MAX REGENT GARMENTS CO LTD v. DIRECT FASHION SOURCING LTD (in liquidation)

HCMP 568/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 568 OF 2012

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BETWEEN

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J U D G M E N T

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1.  This is an application by Max Regent Garments Company Limited (“the Applicant”), a creditor of Direct Fashion Sourcing Limited (“the Company”), seeking certain orders in relation to a creditors’ meeting of the Company held on 20 March 2012, on which date the Company was placed into creditors’ voluntary liquidation as a result of the passing, earlier on the same day, of a resolution by the shareholders of the Company that the Company should be placed into liquidation.

2.  The Applicant seeks orders that the resolutions passed at the creditors’ meeting be declared invalid and the committee of inspection appointed at that meeting be dissolved; or alternatively, if the resolutions at the meeting are not to be invalidated, that the liquidators appointed by the creditors at the creditors’ meeting, Messrs John Lees and Mat Ng, of John Lees and Associates, be removed as liquidators and replaced by Messrs Lai Kar Yan and Darach Haughey, of Messrs Deloittes.  Failing that, the Applicant seeks an order that it be appointed as an additional member of the committee of inspection in the liquidation of the Company.

3.  The background to the application is that the two main shareholders and directors of the Company, Mr David Peters and Mrs Sally Peters, appear to have come to the view towards the end of February this year that the Company was in financial difficulties and could not carry on business.  On realising this, they approached Messrs Lees and Ng to seek advice on the possibility of having the Company placed into liquidation.

4.  Advice having been given, it was decided that the Company should be placed into creditors’ voluntary liquidation, and steps were taken to achieve this.  These steps included the sending out of notices to both shareholders of the Company, convening a special general meeting at which it was proposed that a resolution should be passed that the Company should be wound up voluntarily.  That notice was issued on 9 March 2012, and it indicated that short notice for the calling of the meeting would be sought at the meeting. 

5.  It is said that on the same day, 9 March 2012, notices were also sent out to all the known creditors of the Company summoning them to a creditors’ meeting to be held also on 20 March 2012, immediately after the shareholders’ meeting, at which the resolution to wind up would be considered so that if that resolution was passed, as it was no doubt expected it would be, it would be possible then to go on immediately to deal with the creditors’ meeting immediately afterwards.

6.  The shareholders’ meeting and creditors’ meeting were both held on 20 March 2012.  At the shareholders’ meeting, the resolution for the voluntary winding‑up of the company was passed.  As no declaration of solvency could be or was made at the time of the passing of the resolution, the winding-up was a creditors’ voluntary winding-up.

7.  The matter then proceeded to the creditors’ meeting, at which Mr Peters presided, although he was assisted by Mr Ng, who provided much of the information at the meeting, and in large part conducted the meeting.  Mr Ng has explained on affidavit that, at the creditors’ meeting, he had with him copies of the statement of affairs of the company and the list of creditors setting out the estimated amounts due to each of the known creditors of the company as is required by section 241 of the Companies Ordinance.

8.  Mr Ng says that these matters were laid before the meeting by his informing the meeting of the contents of these documents.  He says that when he was asked for a copy of the statement of affairs by one of the creditors present at the meeting, he indicated that it would be provided to the creditors a little later in the meeting. 

9.  Subsequently, when a second creditor (the Applicant, through persons representing it at the meeting) sought a copy of the statement of affairs, the statement of affairs was, says Mr Ng, provided to all the creditors, copies being distributed for that purpose.  Mr Ng says that both before and after the statement of affairs was handed out, and certainly after a summary of the contents of the statement of affairs and an indication of what it showed in terms of assets and liabilities of the company had been given to the creditors, the creditors were asked if they had any questions and were invited to pose such questions.

10.  So far as the list of creditors is concerned, Mr Ng says that he told the creditors information of the identity of the four largest creditors, these being Mr and Mrs Peters, another trade creditor by the name of Tarsen, and the Applicant.  Between them, these four creditors represented well over 99 per cent of the total indebtedness of the Company.

11.  Mr Ng acknowledges, however, that although he provided this information verbally to the creditors at their meeting, he did not in fact hand out the list of creditors showing the amounts owed to each creditor, as no request for that information was made by any of the creditors at the meeting.

12.  Thereafter, the meeting proceeded to consider the business for which it was convened, one item being the appointment of liquidators for the Company.  The ballot papers for this contained only the names of Mr Ng and Mr Lees.  However, the Applicant, during the course of the meeting, proposed the appointment of alternative liquidators. The Applicant’s candidates as liquidators were permitted to speak and to introduce themselves, and Mr Ng says that he wrote their names on a whiteboard at the meeting so that if any creditors felt that they would prefer to cast their vote in favour of the applicant’s candidates, they could do so by writing their names in a space provided for that purpose on the ballot paper below the printed names of Mr Ng and Mr Lees.

13.  In the event, by a significant majority, the creditors voted to appoint Mr Ng and Mr Lees.

14.  For the purpose of this application, Mr Wong, who appears for the Applicant, has made four principal submissions.  His primary position is that the meeting should be declared invalid and the resolutions passed thereat invalidated on the grounds of what he says are a number of procedural irregularities that he suggests are, either taken alone or in combination, such as to render the meeting a wholly unsatisfactory one which should be invalidated by the court.  Failing this, he suggests that the way in which the meeting was handled by Mr Ng, who is now the liquidator of the company, and certain other actions on Mr Ng’s part, lead the Applicant to have no confidence in Mr Ng’s ability to function as a liquidator competently and impartially, and for this reason the Applicant seeks, as an alternative, an order that Mr Ng and Mr Lees be removed as liquidators and replaced by Mr Haughey and Mr Lai, whom the Applicant proposes should be appointed in their stead.

15.  If the court is not with him on either of these two points, Mr Wong submits that at the very least, the court should appoint his clients as a member of the committee of inspection.  As to this aspect of the application, the liquidators, who represent the Company for the purposes of today’s application and are themselves represented today by Mr Hew, have indicated that they are neutral as to this and do not oppose such an order being made.  They did, however, think it right to draw to the court’s attention a number of matters that might be relevant to the court’s consideration of whether or not that application should be acceded to, pointing out first, that it is likely that the Applicant and other members of the committee of inspection, principally Mr and Mrs Peters, may not see eye to eye on things; secondly, that Mr Peters, who is a substantial creditor of the company as well as being one of its shareholders and directors and a member of the committee of inspection, appears to have expressed the view that he is opposed to the appointment of the Applicant as a member of the committee of inspection; and thirdly, drawing the court’s attention to the fact that there would appear to be another creditor who is willing to be considered for appointment to the committee of inspection.

16.  I shall deal first with the question of whether there have been serious procedural irregularities in relation to the convening of or conduct of the meeting of creditors such as to call for the meeting to be declared invalid.

17.  The first point that Mr Wong took was as to whether or not the notice to the Applicant had been sent out as required by the Companies Ordinance, section 241, at the same time as the notice to convening the shareholders’ meeting.  On this, there is a conflict of evidence.  According to the Applicants, it received advice of the meeting by phone call and by a fax which was received by them on 14 March 2012. According to Mr Ng, postal notice of the meeting was in fact given to all the creditors of the company, including the Applicant, on 9 March 2012, the same day as the shareholders’ meeting to consider the passing of the resolution to wind up was issued.

18.  Mr Ng says that in accordance with his usual practice, the notices were sent out on the same day, and that there had indeed been a phone call to the Applicant with a view to ascertaining its correct address so that the notice could be sent to it.  As to this, although there is a conflict of evidence which is not altogether easy to resolve, it seems to me more likely that notices would have been sent out, but even if that is not right, it seems to me that the failure to give the notice to the Applicant on the same day, if that is what happened, is not something that should invalidate the meeting of creditors.  This is because it is quite clear that the Applicant was aware of the meeting, attended at it, and took steps to speak and make representations as to what resolutions should be passed.

19.  In the circumstances, it seems to me that even if there had been a failure to send out the notice simultaneously with the notices of the general meeting of the company, this is not an irregularity that caused any real detriment to any of the creditors, and certainly does not seem to have caused any detriment to the Applicant, and in those circumstances, I do not think that even if there had been an irregularity in this respect, that it is such that it would call for the invalidation of the whole proceedings at the creditors’ meeting.

20.  The second point that Mr Wong took as being a procedural irregularity was the point that the shareholders’ meeting did not pass a resolution in the form of section 228(1)(c) of the Ordinance, which was to the effect that the company had resolved that, by reason of its liability, it was inadvisable to continue trading and so should be wound up, but instead simply proposed a resolution that the company should be wound up voluntarily.

21.  Mr Wong suggests that there is authority in Hong Kong in the form of Re Shop Clothing Ltd, a decision of Madam Justice Le Pichon to the effect that in order for a creditors’ voluntary liquidation to take place, there must be a resolution in the form of section 228(1)(c) and not section 228(1)(b).

22.  Mr Hew has drawn my attention to an article by Professor Smart suggesting that this may not be correct, with respect to Madam Justice Le Pichon, who was concerned with a rather different situation in which there was a question as to whether or not winding-up proceedings seeking a compulsory liquidation or court-ordered winding-up should be dismissed or permitted to be withdrawn on the basis of agreement between the petitioning creditor and the company, with a voluntary liquidation being permitted instead, in circumstances in which the learned judge appears to have had some concerns as to the reasons for which this was being done.

23.  In fact, it is, I think, quite clear, as Professor Smart points out, that a creditors’ voluntary liquidation can be initiated by either section 228(1)(b) or 228(1)(c).  Quite apart from the fact that this would appear to be the clear implication of the terms of section 116 of the Ordinance, which provides that the period of notice required for a special general meeting is to be 21 days subject to a proviso that permits short notice of such meetings, the proviso making it clear that short notice is permitted for any meeting except a voluntary winding-up which is not a members’ voluntary winding‑up by way of a resolution under section 228(1)(b) – this clearly implies that a resolution passed under section 228(1)(b) may result in a creditors’ voluntary winding-up just as much as a resolution proposed under section 228(1)(c).

24.  Indeed, this would appear to follow from the fact that what renders a voluntary winding-up a creditors’ voluntary winding-up as opposed to a members’ voluntary winding-up not the terms of the resolution, but the declaration of solvency that must be filed if the winding-up is to be a members’ voluntary winding‑up.  In any case in which a resolution to wind up is passed and a declaration of solvency is not filed, the winding-up will be, by default, a creditors’ voluntary winding-up.

25.  In the present case, it seems to me that the point taken by Mr Wong is a rather technical one, since it was all along intended that the winding-up in this case should be a creditors’ voluntary winding‑up.  This is made clear by the affirmations filed both by Mr Peters and Mr Ng in respect of this application, but it is also illustrated by the fact that notice of a creditors’ meeting was given and a creditors’ meeting was held immediately after the members’ meeting at which the resolution to wind up was passed.  There is no need to hold a creditors’ meeting where a members’ voluntary winding-up is intended and a resolution to that effect, supported by the necessary declaration of solvency, is passed.

26.  In the present case, the fact that a creditors’ meeting was convened indicates that what was intended all along was that a creditors’ voluntary winding-up should take place, and that is in fact what happened.  It does not seem to me that the failure to use the appropriate form of words for creditors’ voluntary winding-up as provided for by section 228(1)(c) of the ordinance is thus to be regarded as a procedural irregularity.  It is, of course, preferable that that form of words should be used; but where, by oversight or otherwise, it is not, that does not, I think, invalidate the proceedings or invalidate the meeting of creditors that is otherwise appropriately convened.

27.  Mr Wong’s third point was that the conduct of the meeting was unsatisfactory and contained procedural irregularities in that the statement of affairs was not properly laid before the creditors attending the meeting.  In this respect, Mr Ng has said that his practice has always been, for a considerable number of years, to provide an oral summary or an oral indication of the contents of the statement of affairs and to hand out copies of the statement affairs if that is asked for by the creditors.  He says he does the same in relation to the list of creditors that is required by section 241 of the ordinance to be laid before the meeting.

28.  With respect to Mr Ng, it seems to me that this falls short of what is required.  It seems to me that the concept of laying a document or laying information before a meeting should be construed purposively, and the purpose of providing such information must be to enable the persons present at the meeting to be apprised of it, to consider it, and, if thought appropriate, to ask questions about it.  Simply to provide an oral summary or verbal indication of what is contained in the relevant documents will, to my mind, often be insufficient to enable persons attending the meeting to fully absorb and to consider what steps, if any, they should take or what questions, if any, they should ask.

29.  It does seem to me that when considering what is meant by laying certain information or material before a meeting, the objective must be to bring that adequately to the attention of the persons attending.  In general, it seems to me that this must involve providing copies or providing a version of the document that can be read and understood by the persons present, for example, perhaps by use of a screen projection system whereby the document can be projected onto a screen for all present to see.  To do otherwise is likely to result in a situation in which the persons attending may not fully appreciate or understand what is being said, so leaving them at a disadvantage in trying to deal with it.

30.  However, in the present case, Mr Ng’s evidence, which I accept for the purposes of this application, is that although the copy of the statement of affairs was not handed out immediately, it was handed out during the course of the meeting and was handed out before any resolutions were voted on, and an opportunity was given to the creditors to ask questions, if they wished to do so, prior to voting on the resolutions.

31.  In those circumstances, it seems to me that although the procedure that was adopted was perhaps not ideal, the statement of affairs was in fact made before the meeting as copies were distributed during the course of the meeting to those present and attending. 

32.  The position in relation to the list of creditors, however, is different in that no copies were ever provided, and nor does it seem that a full recital of the contents of that document was given, as Mr Ng states only that he identified the four largest creditors representing over 99 per cent of the creditors.

33.  There is, therefore, to that extent, a procedural irregularity in relation to the way in which the meeting was conducted.  However, it does not seem to me that this procedural irregularity is one that should have the effect causing the meeting to be rendered invalid. The fact is that information as to the identity of the four largest creditors representing in excess of 99.5 per cent of the total value of the creditors, was provided to the meeting.  It is fair to say that no one asked for a copy of the list, and it does not appear that any significant questions were asked as to any other aspects of the creditor situation.

34.  In those circumstances, I do not think that although this was an irregularity, it had the effect of rendering the meeting unable to deal with the matters which it was convened to deal with such that the resolutions passed should be invalidated.

35.  Mr Wong also took the point that the meeting was not in fact chaired by a director of the company, Mr Peters, but was effectively chaired by Mr Ng.  With respect, it seems to me that the person chairing the meeting was in fact Mr Peters, although I think it fair to say that he was assisted to a very large extent by Mr Ng.  This is a common practice in relation to meetings called in respect of creditors’ voluntary winding‑ups, where an insolvency practitioner who is being proposed as liquidator will often be in a better position to advise creditors as to relevant matters in the course of the meeting.  I do not think that the fact that Mr Ng may have been doing most of the talking or that his staff members of his firm were involved in various procedural aspects of the meeting means that Mr Peters was not the chairman of the meeting.  Had there been any procedural disputes at the meeting, they would have had to be resolved by the chairman, which would have been Mr Peters.  There do not seem to have been any major procedural disputes that required the intervention of the chairman, and as such, it does not seem to me that the mere fact that Mr Ng took an active role in presenting information at the meeting rendered Mr Peters something other than the chairman of the meeting.

36.  In those circumstances, I do not think that the results of the meeting fall to be invalidated, and I therefore decline to make the first order sought by the Applicant.

37.  Mr Wong’s fallback position is that as a result of the procedural irregularities of which he has complained, he suggests that his clients have justifiably lost confidence in Mr Ng and Mr Lees, and that they should therefore be replaced.  Alternatively, he suggests that certain other matters, in particular the approach to the question of whether or not his client should be appointed to the committee of inspection, also causes his client to be justifiably concerned that Mr Ng and Mr Lees may be inclined to side with Mr and Mrs Peters in respect of the affairs of the Company in the course of the liquidation.

38.  With respect, I do not think that this submission is well founded.  Mr Ng is an experienced liquidator, and I have no reason to doubt that he will conduct himself properly in that office and will do his best to discharge his duties impartially and fairly and hold the balance between all parties who have an interest in the outcome of the liquidation.

39.  As to the procedural irregularities mentioned, I have already indicated that I do not think that there is much merit to the point in relation to the convening of the meeting or the resolution passed by the members.  As far as the conduct of the meeting is concerned, I would accept, as I have done, that there was a procedural irregularity in relation to the failure to hand out the list of creditors to all present at the meeting, and I would also accept that the way in which the statement of affairs was presented to the meeting could have been slightly more satisfactory, by making it available at the outset of the meeting, but it does not seem to me that either of those matters are such as to cast doubt on the competence or ability of Mr Ng to carry out his functions as liquidator.

40.  Similarly with respect to the other complaints as to the approach taken to the application for appointment of the Applicant to the committee of inspection, I do not think that Mr Ng was really doing anything other than drawing to the court’s attention various factors that the court might wish to take into account in considering whether or not to make such an order.  I certainly do not think that it displays any bias or anything that could reasonably be understood as amounting to a potential bias on Mr Ng’s part against the Applicant.

41.  Finally, there was a suggestion by Mr Wong that the liquidator’s approach to the judgment debt which his clients hold might suggest that they are likely to be less than even-handed in their treatment of his client as compared to others.  With respect, I do not think that that is a fair criticism of Mr Ng.  Although there are some passages in Mr Hew’s skeleton argument that seek to suggest that there might be a possibility of reopening the default judgment which the applicant has obtained, these are not matters that are raised, as far as I can see, by Mr Ng in his affirmation, and they would therefore appear to be points raised by counsel.  They are, in any event, of fairly peripheral relevance to this application in that the status of the Applicant as a creditor is not, I think, seriously capable of challenge at this stage.

42.  I therefore do not think that it would be appropriate to remove Mr Ng and Mr Lees as liquidators.

43.  That leaves the final aspect of Mr Wong’s application, which is for the appointment of his client as a member of the committee of inspection.  As to this, given that the liquidators are neutral on the point, and given that the members of the committee of inspection at this point consist of Mr and Mrs Peters and one of their former employees, it seems to me that there is no great disadvantage in appointing the applicant to the committee of inspection.  While it may be that there will be occasions on which members of the committee of inspection cannot agree on certain matters, I would expect that in those situations the liquidator will have regard to the views of both sides, will bear in mind any particular facts that may suggest that one or other side has a particular axe to grind in respect of a particular matter, and will seek the court’s directions as and when necessary, drawing the court’s attention to all appropriate factors, including any information that might suggest that one or other set or members of the committee of inspection may have reasons to be disposed to vote one way or another on a particular resolution.

44.  While it may be that there may be occasions on which it will be necessary for the liquidator to seek the court’s directions, it does not seem to me that the desirability of avoiding such a situation is so high as to lead the court to think that it would not be appropriate to appoint Mr Wong’s clients as a member of the committee of inspection in this case where they would, in effect, be an independent voice on that committee.

45.  Given the circumstances of the Company, where the most substantial debts appear to be owed by it to its shareholders and directors, I do not think that there is any harm, and (on the contrary) I think there is some merit, in having an unconnected party represented on the committee of inspection, and I shall therefore accede to the third of Mr Wong’s reliefs sought in his application.

(Submissions on costs)

46.  I am not with you, Mr Hew, on the point about indemnity costs.  I do not think the application was wholly unreasonable, and as you have to accept, there are some aspects in relation to the way in which the matter was handled which I have indicated could have been handled differently, and in principle probably should have been handled slightly differently.  I think, in relation to the form of the resolution, although it is not something that I would have said led to invalidity, certainly the more appropriate form of resolution would seem to be section 228(1)(c), and more pertinently in relation to the conduct of the meeting, it seems to me that there was a procedural irregularity, if not a fatal one, in relation to the list of creditors, and I do think that the interpretation that Mr Ng has held of laying before the meeting is one that is, in my view, not really correct.  But in the event, as he did hand out copies of the statement of affairs, they were laid before the meeting.

47.  So I think in all the circumstances I would not be with you on the suggestion that you should get indemnity costs.

(Further submissions on costs)

48.  I think that although the applicant has met with some limited success, the Applicant has been largely unsuccessful in the main aspects of the application that it sought to obtain, and on the aspects on which the applicant succeeded, the liquidator indicated that its stance was largely neutral.

49.  In all of the circumstances, it seems to me that the appropriate order for costs would be simply that the Applicant is to pay the Company’s costs of these proceedings, to be taxed on the party and party basis if they cannot be agreed.