RE MOUNT EVEREST INVESTMENTS LIMITED

IN THE HIGH COURT OF JUSTICE

HONG KONG

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JUDGMENT

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1. I have before me a summons to set aside an order that I made ex parte on the 22nd December 1987 appointing the Official Receiver as provisional liquidator of Mount Everest Investments Limited (the company) upon the application of a creditor James Capel (Far East) Futures Limited (the petitioner).

2. The summons to set aside has been issued by two other creditors of the company Plywah Company Limited and Mr Hui Chun Ping who is also a contributory. Mr Hui, in fact, is the beneficial owner of all the shares in the company of which he and his wife are the only directors. Plywah Company Limited is also under the control of Mr Hui.

3. The company was incorporated in June 1979 as an investment company dealing in commodities and invested on the Hong Kong Stock Exchange and the Hong Kong Futures Exchange.

4. A petition to wind-up the company on the grounds that it is insolvent and unable to pay its debts was presented by the petitioner on the 22nd December 1987. The debt claimed by the petitioner amounts to $9,451,217. On the same day the petitioner sought the appointment of the Official Receiver as provisional liquidator on the grounds that the assets of the company were in jeopardy. The summons was served on the company, but there was no appearance at the hearing. As the summons was heard ex parte the order contained the usual undertaking as to damages.

5. The company experienced financial difficulties following the stock market crash on the 19th October 1987 when the petitioner and an associate company, James Capel (Far East) Limited (JCFE) required a further margin of about $2.9M. Accordingly, at a directors' meeting held on the 21st October 1987 it was resolved that as the company did not have cash available for this purpose, that Mr Hui would charge some of his own assets in the sum of about $4.3M. to secure the liabilities of the company. It was also resolved at the same meeting that the company would sell to Mr Hui one of the company's cars, a flat, a house together with the contents and a club debenture for a total sum of $4,330,000 in consideration of the assets that he had charged on behalf of the company. The sale of the flat and the house were completed by assignments dated the 2nd November 1987 in favour of a nominee company Bloomhall Ltd. The assignment of the flat was registered with the Land Office on the 28th November 1987 and the house on the 9th November 1987. It is conceded by Mr Stocks, the solicitor employed by the petitioner that he had made a mistake in his first affidavit when he said that the date for the transfer of the flat was the 28th November 1987.

6. On the 23rd November 1937 at a directors' meeting of the company a resolution was passed that because of its liabilities the company should be placed into a creditors' voluntary winding-up under section 228A of the Companies Ordinance and the usual statutory declaration as to insolvency was made. Mr Ho Sik Lan, who had been the company's auditor was appointed to be the provisional liquidator. Apart from the petitioner the only other known creditors are the present applicants and Inversiones Kristina S.A. which is another company under the control of Mr Hui.

7. A creditors' meeting was held on the 16th December 1987 which was chaired by Mr Hui. Mr Stocks attended on behalf of the petitioner and JCFE and Mr Chubb for the petitioner's financial advisers Ferrier, Hodgson & Marfan. At the meeting Mr Ho in response to a question from Mr Stocks said that he had obtained possession of the books of the company a few days before the meeting, but that they had been returned to the directors in order to prepare the statement of affairs which had been submitted to him that morning. Mr Ho also confirmed that he had received the registration books of the two cars owned by the company and would be taking steps to take physical possession.

8. Mr Ho was nominated by the members of the company as liquidator whilst Mr Stocks on behalf of JCFE and the petitioner nominated Mr Selwyn Mar of Ferrier, Hodgson Marfan. Objection was taken to the appointment of Mr Ho on the grounds that there would be a conflict of interest as he was the auditor of the company.

9. Mr Chubb observed at the meeting that his client would have no confidence in Mr Ho as he had not secured possession of all the assets. However, upon a vote being taken Mr Ho was appointed to be the liquidator by a majority. A proposal on behalf of James Capel that a Committee of Inspection be appointed was rejected by the votes for Mr Hui on the grounds that there were only a few creditors. An arrangement was made at the meeting for the company's books to be inspected by a representative of James Capel at the liquidator's office on the 21st December, a request for immediate custody having been refused by Mr Hui. In fact no one from James Capel attended the liquidator's office on the date appointed.

10. The petitioner's objection to the appointment of Mr Ho as liquidator was based upon paragraph 27 of Statement 1.203 of the Rules of the Hong Kong Society of Accountants which provides that a member who has had or has a continuing professional relationship with a company should not accept an appointment as liquidator of that company if it is insolvent.

11. Although by virtue of paragraphs 8 and 16 of Statement 1.200, the rules are only laid down for guidance and a failure to observe them does not of itself amount to misconduct a member may, nevertheless, be at risk of having to justify his actions in answer to a complaint.

12. Mr Stocks in his affidavit in support of the application for the appointment of the Official Receiver said that he had drawn the attention of Mr Ho to the rule at the meeting, but now concedes that he had not done so. However, there is no doubt that Mr Stocks explained the reasons for his objection to Mr Ho which expressed the spirit of the rule.

13. Apart from the complaint of conflict of interest Mr Stocks alleged that Mr Ho had failed to secure the assets of the company which had enabled Mr Hui to continue to deal with them. Mr Stocks also complained that the books and records of the company were still in the possession of Mr Hui or other directors and were at risk of being modified, altered or destroyed.

14. Upon the evidence placed before me on the ex parte hearing it was apparent that the company was insolvent and that the assets were in jeopardy so that I acceded to the application. The Official Receiver had no objection to his appointment.

15. Apart from the errors made by Mr Stocks to which I have referred, Mrs Clough who appeared for the applicants submitted that the order should he set aside on the ground that when the application was made, the petitioner failed to disclose material facts which, had they been disclosed, would have shown that the assets were not in jeopardy. She relied upon the minutes of the creditors' meeting held on the 16th December 1987 when Mr Ho said that he had in his possession the registration books of the cars and would be taking steps to obtain physical possession, whilst he had in his possession on that date the key to the deposit box in which the club debenture had been placed. Mrs Clough also complained of Mr Stocks' failure to attend Mr Ho's office on the 21st December 1987 to inspect the books.

16. Mr Ho has made an affirmation in which he states that in view of the attitude of the petitioner, he no longer wishes to continue to act as the liquidator of the company.

17. By the present application the applicants seek to set aside the order made on the 22nd December 1987 and to appoint instead two partners in the accountants firm of Coopers & Lybrand to be the liquidators.

18. On behalf of the petitioner Mr Fox expressed his apology for the errors made by Mr Stocks in his first affidavit and for the non-disclosure of certain facts, but argued, nevertheless, that the order made was justified.

19. It is clear that the company has been insolvent since the 19th October 1987 or even before that date. Yet no steps were taken to put the company into a creditors' voluntary winding-up until the 23rd November 1987. Prior to this time, Mr Hui had, on his own admission, dealt with the assets of the company which clearly calls for an investigation as to whether there has been any fraudulent trading or any fraudulent preference. The appointment of Mr Ho as provisional liquidator and subsequently as liquidator at the creditors' meeting on the 16th December 1987 was wholly inappropriate having regard to his professional relationship with the company as its auditor. There was an obvious conflict of interest which should have been appreciated by Mr Ho despite the error made by Mr Stocks that he had specifically drawn the rules of the Hong Kong Society of Accountants to his attention. Apart from professional ethics, common sense should have alerted Mr Ho to the folly of accepting such an appointment. It is also apparent that Mr Ho failed to carry out his statutory duties in accordance with section 228A(6)(b) of the Companies Ordinance by taking into his custody or control all the assets of the company. Indeed even after the creditors' meeting on the 16th December 1987 he did not receive the documents until the 18th December 1987.

20. The petitioner was quite  justified in having serious doubts with regard to the competence of Mr Ho by virtue of the fact that he had taken no action after his appointment as provisional liquidator on the 23rd November 1987 until the creditors' meeting on the 16th December 1987 and the issue of conflict of interest. Mr Fox quite properly stated that Mr Ho could be described as Mr Hui's man. Further the action taken by Mr Hui in dealing with the assets were alone sufficient to warrant the appointment of the Official Receiver as provisional liquidator.

21. Having considered the evidence, I am quite satisfied that the errors made by Mr Stocks arose as a result of genuine mistakes whilst the non-disclosure of the facts drawn to my attention were not withheld deliberately or to deceive the Court. Taking into account the overall conduct of Mr Hui and Mr Ho, those facts in any event would not have affected my decision that there was a likelihood that the assets of the company were in jeopardy.

22. A further submission made by Mrs Clough that investigations can be made into the conduct of Mr Hui with regard to his disposal of the assets of the company in a voluntary winding-up as well as in a compulsory winding-up is correct, but the Court may in a compulsory winding-up under section 277(1) of the Compapies Ordinance direct the liquidator to refer a matter to the Attorney General whereas under section 277(2) in a voluntary winding-up the Court does not have this power which is vested in the liquidator.

23. Mrs Clough also submitted that Mr Ho should have been given an opportunity of answering the allegations that have been made against him before the order was made. However, upon the evidence, the matter was one of urgency and in my judgment, there was no reason why he should have been served. In any event, he has not chosen to be represented on the present application. It is also significant that at the meeting on the 16th December Mr Ho did not appear to have a real grasp of the financial affairs of the company which could have inspired little confidence in his capability.

24. The argument that the voluntary winding-up is in the interests of all parties is without merit. There are in effect only two creditors, Mr Hui and the petitioner. In all the circumstances, the petitioner is quite justified in its concern to preserve the status quo with the appointment of an independent provisional liquidator. As a result I consider that the present appointment shou1d continue with the result that the summons is dismissed.