XCHRX PINEMILL CO. LTD. v. LAI HONG SAN AND OTHERS

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP)

CWU No 19 of 98

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REASONS FOR DECISION

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1. At the hearing on 10 May 2000, I gave directions for the examination of the Respondents under s.221 of the Companies Ordinance and I made an order that the costs of the application be to the Applicant. I said I would give written reasons for the decision on costs, liability for which had been disputed by the 2nd - 5th Respondents. The 1st Respondent had made no submission on the argument on costs.

2. The proceedings had begun in May 1999 with the issue by the Applicant of the Originating Summons. There were 2 appearances in Court before this hearing. By the time of this hearing, all the Respondents had accepted that examination should take place, but the Respondents (other than the 1st Respondent) say that the Application was premature and therefore the Applicant should not be entitled to be paid its costs.

3. In my view, the dispute as to costs really boils down to the question whether in the period of time between May 1999 when the application was issued and this hearing, the Respondents should have realized that examination was likely to be ordered, so that they should not have opposed the proceedings which had led to the Applicant's incurring of costs.

Background

4. The matter arises in this way. In August 1996, pursuant to various agreements, Pinemill ("the Creditor") delivered various shipments of gasoil to Weihong Petroleum Co Ltd ("the Company"). It would appear that the Company resold the gasoil on the Mainland and in Hong Kong and there is evidence that it did so at a profit.

5. By June 1997 however, the outstanding amount due from the Company to the Creditor was in excess of US$2.5m together with interest. A writ was issued for payment of that amount. The Creditor obtained judgment in default in July 1997.

6. In January 1998, the Creditor presented a petition to wind up the Company. The petition was unopposed and the Company was wound up in March 1998. The Creditor was the only creditor who filed a proof of debt.

The 2 Statements of Affairs

7. On 23 May 1998, a Statement of Affairs ("the 1st Statement of Affairs") was filed by Weihong Holdings Co Ltd ("WHC"), a director of the Company. The statement was prepared by the 1st Respondent, a director of WHC. The statement showed estimated net assets of $26,566,029.00.

8. On 29 June 1998, another Statement of Affairs ("the 2nd Statement of Affairs") was prepared and filed by the 2nd Respondent, a former director of the Company and also a former director of WHC. This Statement of Affairs showed estimated net assets of only $2,233,827, less than 10% of that shown in the 1st Statement of Affairs.

9. The discrepancy between the amounts of "cash at bank" was $18m. The actual balance in the Company's account was negligible.

Liquidators' investigations

10. On 30 June 1998, the day after the 2nd Statement of Affairs was filed, Mr Dermot Agnew and Mr Joseph Lo were appointed liquidators (the Official Receiver having previously dealt with the liquidation).

11. The books and records of the Company were missing, or at least were incomplete. Copies of the Company's bank statements showed however that from October to December 1996, substantial sums had passed through the Company's bank accounts, with large amounts having been paid to the Respondents or companies said to be controlled by them.

12. The 1st - 4th Respondents are all persons who had been involved in the Company, at one stage or another, whether as directors or as directors of corporate directors. The 5th Respondent is a firm of solicitors, who had received substantial payments from the Company's bank account, and who had also been involved in drafting certain documentation concerning a BVI company called Grand Petroleum Holdings Ltd., which will be referred to later.

13. In July 1998, the Liquidators issued a questionnaire to the 4th Respondent (who had been a director of the Company from 29 October 1996 to 20 November 1996). They also had interviews with the 2nd Respondent and the 1st Respondent in September and October 1998 respectively. A further questionnaire was issued to the 4th Respondent in November 1998.

Books and Records

14. As far as the books and records of the Company were concerned, there were discrepant versions of their current location. The 1st Respondent claimed that they were with the 3rd and 4th Respondents. In support of that version, a former financial controller of the Company who had assisted the 1st Respondent in preparing the 1st Statement of Affairs claimed that the books and records had been given to the 2nd - 4th Respondent. It was also said that they had been given to the 3rd Respondent's wife.

15. However, as early as April 1998, the 3rd and 4th Respondents had told the Official Receiver's office that they were not in possession of the Company's books or records. Further, in his interview with the Liquidators in September 1998, the 2nd Respondent also denied that he had the books and records. The 3rd Respondent's wife also denied having received them.

Company's business

16. As far as the Company's business was concerned, there was also a difference in the Respondents' versions. It would appear that there were two camps.

17. The 1st Respondent said that in October 1996, the 2nd - 4th Respondents took over the management of the Company and caused its business to be carried on by Grand Petroleum Holdings Ltd., the BVI company previously referred to. There is some documentation which may support that allegation but on this, as well as other factual issues, I should say no more at this stage given that there will be an examination.

18. The 2nd Respondent has denied the 1st Respondent's allegation and has in turn alleged that the Company's funds may have been misappropriated. This had prompted him to engage a firm of auditors to carry out a special audit of the Company for the period ending 30 September 1996. A draft report was prepared in November 1996. No final report has been issued pending payment of fees and clarification of outstanding issues.

Application

19. In November 1998, after a meeting between the Creditor and the Liquidators, the Liquidators sent a letter to the Creditor's solicitors in which they set out the above.

20. In December 1998, there was a meeting between the Liquidators' representatives and the Creditor's representatives at which the Creditor proposed to issue proceedings for examination of directors or persons in possession of information as to the affairs of the Company. The Liquidators' representatives are recorded as having "agreed that the said actions be taken by the creditor". I should note however that the Liquidators did not make a report to the Court until December 1999.

21. It was under these circumstances that in May 1999, the Creditor issued the present application under s.221 of the Companies Ordinance.

Costs arguments

22. There is no dispute that a creditor has locus to make an application under s.221. Nor is it now disputed that an order for examination ought to be made. What the 2nd - 5th Respondents say is that the Creditor had 'jumped the gun' in issuing the application in May 1999 when the Liquidators had not indicated that an examination was necessary and when further questionnaires had not been issued. A further questionnaire had been issued on 8 December 1999, which was answered by the Respondents between January and July 2000.

23. In my view, the Creditor was entitled to issue these proceedings when they did, and given the discrepant versions as to the location of the books and records and the Company's business as recounted above, the Respondents should have realized that examination was likely to be ordered.

24. As far as the answers given in the questionnaire issued in December 1999 were concerned, they only served to intensify the questions about this Company that were already apparent from the Liquidators' letter to the Creditor in November 1998, which letter had been exhibited in the Creditor's Affirmation in support of the application.

25. The Liquidators (and the Creditor) are none the wiser about the location of the books and records, despite the Liquidators having sent investigative agents to the Mainland to check out addresses in the answers provided this year. Further, substantial sums said to have been paid to the Company cannot be identified in the Company's bank accounts. Therefore, although the answers to the further questionnaire did provide some more information for the Liquidators, that process did not go far at all towards achieving the purpose of rendering an examination unnecessary.

26. As to the Respondents' submission that the Liquidators had not indicated that an examination was necessary, it is true that the Liquidators had not sent a report to the Court until after the previous hearings. It is also true that the 1st Affirmation of Mr Agnew only said that "full and frank answers to the questions ... would assist the Liquidators in their work" and that further investigative work might be necessary once the answers have been reviewed and considered.

27. However, that does not equate to the Creditor having taken out the application prematurely. Although the Creditor is the only creditor and has given the Liquidators an indemnity for their fees, the Liquidators are not the agents of the Creditor. A creditor cannot instruct liquidators to apply for an examination. Here, the Creditor's representatives had discussed the matter with the Liquidators's representatives before issuing the application - it was not as if the Creditor had issued the application without any consultation with the Liquidators who might have been able to provide information rendering the application unnecessary.

28. A creditor has his own locus and in the light of the matters set out above regarding the Company's books and records and its business prior to its cessation of trade, the Creditor here has shown a prima facie case for an examination so that the truth about the affairs of the Company can be ascertained. That prima facie case, shown in the documents supporting the application in May 1999, has not weakened notwithstanding the questionnaire and answers provided this year.

29. In the light of the above, in the exercise of my discretion, I ordered that the Applicant should have its costs. Given the factual disputes that have arisen, when the true facts are ascertained after examination it may well be that one or more respondents may wish to ask one or more of the others to contribute to their liability to these costs. That is a matter that will have to be left to after the examination.