RE DRAGON SEAFOODS LTD

HCCW 265/2021

[2023] HKCFI 2624

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 265 OF 2021

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JUDGMENT

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1.  This is the Re-Amended Winding Up Petition (“Petition”) against the Company. The Petitioner is a judgment creditor of the Company. The judgment in the sum of US$3,387,116.25 (plus interest and costs) was granted by DHCJ MK Liu on 15 March 2021 by way of summary judgment under HCA 1240/2017 (“Action” and “Judgment”).

2.  The Company is currently in creditors’ voluntary liquidation.  By the Petition, the Petitioner seeks to have it converted into a compulsory liquidation. 

3.  The Petition is opposed by Laxagone Investment Ltd (“Laxagone”) who claims to be a creditor of the Company in respect of a debt of US$2,773,862.  The debt was acquired from Norebo Europe Ltd (“NEL”) and Ohodsk Fishing Co Ltd (“Ohodsk”) under a deed of assignment dated 5 April 2022. The Liquidator, Mr Arboit, adopts a neutral stance to this application. 

The parties’ contentions

4.  There are 5 grounds advanced by Mr Kwong, who appeared for the Petitioner :

(1)  The current sole liquidator (“Liquidator”) was appointed by corporate vehicles owned and controlled by the Company’s ultimate shareholders and director, who orchestrated and benefited from a scheme to strip the assets of the Company (“Scheme”) (see below);

(2)  The Liquidator fails and/or refuses to investigate the Scheme;

(3)  The Liquidator has been attempting to assign the claims of the Company in favour of a funder[1], and the terms of the proposed assignment make no commercial sense;

(4)  The Liquidator refuses to recognize and accept the Judgment.  Despite the Court’s unequivocal findings, he insists that the Petitioner must prove the Company’s indebtedness in question;

(5)  The Liquidator fails and/or refuses to investigate whether the indebtedness allegedly owed to Lexagone exists.

5.  Laxagone, represented by Mr Tai, contends that the Court should not make a compulsory winding-up order for the following 4 reasons :

(1)  The Petitioner has failed to identify any credible or valid reason to doubt the Liquidator’s impartiality and independence, and there is no credible or fair reason to think that any investigation cannot be carried out by the Liquidator; 

(2)  At its core, the Petitioner’s case is that it is dissatisfied with the Liquidator.  The Petitioner could have made an application to challenge the Liquidator’s decision and/or to remove him, each of which would have been an adequate alternative remedy; 

(3)  The Company was put into voluntary liquidation some 30 months ago and the Liquidator had incurred costs of some HK$3.3 million. A compulsory winding up will lead to further costs and delay without resolving any of the disputes; 

(4)  Despite the connection between Laxagone and the Company, Laxagone’s views can and should be taken into account, especially when it had played no part in the appointment of the Liquidator.

6.  In this Judgement, the background facts will first be set out.  Some of the factual issues will be dealt with in doing so. The applicable principles of law will then be identified, followed by the determination of the arguments before the Court and its decision.

Background

7.  The background facts are complex.  I shall endeavour to summarize those relevant to the resolution of the Petition. 

8.  The Company was part of a substantial fisheries business with operations across Russia and Europe (“Group”).  The Group was started in 1997 by Mr Orlov (“Orlov”) and Mr Roth (“Roth”), and they jointly owned it.  The Company formed part of the Group and was jointly operated by Orlov and Roth since 2006. 

9.  By 2013, the Group essentially consisted of two groups of companies: (1) NEL, Ohodsk, Norebo Holdings JSC (“Norebo Holdings”) and its subsidiaries (“Norebo Group”); and (2) Three Towns Capital Ltd (“TTC”) and its subsidiaries (“TTC Group”).  The Company was a wholly owned subsidiary of TTC, the latter being its only shareholder.

10.  Since April 2016, the Group fractured into two camps, with Orlov in control of Norebo Group (after acquiring Roth’s interest in Norebo Holdings) and Roth in control of the TTC Group.  The facture was followed by protracted disputes between Orlov and Roth over, inter alia, the management of TTC (which was under Roth’s control).

11.  By a judgment dated 28 August 2019, Coleman J ordered Roth to buy out Orlov’s 50% interest in TTC pursuant to an unfair prejudice petition.  The buyout was completed in April 2021.

12.  The Judgment (dated 15 March 2021) concerned the unpaid price of fish products sold and delivered to the Company by the Petitioner pursuant to a Master Agreement for Fish Supplies dated 17 December 2010 (“Master Agreement”).

13.  The shareholders of TTC (and the ultimate owners of the Company) were Orlov and Roth.  However, Roth became the sole shareholder of TTC since April 2021 (after the buy out).

14.  Mr Helge Rolf Klock (“Klock”) was appointed a director of the Company on 31 October 2013 and has been the Company’s sole director since 2016.  From March 2008 to January 2011, Mr Erik Gunnar Mansfeld (“Mansfeld”) was also a director of the Company.  

15.  There was a long history of bitter contest by the Company over the unpaid price owed to the Petitioner, which began in 2012 involving arbitration and litigations in Russia and in this jurisdiction.  It is unnecessary to detail that history, save to mention that the Company went as far as making a volte-face,after having succeeded in disputing the jurisdiction of the Russian Court over the Petitioner’s claim, by later applying to stay the Action in favour of Russian Court.  The stay application was duly dismissed.

16.  There is no evidence whether both Orlov and Roth were driving the Company’s dispute with the Petitioner when it was started in 2012.  On the other hand, it may be said that until April 2016, when they parted company and TTC came under the control of Roth, there is no reason to believe that Orlov was not at least alive to the Company’s dispute with the Petitioner. 

17.  Laxagone’s claim as a creditor of the Company is based on an assignment dated 5 April 2022 by which NEL and Ohodsk assigned their alleged claims against the Company in the sum of US$2,773,862 to Laxagone.

18.  NEL and Ohodsk are both indirect subsidiaries of Norebo Holdings.  The shareholders of Norebo Holdings were Orlov and Roth prior to April 2016.  In April 2016, Orlov became Norebo Holdings’ sole shareholder after he acquired Roth’s interest.  Mansfeld is one of NEL’s directors.

19.  The shareholders of Laxagone were Orlov and Roth prior to April 2022.  Roth is the sole shareholder since April 2022.  Laxagone’s sole director is Klock, who is also the sole director of the Company.

20.  It is reasonably clear from the evidence that NEL and Ohodsk were ultimately owned by Orlov and Roth at least prior to April 2016.  The Company and Laxagone were so owned also until April 2021.  They became solely owned (directly or indirectly) by Roth since April 2021 and April 2022 respectively.  Viewed in conjunction with the fact that the Company and Laxagone have a common director, Klock, it was plainly right for Mr Tai to accept that the Company and Laxagone are connected.

The Scheme

21.  The Action was commenced on 25 May 2017.  It can be seen from the Company’s financial statements for the years 2016 to 2020 that in 2016, the Company had net assets and retained earnings of US$4,295,503. After the commencement of the Action, in 2017 the Company’s net assets and retained earnings were reduced to US$5,306.  In 2018, the Company became insolvent, with stated liabilities of US$30,344.  In 2019, the Company’s liabilities increased to US$3,285,437. 

22.  What apparently transpired was as follows :

(1)  Prior to 31 December 2017, TTC (the Company’s sole shareholder) owed a debt of US$4,890,786 to the Company (“TTC Debt”);

(2)  By a director’s resolution dated 31 December 2017 signed by Klock, dividends of US$4,060,000 were declared in favour of TTC (“Dividends” and “Dividend Resolution”).  Most of the TTC Debt was then set off against the Dividends;

(3)  As a result, the Company’s net assets were decreased from US$4,295,503 (2016) to US$5,306 (2017);

(4)  It should be pointed out that the Company’s audited financial statements did not include the debt of US$3,387,116.25 owed to the Petitioner. 

(5)  In 2019, the Company wrote-off a debt of US$3.5 million that was due from a company called Brackway Services Inc (“Brackway” and “Brackway Debt”);  

(6)  Klock’s evidence was that Brackway became indebted to the Company in the sum of US$3.5 million as a result of two loan agreements dated 13 May 2016.  He “came to the view that the Brackway Debt was no longer recoverable because [he] discovered that Brackway was dissolved in Panama back in 13 November 2017”;

(7)  Klock provided no explanation why Brackway would be dissolved shortly after it received the loan of US$3.5 million.  It should also be said that there is no evidence of any step taken by the Company to demand repayment before Brackway’s dissolution, revive and/or reinstate that company or sought advice on the actions that could be taken against Brackway’s directors and/or shareholders to recover the Debt;

(8)  As of 31 December 2016, a “related company” owed the Company a debt of US$852,002.  That debt disappeared from the financial statements of 2017;

(9)  Klock’s evidence was that the debt of US$852,002 was owed by NEL (“NEL Debt”) but “netted off” against a liability owed to Norebo Overseas Holding Ltd, which was related to NEL.  He claimed that this was done “pursuant to proper accounting treatments”.  No supporting evidence had been produced by Klock.

23.  Mr Kwong submitted that the Scheme is likely to be unlawful and invalid.  First, taking into account the debt owed to the Petitioner, the Company did not have sufficient financial resources to distribute the Dividends.  Such distribution was unlawful under ss. 297 and 301 of the Companies Ordinance, Cap 622 (“Ordinance”).

24.  Second, the steps taken under the Scheme were carried out for the improper purpose of stripping the Company’s assets and rendering it judgment-proof, contrary to the best interests of the Company and in breach of Klock’s fiduciary duty to the Company.

25.  Third, Klock also breached his duty to the Company’s creditors.  A director has a duty to take into account the interests of creditors if the company is insolvent, or near insolvent, or of doubtful solvency, or if a contemplated payment or other course of action would jeopardise the company’s solvency: Tradepower (Holdings) Ltd v Tradepower (HK) Ltd (2009) 12 HKCFAR 417, [128]-[131].

26.  Fourth, the Dividend Resolution, as well as writing off the Brackway Debt and the treatment of the NEL Debt are liable to be set aside pursuant to s. 60 of the Conveyancing and Property Ordinance, Cap 219, because the steps were taken to defraud the Company’s creditor, namely, the Petitioner.

27.  Mr Kwong submitted that these matters cry out for a thorough and independent enquiry.  This is what the Company’s ultimate shareholders and director (Orlov, Roth and Klock) strive to avoid.

28.  Although Roth is in sole ownership of the Company since April 2021, the acts under the Scheme were carried out prior to April 2021 at the time when the Company was jointly owned by Orlov and Roth. In fairness, it should be pointed out that Roth had been in control of the Company since April 2016.  It may be said that with the exception of the treatment of the NEL Debt, the acts which constituted the Scheme might not have resulted in any benefit to Orlov.  It is plainly not possible to get to the bottom of such matters in these proceedings. 

Voluntary liquidation

29.  On 29 January 2021, whilst the Action was on foot, the Company was placed into creditors’ voluntary liquidation pursuant to a written resolution passed by TCC as its sole shareholder (TCC was jointly owned by Orlov and Roth at the time, although controlled by the latter).

30.  The 1^st creditors’ meeting took place on 5 February 2021.  It was chaired by a nominee appointed by Klock.  The meeting was attended by the representatives of NEL (as creditor claiming US$273,862), Ohodsk (as creditor claiming US$2,500,000) and the Petitioner. 

31.  As Mr Tai pointed out, Orlov and Roth were locked in dispute at the time.  The persons nominated by TTC (under Roth’s control) for appointment as voluntary liquidators were not so appointed.  Instead, Mr Arboit and his colleague, Ms Chan, who were nominated by NEL (under Orlov’s control), were appointed as the joint and several liquidators of the Company. 

32.  However, Ms Chan tendered her resignation in May 2021.  Since then, Mr Arboit has become the sole liquidator of the Company.

33.  Shortly after the Liquidators’ appointment, the hearing of the Petitioner’s summary judgment application took place on 15 March 2021.  It can be seen from the Judgment that no submission was made on behalf of the Company.

34.  The Petition was presented on 23 July 2021. 

35.  On 9 August 2021, at an adjourned meeting of creditors, a committee of inspection (“COI”) was formed consisting of representatives of NEL (Mr Lambert, NEL’s solicitor), Ohodsk (Mansfeld) and the Petitioner (Mr Leung, its solicitor).  At that meeting, an advice of Messrs Tanner De Witt (“TDW”) dated 8 August 2021 on the set off of the Dividends was circulated.  That is consistent with the Liquidator’s evidence that he began working on the liquidation after his appointment, and had identified and informed the COI of the potential claims of the Company, including those under the Scheme. Summaries of the actions taken by the Liquidator during the course of the liquidation had been exhibited to his evidence.  There is no sufficient reason to doubt the accuracy of these summaries despite Mr Kwong’s suggestion that little had been done by the Liquidator.  With respect, the suggestion is not borne out by the evidence.

36.  There were 6 COI meetings from 12 August to 6 December 2021.  It appears from the evidence that the relationship between the Petitioner (and the other creditors) and the Liquidator was amiable and the liquidation was proceeding in a satisfactory manner despite the lack of funding under which the Liquidator had to operate.

37.  As a summary of the meetings :

1st Meeting   (12 August 2021)	Liquidator provided an update on his investigations and findings, including the Dividends which he explained were suspicious.  Further actions by the Liquidator, including seeking discovery from TCC’s solicitors were agreed.
2nd Meeting (23 August 2021)	Liquidator provided update on the agreed actions.  The potential claim against TCC was discussed and further actions agreed.
3rd Meeting (1 September 2021)	Liquidator provided update on agreed actions, including the response received from TCC’s solicitors to TDW’s demand for repayment.  Wide ranging discussions were held on the recovery against TTC.
4th Meeting (15 October 2021)	The COI discussed and agreed on the urgent need to find a funder to assist Liquidator to recover the Dividends[2].
5th Meeting (12 November 2021)	The COI considered the offer made by the funder (“Remedy”) identified by the Liquidator.  A draft Agreement and Deed of Assignment were circulated to the members by the Liquidator on 29 October 2021. Shortly before the meeting, Leung circulated a letter which contained an expression of interest by another funder.  It was agreed that the Liquidator would discuss further with that funder, in light of the vagueness of its letter. Leung then announced that the Petitioner was interested in the funding and wanted time to put together a proposal[3].
6th meeting (6 December 2021)	The funding proposals were discussed and Leung repeated the Petitioner’s interest in funding.  It was agreed that the COI would meet again in 1 week with the view to a final decision[4].

38.  The Petitioner’s proposal of funding did not come to fruition.  It should be noted that Leung was at each of the said COI meetings during which he actively participated.  As suggested in Mansfeld’s evidence, the COI members had a good working relationship amongst themselves and with the Liquidator.  On 7 October 2021, in an email from Leung to the Liquidator, the former commented that the latter “have been doing quite a good job in recovering so far”.       

39.  On the day after the 6^th COI meeting, 7 December 2021, Leung wrote to the Liquidator demanding the adjudication of the Petitioner’s claim by 10 December 2021, 6 pm.  This was apparently a change of stance by the Petitioner because it was previously the understanding of the creditors and the Liquidator that there was no justification in undertaking any adjudication when there was no prospect of distribution[5].  It was accepted by Mr Kwong that for the purpose of minimising unnecessary costs it was the normal practice for a liquidator to admit proofs for dividend only when he is certain that there will be sufficient funds to make a distribution to a particular class of creditor: see Hong Kong Corporate Insolvency Manual, 4^th edn, [10.1]. 

40.  However, Leung’s letter dated 7 December 2021 referred to the prospect of assigning the Petitioner’s debt under a funding agreement.  I can understand that the Petitioner wanted the adjudication prior to committing itself to a reduced return under an assignment to funder.

41.  The 7 December 2021 letter was followed by another one 2 days later.  It can only be described as a hostile letter accusing the Liquidator of “inactions”, making reference also to past “conducts”.  The only inaction or conduct of complaint I can see was the lack of adjudication of the Petitioner’s claim.  Leung made threat to the Liquidator: “Should you not be sensible enough to run your CVL process in a manner to our client’s detriment, then we may consider … having the [CVL] to be replaced by the CWU process”.

42.  Apart from the fact that the letter is quite surprising and groundless in light of what had transpired in the liquidation, I am unable to see how such attitude would assist the Petitioner’s cause. Instead, it gives much impetus to Mr Tai’s submission that the Petitioner made a volte-face on the liquidation when the adjudication of its proof of debt did not go as it planned. 

Petitioner’s proof of debt

43.  In the event, the Petitioner’s request for adjudication was acceded to by the Liquidator with the consent of the COI.  The other members of the COI were given the opportunity to submit information to facilitate adjudication.  Subsequently, the Liquidator received information from Lambert which suggested that the Court had been misled by the Petitioner in granting the Judgment.

The Judgment

44.  It was one of the Company’s defences in the Action that that it had transferred USD2.4 million to a Panamanian company called Alesund S.A. on 21 January 2011 in accordance with the Payment Instruction it received from the Petitioner’s chairman, Mr Konstantin Smirnov (“Smirnov”), on 19 January 2011 and that any sum payable by the Company to the Petitioner should be reduced by that amount.  A copy of the Payment Instruction and a related Invoice dated 18 January 2011 from Alesund to the Company was adduced before the Court for the summary judgment application. 

45.  The Court dealt with this defence in paras 5(2) and 15-17 of the Reasons for Decision dated 16 March 2021 ([2021] HKCFI 657) :

“(2) Part Payment Defence

On 19 January 2011, [the Company] received a written payment instruction from [the Petitioner’s] chairman, directing [the Company] to pay a sum of US$2,400,000 to an account in accordance with the terms of the invoice attached to the payment instruction. On 21 January 2011, [the Company] transferred US$2,400,000 to Alesund in accordance with the payment instruction. Accordingly, the unpaid amount due to [the Petitioner] under the Agreement should be reduced to U$987,116.25 (US$3,387,116.25 - US$2,400,000).

…

Part Payment Defence

15. [The Company] has never produced any document to show the alleged transfer of US$2.4 million to Alesund on 21 January 2011. If there is any truth in this allegation, there would be some documents evidencing the transfer. However, not a single piece of document has been produced to support this allegation.

16. In the Stay Application, [the Company] produced a payment instruction dated 19 January 2011 requesting [the Company] to pay US$2.4 million according to the Contract No. 010-01-11 dd 18/1/2011, and an invoice dated 18 January 2011 for that sum. However, this payment instruction is unrelated to the Agreement dated 17 December 2010. The US$2.4 million mentioned in that payment instruction cannot be the part payment alleged by [the Company] in these proceedings.

17. The Part Payment Defence is unbelievable.”

46.  The defence was rejected as unbelievable for two reasons, namely, (a) lack of document evidencing the transfer; and (b) the contract stated in the Payment Instruction was unrelated to the Master Agreement. 

47.  The first basis of rejection came into question when a bank confirmation showing that a sum of USD 2,400,000 was transferred to Alesund on 21 January 2011 by the Company was produced by Lambert to the Liquidator.

48.  Mr Tai submitted that the Company was hampered in the production of evidence in support of its case for the summary judgment application due to the bitter dispute between Orlov and Roth.  There may be some truth in it.  It is not an issue which this Court can or is required to resolve in this application. 

49.  In respect of the second basis, Mr Tai rightly pointed out that the contract referred to in the Payment Instruction by reference to its number was apparently a mistake because the number was that of the Invoice.  This might have been a translation error because the Payment Instruction was in Russian.  However, it is evident from the Payment Instruction that it referred to “prepayment for fishing products produced … by [the Petitioner] in 2011”.  Even though the Payment Instruction did not refer to the Master Agreement, the second basis for rejecting the set off claimed by the Company was also called into question when the Payment Instruction and Invoice were correctly read.

50.  It should be added that the information uncovered by Lambert also showed that Smirnov was the director, president and treasurer of Alesund prior to its dissolution in 2019, and the other two directors were likely to be his relatives as they bear the same family name.

51.  In the premises, I agree with Mr Tai that the issues raised in respect of the Petitioner’s claim warranted investigation and explanation.  By a letter from the Liquidator to Leung dated 7 February 2022, he asked for explanation, inter alia, on why Leung (acting as Petitioner’s solicitor) and Smirnov went on oath to say that the Company did not transfer the sum of US$2,400,000 to Alesund for the purpose of the summary judgment application. 

52.  Mr Tai submitted that instead of answering the Liquidator’s queries, Leung adopted an evasive and hostile attitude, and stone-walled the Liquidator’s investigations, which had led to wastage of time and costs. The submission is borne out by the evidence. 

53.  For completeness, the evidence filed by the Petitioner for this application in relation to the payment to Alesund contained little more than blanket allegation of forgery in respect of the Payment Instruction and Invoice.  In particular, it failed to properly answer the relationship between Smirnov and that company.

Applicable principles

54.  The legal principles on converting a voluntary liquidation into compulsory liquidation were summarised by G Lam J (as he then was) in Re STX Pan Ocean (HK) Co Ltd (in liq) [2014] 5 HKLRD 581, [48]-[51] :

(1)  The Court may order the compulsory winding-up of a company despite that it is already in voluntary liquidation, [48];

(2)  An undisputed creditor is generally, as against the company, entitled ex debito justitiae to a winding up order.  But where the company is already in voluntary liquidation, and the contest is between creditors, some favouring and some opposing a compulsory winding-up order, the court is not bound to make a winding up order but has an unfettered discretion, [49];

(3)  The discretion is a broad one and unfettered by rules.  The discretion must of course be exercised judicially, taking into account all material factors.  Precedents are only guideposts rather than any binding rule of law or practice, [50];

(4)  A helpful way of approaching the Court’s decision is to see whether the class remedy of liquidation is better satisfied by the continuation of the voluntary liquidation or is better served by being superseded by a compulsory liquidation, [51(1)];

(5)  In deciding whether to wind up a company already in voluntary liquidation, the Court will have regard to the wishes of the creditors as permitted by s.287(1) of the Ordinance.  In doing so, regard shall be had to the value of each creditor’s debt: s.287(2).  However, the views of the majority are not decisive, [51(2)];

(6)  In general, the Court should grant a compulsory winding up order, even where the company is in voluntary liquidation, if the majority of the creditors so wish, [51(3)];

(7)  The Court is not bound to give equal weight to all debts of equal amount. It is not simply a head count or value count of creditors.  A qualitative, as opposed to a purely quantitative approach to the majority, has to be taken.  The Court will have regard to other interests which may influence the views of a particular creditor.  Less weight is given to creditors who are related to the management of the company, especially where the reason for seeking a compulsory winding up is the need for independent investigation into the management, [51(5)];

(8)  A factor given significant weight is that liquidators must not only act independently and impartially, they must be seen to be doing so, … It is in the public interest that the creditors should have confidence in the independence of liquidators.  … Thus a compulsory order might be made in preference to a voluntary liquidation even though no attack was made on the probity or the competence of the voluntary liquidator, [51(7)];

(9)  The Court is entitled to have regard to the general principles of fairness and commercial morality which underlie the details of the insolvency law as applied to companies.  A judicial exercise of discretion should not leave substantial independent creditors with a strong and legitimate sense of grievance, [51(8)];

(10)  The question of whether additional expenses both in terms of the liquidators’ fees and disbursements and ad valorem fees payable to the Official Receiver should be incurred are usually best left to the majority of creditors, [51(9)].

55.  Sub-paras (4) to (10) were the principles established in previous precedents.

56.  In exercising its discretion, the Court would look at the reason(s) as to why the voluntary liquidation would not ensure that the debts of the creditors would be dealt with expeditiously, efficiently and impartially: Re Medisco Equipment Ltd [1983] BCLC 305, 309b-c.

57.  Where there are matters which require investigation, they do not necessarily call for compulsory liquidation.  The question is whether there is any credible and fair reason to think that this cannot be done by the voluntary Liquidators: Re China City Construction (Intl) Ltd [2019] 3 HKLRD 491, [17(1).

58.  There is disagreement between the parties on whether the Liquidator should have abided by the Judgment.  However, there is no argument that in deciding whether to admit or reject a proof of debt, a liquidator is carrying out a quasi-judicial function.  In this position, he is not acting on behalf of the company and hence may go behind a judgment or a stated account which before the winding up would have been binding on the company: McPherson & Keay, the Law of Company Liquidation, 5^th edn, [8-042], citing Tanning Research Laboratories Inc v O’Brien (1990) 8 ACLC 248.

59.  The non-exhaustive circumstances identified in Tanning under which a liquidator may go behind a judgment included fraud, collusion or miscarriage of justice, ie, “for some good reason there ought not to have been a judgment”[6]. 

60.  On miscarriage of justice, Mr Kwong relies on the dicta of Barma JA in Re Sun Fung Timber Co Ltd [2021] HKCA 1660, [32] citing Tam Mei Kam, unrep, CACV 87/2012, 8 May 2013, [26.2] :

“miscarriage of justice refers to something from which [the Court] can conclude that had there been a properly conducted judicial process it would have been found, or very likely would have been found, that nothing was in fact due to the claimant”.

61.  Tam Mei Kam was a case concerning the power of the Bankruptcy Court, so was Sun Fung Timber. Whether the same test for miscarriage of justice should be applied by a liquidator in adjudicating proof of debt based on a judgment is not dealt with by the authorities cited to this Court. 

62.  It was said in Re Lam Kwok Hung Guy [2022] 4 HKLRD 793, [69], per G Lam JA that it was a “special power” available to liquidators (and trustees in bankruptcy) to go behind a judgment against the company “usually exercisable” where there is a possibility of fraud, collusion or miscarriage of justice.  I shall return to this point below. 

Independence of the Liquidator

63.  It is not in dispute that the Liquidator was nominated by NEL.  NEL was at the time under the control of Orlov, who was locked in dispute with his ex-business partner, Roth.  The disagreement by the two over the choice of liquidator is self-evident. 

64.  In a broad sense, the Liquidator was appointed by a company controlled by one of the Petitioner’s adversaries (Orlov), but that is an over simplistic view.  At least since April 2016, Orlov no longer shared the control of either the Company or TCC with Roth.  Since April 2021, both the Company and TCC became solely owned by Roth, and so is Laxagone since April 2022.

65.  The more important consideration is that the liquidation has been proceeding since February 2021, and the evidence demonstrates that during the 2 ½ years the Liquidator has been discharging his duties to the satisfaction of the COI.  There is no suggestion that he has acted in a manner other than even-handedly.  Mr Kwong rightly made clear that no allegation of impropriety is made against the Liquidator.  However, he submitted that a liquidator must not only act independently, he must be seen to be doing so: Re Goldcone Properties Ltd [2000] 2 HKLRD 16.

66.  The fact that soon after his appointment the Liquidator had brought to the notice of the creditors the problematic transactions identified by the Petitioner under the Scheme, in particular the Dividends, showed that he was acting with diligence and not showing any favouritism to the Company’s ex-management, TCC or Laxagone.

67.  It is telling that the Petitioner only became dissatisfied with the Liquidator when he decided to act on the materials provided by Lambert and asked for the Petitioner’s explanations.  If it was proper for the Liquidator to have done so, bluntly the Petitioner’s case of lack of apparent independence has no leg to stand on. 

Failure to accept the Judgment

68.  It is quite clear that the information supplied by Lambert to the Liquidator called into question the bases for granting summary judgment against the Company, which did not take into consideration the alleged set off of US$2.4 million. 

69.  I do not believe that it can seriously be suggested that the information should have been ignored by the Liquidator.  As to whether the Liquidator should have satisfied himself that there was or was not miscarriage of justice before he acted on the information and asked for the Petitioner’s comments, first, I do not believe that there is clear authority that it was a condition to be satisfied before the Liquidator should act on the information. 

70.  In Re Lam Kwok Hung, the Court of Appeal referred to the usual grounds on which liquidators may go behind a judgment, including miscarriage of justice.  There is nothing to suggest that those usual grounds are exhaustive. 

71.  Second, the concept of miscarriage of justice referred to in Tam Mei Kam (see para 60 above) potentially involves complex legal analysis, which would be onerous and expensive for the Liquidator to undertake.  Such an exercise does not necessarily sit well with the principle that a liquidator acts in the interest of the creditors as a class, and that the liquidation should be conducted expeditiously and efficiently.

72.  In the premises, I am of the respectful view that the less technical test for miscarriage of justice set out in Tanning Research (para 59 above) is the more practical and appropriate for guidance to liquidators. 

73.  On the evidence before the Court, I find it perfectly proper for the Liquidator to have sought the Petitioner’s comments on the information supplied by Lambert.  The Petitioner cannot complain if it had failed to provide any satisfactory answers to the Liquidator.  Indeed, the lack of answer gave credence to the doubt raised by the information provided by Lambert.  As a consequence of the lack of satisfactory answers, the Petitioner’s claim as a creditor of the Company is potentially much smaller than stated.

Lack of investigation of Laxagone’s claim

74.  I fail to see any substance in this complaint. As accepted by Mr Kwong, it is normal practice for the adjudication of proofs to wait until there is asset for distribution. 

75.  There is also an inconsistency between this complaint and the complaint that the liquidator has incurred substantial costs up to now. 

Lack of investigation of the Scheme

76.  It is not easy to understand this complaint because the Liquidator had investigated the Dividends, which was central to the Scheme, and decided with the agreement of the COI that it should be pursued.

77.  What had stalled the pursuit of the Company’s claim so far is the funding arrangement.  The Petitioner’s funding proposal came to nothing, and the funding agreement with Remedy remains unapproved.  The weight of the evidence is that the dispute over the adjudication of the Petitioner’s claim is the main reason for the lack of progress.

78.  It appears from the evidence that so far little had been done by the Liquidator in respect of the investigation of the other two transactions of the Scheme, the Brackway Debt and the NEL Debt.  On the other hand, with the lack of resources, it is unreasonable to expect the Liquidator to investigate everything, and it is sensible for the potential recoveries to be prioritized. 

Reasonableness of the proposed assignment to Remedy

79.  The only valid complaint advanced on behalf of Petitioner is that, under clause 2.5 of the draft Deed of Assignment by which the Company would assign its claim in respect of the Dividends to Remedy, the latter would only reassign the cause of action back to the former in the event that Remedy determines to cease to prosecute any proceedings, fails to meet any order for security for costs or is found by the Court to have breach any term of the Deed.  However, there is no time frame on the prosecution of proceedings.  Consequently, there is no protection for the Company in the event of unreasonable delay by Remedy.

80.  On the other hand, as pointed out by Mr Tai, the Deed is in draft form and can be further negotiated.  Clearly, there is no real danger of the Liquidator executing the Assignment without the approval of the COI.  I can see no real substance in this complaint either.

Conclusions

81.  I am unable to agree with any of the grounds relied upon to turn this voluntary liquidation into a compulsory one.  I am unable to see what there is to gain or how it will benefit the creditors.  It may be added that new liquidators can be expected to query the Petitioner in respect of the set off of US$2.4 million.

82.  The evidence supports Laxagone’s submission that over the course of 30 months (with substantial costs incurred), the liquidation had proceeded normally and the Liquidator had a good working relationship with the COI.  Things only started to go astray when the Petitioner was asked about the US$2.4 million set off.

83.  There is no sufficient reason to turn this liquidation into a compulsory one.  In the premises, the Petition is dismissed. Having considered the written submissions on costs of the parties, the Liquidator as well as the letter of the Official Receiver to the Court dated 8 August 2023, I do not see any adequate reason that the costs of this hostile application should not follow the event.  I order that the costs of Laxagone and the Liquidator be paid by the Petitioner, to be taxed if not agreed.  The costs of the Official Receiver in the sum of HK$6,500 be deducted from the Petitioner’s deposit.

84.  I am grateful to counsel for their assistance.