management of the company or business.
	Insolvent liquidation following receivership
	16.	Where a partner in or an employee of a practice is, or in the previous two years has been, receiver of any of the assets of a company, no partner in or employee of the practice should accept appointment as liquidator of the company in an insolvent liquidation. This restriction does not apply where the appointment was sanctioned by the court.
	Audit following receivership
	17.	Where a partner in or an employee of a practice has been receiver of any of the assets of the company, neither the practice nor any partner in or employee of the practice should accept appointment as auditor of the company, or of any company which was under the control of the receiver, for any accounting period during which the receiver acted or exercised control.
	Other potential conflicts of interest
	Group, associated and 'family-connected' companies
	18.	Members should be particularly aware of the difficulties likely to arise from the existence of inter-company transactions or guarantees in group, associated or 'family connected' company situations. Acceptance of an insolvency appointment in relation to more than one company in the group or association may raise issues of conflict of interest. Nevertheless, it may be impracticable for a series of different insolvency practitioners to act. A member should not accept multiple appointments in such situations unless he or she is satisfied that he or she is able to take steps to minimise problems of conflict and that his or her overall integrity and objectivity, are and are seen to be, maintained."

14. I note that that the present situation is not quite the situation envisaged in paragraph 16 of the above extract. Here, the appointment as receiver is not of the asset of the companies being the subject of the winding-up petitions but of the asset of a subsidiary within the Group. Nevertheless, I consider the above provisions do provide valuable guidance as to how a material professional relationship should be viewed in assessing whether the objectivity of an appointee could reasonably be seen to be compromised in the appointment of provisional liquidators.

15. There is a useful extract in McPherson's Law of Company Liquidation by Andrew Keay, 1st edition, at paragraph 6.16, providing guidance as to who may be appointed provisional liquidators:

"Where an insolvency practitioner is concerned, the same principles that generally regulate the appointment of liquidators apply to the appointment of provisional liquidators. The court should, in making an appointment, try to avoid persons who have associations with the applicant. The court will look for someone who is independent and unobjectionable to the applicant or the company. If there is any suggestion of a real prospect of conflict for a person, even if the prospect is small, then the courts will refrain from appointing that person. There must be no suggestion of bias as far as the appointee is concerned and he or she should be above suspicion. If there are urgent or exceptional circumstances, then appointment of a person who is already familiar with the affairs of the company may be made.

If the applicant for an appointment is the company and it nominates a person to act as provisional liquidator, then ordinarily the court will treat the nomination with caution. It might be prudent for the prospective appointee or some other appropriate person to provide evidence that neither the prospective provisional liquidator nor any member or employee of his or her firm has had any social or professional association with the company or its past or present officers.

If the court has already appointed a receiver to a company and an application is made for the appointment of a provisional liquidator, the court may well appoint the receiver when his or her term expires, even if some creditors dissent from this course of action, especially where the duties conferred on the receiver were of the kind exercised by provisional liquidators."

16. An Australian decision, Re Southern Cross Airlines Holdings Ltd (1993) 10 ACSR 466, was cited for the last sentence in the above extract from McPherson. In that case, objection was taken to the appointment as provisional liquidators a person who had been appointed as receiver by the court. In rejecting the objection, Dowsett J drew the distinction that the appointment as receiver was not pursuant to any security and the duties conferred on the receiver by the court order were "very similar to those normally undertaken by a provisional liquidator". He explained why in cases where a receiver is appointed under a security, it may not be appropriate to appoint such a receiver as provisional liquidator at 467:

"Where a receiver has acted to recover assets subject to a charge, primarily for the benefit of the secured creditor, considerations may well arise as to the way in which he has performed his duties, making it inappropriate that he act subsequently as provisional liquidator or liquidator because in that capacity it may be appropriate for him to challenge the way in which he performed his previous duties as receiver."

17. Similar views on this are found in Loose on Liquidators, 1997 edition, p. 203; Gower and Davies' Principles of Modern Company Law, 7th edition, p. 844; and Lightman & Moss, The Law of Receivers and Administrators of Companies, 3rd edition, paragraph 22-019.

18. A receiver appointed under a security is not an officer of the court and owes obligations only to the creditor who appointed him. Frequently, under the instrument appointing him, he is an agent of the company to which he is appointed. His responsibility is to take management control of the company or of the asset to realise sufficient asset to repay the creditor appointing him. He is not answerable to the general body of creditors, unlike a provisional liquidator or liquidator in an insolvent liquidation, which is a class remedy designed to protect the interests of unsecured creditors.

19. No documents have been exhibited by Umbrella Finance or by the Companies regarding the exact scope of the duties of RSM or KPMG under their respective appointments. But by the very nature of their appointments, both KPMG and RSM have been obliged to act in a partisan manner in favour of the creditors appointing them. What is more, as provisional liquidators, they may be obliged to investigate the affairs of the Companies, and the assets to which they were appointed receivers are substantial assets of the Group, although not directly owned by the Companies to which they were appointed provisional liquidators. As stated in Southern Cross, the provisional liquidators may in the course of their investigation be called on to review and even challenge the way they performed their duties as receivers of these substantial Group assets. Further, the liquidators have a duty to examine the receiver's remuneration (Loose on Liquidators, at p. 205).

20. It was submitted by Korff for Umbrella Finance that it is not for the provisional liquidators of the Companies to review the way in which the receivers have performed their duties. It is for the liquidators of SIDL, which is the Official Receiver, to perform that function. I do not accept that the provisional liquidators of the Companies would have no business to investigate and review the conduct of the receivers to the properties. The property was charged by SIDL as security for its debt to Umbrella Finance, and that debt was guaranteed by the Companies. The provisional liquidators of the Companies would be interested in assessing if the balance of the unsecured debt, after the realisation of the security, was correct. The Official Receiver also takes position that the liquidator of the parent company may conduct a review of the security documents.

21. I am mindful of the fact that the appointment of RSM is supported by Umbrella Finance and another creditor, Wei Wu, who between them account for 28% of the claims made against the Group and represent a substantial portion of the overall indebtedness of the Group. Nevertheless, I do not think it is appropriate in the circumstances that RSM or KPMG should be appointed as provisional liquidators.

22. I have also considered my earlier decisions in Re Luen Cheong Tai Construction Company Limited, HCCW No. 190 of 2002, 14 November 2002, and Re Yiu Wing Construction Company Limited, HCCW No. 202 of 2002, 22 November 2002. I do not think the circumstances in those cases are comparable. In this connection, I have noted paragraph 12 of the Rules of the Hong Kong Society of Accountants, Supplement to Statement 1.203. The situation in Re Arrows Ltd [1992] BCC 121 is also distinguishable. There, receivers were appointed by the court over 80 odd companies and there was an obvious advantage for a pragmatic approach to be taken to appoint them as provisional liquidators, in view of the extensive work already performed.

23. I therefore appoint the Deloittes candidates as provisional liquidators. I will hear the parties on the terms of the order of their appointment and directions to be given for the restoration of the winding-up petitions.