RE TAI SUN PLASTIC NOVELTIES LTD

HCMP 401/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 401 OF 2006

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J U D G M E N T

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1.  This was an application by Full Grand Enterprise Limited ("the Applicant") to remove Mr Lui Wan Ho Stephen ("Mr Lui") and Mr Ha Man Kit Marcus ("Mr Ha") (collectively "the Liquidators") as liquidators of Tai Sun Plastic Novelties Limited ("the Company"), which is in creditors' voluntary liquidation.  The application also seeks the appointment of Mr Stephen Briscoe ("Mr Briscoe") and Mr Kelvin Flynn ("Mr Flynn") as liquidators of the Company in their place, or alternatively such other relief as the court may think appropriate.  The application was made by Notice of Originating Motion dated 28 February 2006.

2.  Mr Ha in fact purported to resign as a liquidator at a creditors' meeting held on 24 October 2005, although it seems that no notice of his desire to do so had been given to the Company's creditors prior to the meeting.  Shortly after that meeting, Mr Lui also offered to resign.  His resignation was considered at a creditors' meeting held on 6 December 2005, but a majority of the Company's creditors refused to accept his resignation.  Mr Lui subsequently lodged a report with the court on 29 December 2005 concerning his offer to resign and the outcome of the meeting, apparently pursuant to rule 154 of the Companies (Winding-up) Rules (Cap. 32), which resulted in the Companies Master inviting the Applicant to make this application.

3.  This application having been made, Mr Lui indicated that he wished to file evidence in relation to it.  In his affidavit dated 7 April 2006, he indicated that he wished to answer the allegations that the Applicant had made against him in relation to his conduct of the liquidation in order to support this application.  He also suggested that the questions of his resignation or removal, and the identity of any replacement liquidators, were matters for the consideration and decision of the creditors as a whole.

4.  At the hearing, the Applicant was represented by Mr Bartlett.  Mr Lui appeared in person.  One other creditor, Messrs Norman M.K. Yeung & Co. ("NMKY"), was represented by Ms Lam.  NMKY's position was that while it did not oppose the removal of Mr Lui and Mr Ha, it was not appropriate to appoint Messrs. Briscoe and Flynn in their place immediately, and that directions should be given for the convening of a meeting of creditors to consider the identity of replacement liquidators.

5.  The Company was placed in creditors' voluntary liquidation on 1 November 2004.  On the same day, at the first meeting of its creditors, the majority of the creditors resolved that Mr Lui and Mr Ha should be appointed its liquidators.  The Applicant had attended this meeting, and had unsuccessfully proposed that Messrs. Briscoe and Flynn should be appointed.

6.  The Applicant is a creditor of the Company in the sum of HK$2,899,138.79.  It is a judgment creditor of the Company under a judgment of the High Court dated 23 June 2004, which was entered following an action brought by the Applicant against the Company.  The liability to the Applicant accounts for 46.58% of the Company's debts.

7.  The largest single creditor of the Company is one of its former directors, Mr Lo Wai Shing ("Mr Lo"), whose claim against the Company represents 50.67% of the Company's debts.  The only other known creditors appear to be NMKY, with 1.17% of the Company's debts, and a Ms Yu, a former employee of the Company, with 1.58% of its debts.

8.  On 18 November 2004, shortly after the Company went into liquidation, Mr Briscoe, apparently acting on the instructions of the Applicant, e-mailed Mr Ha (who appears to have been principally responsible for the liquidation until his resignation from the firm of which he and Mr Lui were partners) with a range of questions concerning the financial position of the Company.  These included a request for copies of its audited accounts for the last two financial years, questions as to the Company's financial position in the period prior to the resolution to wind up, and information concerning the existence and relationship of the Company with other companies which had common ownership or control, including an inquiry as to a company called TS Toys Limited, which had the same directors as the Company, and shared its address.  No response having been received, a follow up e-mail was sent on 6 December 2004.  Mr Ha then indicated that Mr Lo was out of Hong Kong, and eventually on 24 December 2004, responded to the questions that had been raised.  It is apparent from the response that Mr Ha was still awaiting further information from Mr Lo, and only limited information was provided.  Nothing further had been received by 15 April 2005, when the Applicant's solicitors wrote to press for responses.  Mr Ha's reply of 23 April 2005 indicates that his source of information for almost all of the information provided was Mr Lo.

9.  On 31 May 2005, a related company called Rich Brother International Limited ("Rich Brother"), which had the same directors as the Company, was placed into members' voluntary liquidation.

10.  Nothing further was heard until 23 September 2005, when a notice of a proposed final meeting of creditors' was sent to the Applicant, indicating that the final meeting would be held on 24 October 2005.  Thereafter, following a further request from the Applicant, copies of the Company's audited accounts were sent to the Applicant on 12 October 2005, some 11 months after they had been requested by Mr Briscoe.  The next day, a limited amount of further information was provided in relation to the queries contained in the Applicant's solicitors' letter of 15 April 2005.

11.  On receipt of the accounts, the Applicant appears to have contacted Mr Lui to seek information concerning Rich Brother, and also to ask for the liquidation of the Company to be extended.  This resulted in Mr Lui writing to the Applicant to on 17 October 2005 to request (i) payment of HK$500,000 on account to cover further costs in the event of the liquidation being extended, and (ii) the provision of a bank guarantee for HK$10 million to cover future costs, apparently on the assumption that litigation might be initiated against other parties.  Mr Lui stated that unless these were provided by 24 October 2005, the liquidators would not consider the request.

12.  On 21 October 2005, the Applicant's solicitors wrote to complain of the decision to bring the liquidation to an end.  They pointed out a number of areas for potential investigation which had been identified on the basis of a quick review of the audited accounts provided in respect of the 2004 financial year.  These included:-

(1)	The declaration of a dividend of HK$2.4 million on 4 November 2003;
(2)	The writing off of a bad debt of HK$4.5 million, in the context of concerns expressed by the auditors in the previous year's accounts (about 10 months earlier) about the recoverability of a loan to a related company of some HK$15,077,535, despite which no provision had been made;
(3)	The disposal of the entirety of the Company's fixed assets for nil consideration;
(4)	Recovery of assets and the utilisation of such recoveries in the period prior to liquidation;
(5)	Why the Company continued to pay rent to a related company, while being owed over HK$15 million by the related company, and at a time after it had disposed of all of its assets;
(6)	A consultancy fee of some HK$711,333 paid to a director on behalf of the Company.

13.  At the meeting on 24 October 2005, Mr Ha purported to resign.  It seems that Mr Lui indicated that in order to look into the matters raised by the Applicant, it would be necessary to obtain information from the Company's directors and former auditors, and requested HK$100,000 by way of funding for further investigations.  When requested to resign by the Applicant, Mr Lui declined to do so.  The meeting was adjourned to 31 October 2004, but proved inconclusive.

14.  Meanwhile, on 26 October 2005, the Applicant's solicitors wrote to record their dissatisfaction with the situation, and to request Mr Lui to resign.  Mr Lui again declined to do so, repeating that there were no funds available for further investigations.  He stated that the replacement of the liquidators was not a matter he could deal with simply as between himself and the Applicant, as it was a matter which should be dealt with by the creditors as a whole, or by the court.

15.  The Applicant then asked other creditors whether they would be prepared to provide funding.  None were prepared to do so, although at a subsequent meeting, Mr Lo and NMKY indicated that they were willing to make some further funding available.  The Applicant also obtained a fee estimate from Messrs. Briscoe and Flynn, which was, on the face of it, more economical than the amounts proposed by Mr Lui.

16.  On 4 November 2004, the Applicant asked for resolutions to be put at the next creditors' meeting accepting Mr Lui's resignation (he having apparently indicated his willingness to resign if all the creditors wished him to do so) and appointing Messrs. Briscoe and Flynn in his place.  In response Mr Lui proposed a slightly different first resolution, and an additional resolution relating to funding of the liquidation.  These resolutions were put to the creditors at a meeting on 6 December 2005, when the majority (consisting of Mr Lo and NMKY) voted against replacing Mr Lui, and also agreed to provide funding of HK$50,000 for the continuation of the liquidation and further investigations.

17.  Dissatisfied with this outcome, the Applicant suggested to Mr Lui that he should make an application to the court under rule 154 of the Companies (Winding-up) Rules, seeking directions from the court on the basis that the creditors had refused to accept his resignation.  Mr Lui does not appear to have done this, simply submitting his report as required under the rule, but without seeking any directions.  This led to the present application.

18.  In its evidence in support of the application, the Applicant complained of the failure by Messrs. Lui and Ha to deal satisfactorily with the queries that it had raised and in particular the failure on their part to investigate possible claims against the Company's directors, in particular Mr Lo.  Five specific areas for investigation were identified:-

(1)	It was said that no proper investigation was carried out into the relationship between the Company and TS Toys Limited, which was incorporated shortly after judgment was given against the Company in the Applicant's claim against it.  TS Toys was previously the business name of the Company.  The new company had the same directors as the Company, and appeared to operate from the same address.  This, combined with the disposal by the Company of all its assets for no consideration, caused the Applicant to suspect that the business and operations of the Company had simply been diverted to TS Toys Limited.
(2)	It was also said that there had been no proper investigation into the writing off of virtually the whole of the loan to Rich Brother, which was subsequently put into members' voluntary liquidation, without any claim being made against it.  It was suggested that this enabled Rich Brother to be put into solvent liquidation, rather than insolvent liquidation.
(3)	The dividend of HK$2.4 million in November 2003, when it might have been questionable whether there was in fact a proper basis for declaring and paying it.
(4)	The write off of a bad debt of HK$4.5 million.
(5)	The payment of the consultancy fees referred to above.

19.  In response, Mr Lui filed an affidavit stating that he considered that he had properly discharged his duties as liquidator, and put forward his explanation of his conduct of the liquidation.  He also dealt with each of the areas raised by the Applicant as being areas for investigation, explaining why he did not consider that there was any need for further investigation of these matters.  His explanations were responded to by further evidence filed by the Applicant in reply.

20.  In relation to the position of TS Toys Limited, Mr Lui says that according to the directors, there were four companies (the Company and three others, not including TS Toys Limited) operating from the same premises which had run the same business for some years (it is not clear whether Mr Lui means by this that they had a common business, or simply that they had run their own individual businesses for some years).  He says that Mr Lo informs him that TS Toys Limited was incorporated after the Company cease business and now runs the "same trading business co-existed with the other three companies at the same address", but has not taken over any of the assets or business of the Company.  As the Applicant points out, Mr Lui appears to have simply taken Mr Lo's statements at face value, and does not appear to consider that there is any need to probe further, notwithstanding that Mr Lo appears to be interested in TS Toys Limited.  In my view, there is clearly scope for further investigation in relation to this matter.

21.  So far as the debt from Rich Brother is concerned, this was, according to Mr Lui, largely eliminated by the write off of HK$4.5 million, and what is described as a "book debts settlement" of slightly over HK$10 million.  Both of these matters are said to have taken place in February 2004.  Mr Lui appears to consider that the writing off of HK$4.5 million was acceptable, as its purpose was to enable the Company to be "closed", when it had negative net assets, as a result of a decline in the value of its property assets.  He also suggests that no loss was suffered by the Company, and that no party benefited by payment of monies by Rich Brother to it, at the expense of the Company.  This explanation is not easy to follow.  Even if it were considered that the recoverability of the Company's loan to Rich Brother were in question, such that the Company should make provision for it in its books, it does not follow that it would be appropriate for the Company to have waived or released the liability altogether, so as to preclude itself from ever recovering the amount waived from Rich Brother in the event that Rich Brother should turn out to be in a position to pay it.  Further, had no waiver taken place, it is likely that Rich Brother would have had to have been placed into insolvent liquidation, with the consequent opportunities for further investigation of its affairs.  So far as the book debt settlement is concerned, Mr Lui does not elaborate on what precisely were the book debts that were settled, and according to the Applicant, it is not possible to discover what these were from the accounts of the Company.  In the circumstances, there would appear to be ample scope for further investigation of these matters also.

22.  In relation to the dividend payment, Mr Lui says that the Company appears, on the basis of its balance sheet just before and after the declaration and payment of the dividend, to have been solvent, and that, in any event, no cash was actually expended in paying the dividend.  However, as the Applicant points out, neither of the balance sheets appears to have been audited.  Moreover, Mr Lui does not indicated the provenance of the balance sheets to which he refers.  More significantly, the Company's solvency was largely due to the existence of receivables from related companies of over HK$18,000,000 (as to recoverability of which the auditors had, it seems, expressed concerns), which were a few months later reduced by some HK$4.5 million by virtue of the writing off of part of the debt due from Rich Brother.  Had this been done at the time of the dividend payment, the Company's financial position would have been much poorer.  In these circumstances, it would appear that this is a matter which did call for investigation, notwithstanding Mr Lui's views to the contrary.

23.  As for the disposal of the Company's assets, and the payment of the consultancy fee, Mr Lui appears to have sought information from the Company's former auditors and its directors, and simply accepted the explanations proferred.

24.  I would also note that Mr Lui does not indicate in his affidavit when precisely he considered these matters.  However, from the fact that he refers to information supplied by the auditors in December 2005, it would appear that he looked into these matters only after they were raised by the Applicant in October 2004.

25.  So far as the first part of the application is concerned, it is fair to say that at the hearing, Mr Lui took a neutral position in relation to the question of whether or not he should be removed, his concern being principally to put before the court his explanation for his actions (or lack of them) during the course of the liquidation to date.

26.  Mr Bartlett submitted that it appeared to be common ground amongst all the creditors, including Mr Lo, that there was a need for further investigation, not least as Mr Lo and NMKY had, at the creditors' meeting on 6 December 2005, agreed to provide funding for this purpose.  He submitted however, that it would be appropriate to remove Mr Lui and Mr Ha as liquidators pursuant to section 252(2) of the Companies Ordinance, as the Applicant had shown cause for doing so.  In this context, he drew my attention to Re Keypak Homecare Ltd [1987] BCLC 409, and submitted, in my view correctly, that due cause in this context does not require misconduct or personal unfitness on the part of the liquidator to be established, and that it suffices to show that the liquidator has been too relaxed in his approach to the investigation of the Company's affairs, and that the creditors were justified in losing confidence in his ability to carry on the liquidation effectively.  Mr Bartlett submitted that in the circumstances, it was clearly reasonable for the Applicant to have lost confidence in Mr Lui, given the manner in which the liquidation had been dealt with to date - in particular, the dilatory manner in which the Applicant's queries were responded to, the failure to properly investigate matters which called for investigation, and the demand for an excessive amount of funding from the Applicant when the Applicant asked for the liquidation to be continued.

27.  In my view, each of these matters is made out.  While I would accept that Mr Ha and Mr Lui may have been constrained in their actions by a lack of funds, it seems to me that they have fallen short of the standards to be expected of them in the manner in which they have dealt with the Applicant's concerns.

28.  So far as the Applicant's queries are concerned, these were not responded to for a considerable period of time.  It is particularly surprising that notwithstanding a request for provision to the Applicant of the Company's audited accounts, these were not forthcoming until some 11 months after the request, and only less than two weeks before the proposed final meeting of creditors.

29.  So far as the potential areas of investigation are concerned, for the reasons which I have already given, each of them does appear to warrant further investigation.  It may be that end of the day, such investigations will necessarily result in proceedings being brought or recoveries achieved, but that is not a reason for not looking into the matters where this can be done.  However, there is hardly anything to suggest that Mr Lui or Mr Ha looked into these matters at any time prior to October 2005.  In these circumstances, there does seem to have been a failure on their part to appreciate the need to investigate the Company's affairs and the causes of its failure, and to consider whether it has any potential claims which ought to be pursued, whether against its former directors or others.

30.  Finally, as for the demand for funding made of the Applicant, it was clearly excessive, and it is understandable that the Applicant regarded it as an attempt to discourage it from pursuing matters further.

31.  In these circumstances, it seems to me that due cause has been shown for the removal of Mr Ha and Mr Lui as liquidators of the Company.  In this regard, I would add that while consideration should also be given to the views of the other creditors, some caution must be exercised in relation to the views of Mr Lo, inasmuch as he is clearly likely to be the target of any investigations that may be carried out.  Mr Lo, however, has not appeared on this application, and having regard to his position, I would not be prepared to allow his views, which may be inferred from the way in which he voted at the meeting of 6 December 2005, to outweigh those of the Applicant.

32.  I shall therefore make an order removing Mr Ha and Mr Lui as liquidators of the Company.  However, the question that then arises is whether or not Mr Briscoe and Mr Flynn should be appointed as liquidators in their place.

33.  Although Mr Lui initially appeared to take the position that this was a matter on which the other creditors should be consulted, he did not press this view at the hearing.  However, NMKY did submit that it would not be appropriate to appoint Messrs Briscoe and Flynn today.  Ms Lam's position was that the matter should be left to a meeting of creditors to be convened for the purposes of considering and if possible resolving on the identity of the replacement liquidators.

34.  She submitted that, in the light of the fact that Mr Briscoe had previously been acting for the Applicant, it was inappropriate for him to be appointed as a liquidator, and drew my attention to the observations of Yuen J (as she then was) in Re Akai Holdings [2001] 2 HKLRD 411 at 421A, where she said:

"It is well established that liquidators should not only be independent and impartial, but should also be seen to be so.  Any conflict of interests or even over-familiarisation should be discouraged."

35.  She also submitted that there were other qualified candidates for appointment, who had indicated their willingness to act as liquidators in this matter.

36.  Mr Bartlett, for his part, submitted that there was nothing to suggest that Mr Briscoe and Mr Flynn would act otherwise than impartially as liquidators.  He also suggested that any liquidator proposed by or supported by Mr Lo would, for obvious reasons, be unacceptable to the Applicant, having regard to the fact that Mr Lo would be the likely principal target of investigations if a new liquidator were appointed.  Mr Bartlett also pointed out that a new liquidator would be dependent on funding to carry out his duties, and that it was self-evidently undesirable for such funding to be provided by Mr Lo.

37.  I would accept the submission that little weight should be given to any views of Mr Lo, and that it would be undesirable for any liquidator to be funded by him.

38.  However, although I would accept that Mr Briscoe and Mr Flynn would be competent and able liquidators, it does seem to me that the fact that Mr Briscoe has previously been advising the Applicant in relation to this matter, as is evidenced by his corresponding with Mr Ha at the beginning of the liquidation, would give rise to a reasonable perception of conflict or bias on the part of other creditors, and in particular Mr Lo.  Although I have accepted that there is scope for further investigation as to the Company's affairs, and that such investigation is likely to involve Mr Lo, it remains important that the liquidators of the Company should not be too closely or evidently associated with one particular creditor or group of creditors.  In this case, the fact that Mr Briscoe has previously been engaged by the Applicant to assist them, and was no doubt remunerated for his services, does, in my view, make it undesirable for him, or other members of his firm, to accept appointment as replacement liquidators in this matter.  I would add that while the full extent of Mr Briscoe's involvement on behalf of the Applicant is not entirely clear, it seems to me at least possible, if not likely, that he has been involved in the identification of areas for investigation by the Applicant.

39.  That being the case, it seems to me that the appropriate order to make in the circumstances would be to remove Mr Lui and Mr Ha as liquidators of the Company, but to direct that such removal shall not take effect until after the appointment of new liquidators, and to direct Mr Lui to convene a further meeting of the creditors of the Company for the purpose of considering who should be appointed in their place.  If any party is dissatisfied with the outcome of that meeting, they should apply to the court for directions to determine the identity of the replacement liquidators within 14 days of the meeting, in which event the court will determine the identity of the replacement liquidators.

40.  In the light of the conclusions that I have reached, I do not propose to make an order nisi as to costs, but will direct that the parties should each lodge written submissions as to costs within 14 days, with liberty to lodge further written submissions in reply to the other parties' submissions within 7 days thereafter, following which a ruling as to costs will be handed down.