THE JOINT AND SEVERAL LIQUIDATORS OF JUMBO FORTUNE (HONG KONG) LIMITED (IN COMPULSORY LIQUIDATION) v. Y H CHEUNG & COMPANY CERTIFIED PUBLIC ACCOUNTANTS (a firm)

HCCW 143/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 143 OF 2006

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D E C I S I O N

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1.  This application was taken out by the liquidators of Jumbo Fortune (Hong Kong) Limited (“the Company”) under section 221 of the Companies Ordinance, Cap. 32 against Y H Cheung & Company, CPA.  The respondent was the former auditor of the Company.  The liquidators seek an order to examine the appropriate officers of the respondent on matters relating to the affairs of the Company and for production of documents relating to the Company or its affairs.

2.  I will first set out the relevant background matters.

3.  The Company was incorporated in Hong Kong in 1997 to act as an intermediary for customers in Mainland China for the import and export of metal products between China and other countries.  It was wound up by the court on 19 June 2006 on the petition of a creditor presented in March 2006 for unpaid brokerage fees.  The liquidators were appointed by the court on 12 January 2007.

4.  For the purpose of this application, the liquidators have identified two areas which require investigation.

5.  Firstly, the liquidators’ investigations revealed that in July 2003, the Company acquired an investment being a 42% interest in a company in China known as Jiaozuo Oriental Gold and Lead Company Limited (“Jiaozuo Oriental”) and had purportedly disposed of it in May 2005 for US$900,000 to a company known as Gold Talent International Holdings Limited (“Gold Talent”).  The liquidators have seen a board resolution of Jiaozuo Oriental approving the transfer of its 42% interest from the Company to Gold Talent and the audited financial statements of Jiaozuo Oriental in 2005 indicating that the Company’s 42% interest in Jiaozuo Oriental had a book value of RMB 9.3 million odd, although these documents have not been exhibited to the supporting affidavits of the liquidators.  Jiaozuo Oriental has been operating a substantial metal refining and processing facility, as shown in the photographs taken recently by the liquidators.  The liquidators do not understand why this investment of the Company had not been recorded in the Company’s audited financial statements for the years ended March 2004 and March 2005.  Further, they have received confirmation from the Company’s banker that the consideration of US$900,000 had not been paid into the Company’s bank account, contrary to an advice in May 2005 purportedly issued by the bank.  The liquidators are suspicious of the veracity of the documents regarding the transfer of interest, nor do they understand the commercial rationale for the transaction.  They have made inquiries with creditors and, according to the information provided, Gold Talent is a company associated with the Company.

6.  Secondly, there was a sudden, substantial, and unexplained fall in the turnover of the Company from the year ended March 2005 to the year ended March 2006, from HK$855 million to HK$57 million.  The liquidators have not been able to establish the reason for the significant decrease in turnover in such a short period prior to the months leading up to the winding up of the Company.

7.  The liquidators have not been able to locate any books and records of the Company at the current and former registered office of the Company.  They have received no assistance from the former directors, shareholders and management.

8.  The liquidators believe that the respondent should be in a position to provide meaningful assistance to help with their investigations.  The respondent was engaged as the auditor of the Company for 4 years and had audited the financial statements of the Company for the years ended March 2002 to March 2006, the year in which the Company was wound up.  It had assisted the Company in filing returns to the Inland Revenue Department and annual returns in the Companies Registry.  Furthermore, the documents filed by Gold Talent at the Companies Registry were presented by a secretarial service company with the same address as the respondent.  Another entity, Oriental Industry and Commerce Group Limited, the bank account of which was used in the purported transfer of US$900,000, had also engaged the same secretarial service company to present its documents for registration at the Companies Registry. 

9.  From February to July 2007, the liquidators had requested assistance from the respondent.  The respondent provided copies of the audited financial statements but resisted in providing its own audit working files and any information relating to Gold Talent.  The respondent contended it has no obligation to provide such documents and information.

10.  Hence, this application was taken out by the liquidators.

11.  The legal principles in an application of this nature are well established.  I should consider first if the liquidators have made out reasonable requirement for the documents and information sought and the need to examine the officers of the respondent.  In considering this, it would be right to give great weight to the views of the liquidators.  If reasonable requirement is made out, I should balance the reasonable requirement against the risk of oppression to the respondent.  The court should strike a balance in the exercise of its discretion and avoid making an order that is wholly unnecessary or oppressive to the respondent.

12.  I reject the respondent’s argument that as the audit working files are its own documents generated in the course of audit and not the property of the Company, the audit working files would not be within the scope of documents for which production may be required under section 221.  I reject also the contention that the information and documents of Gold Talent, not being the property of the Company, would not come within the scope of a production order.  Under section 221, production may be ordered of documents relating to the Company.  I am satisfied that the audit working files and documents and information of Gold Talent are documents and information relating to the affairs of the Company.  As stated earlier, there is evidence before this court that Gold Talent had acquired a substantial investment of the Company and had not paid the consideration for the acquisition.

13.  The respondent objected to production saying that to order production would be to allow the liquidators to engage in a fishing exercise.  A production order in section 221 is not like discovery in ordinary civil litigation, which must be confined to a matter in question in the action.  As the Court of Final Appeal has said in Joint and Several Liquidators of Kong Wah Holdings Limited v Grande Holdings Limited [2007] 1 HKLRD 116 at 130D to E, paragraph 33, the liquidator is necessarily engaged in a fishing or speculative expedition and the purpose of section 221 is to enable him to carry it out effectively.

14.  I am satisfied reasonable requirement is made out in this instance.

15.  The respondent claimed it had little involvement with Gold Talent, and had never audited its financial statements.  It seems to me the respondent has not been forthcoming in this respect.  No information was disclosed by the respondent concerning its involvement with Gold Talent in all the correspondence exchanged with the liquidators in 2007, or in its opposing affirmation filed in February 2008.  It is only in the submission served in this hearing that the respondent disclosed what services it had provided to Gold Talent.

16.  It does not appear to me it would be oppressive in the circumstances to order the respondent to provide documents and to be examined by the liquidators on the affairs of the Company.  Whether the liquidators may or may not be able to obtain information and documents from Gold Talent is beside the point.  It has been shown that the respondent is in the position to give some assistance to the liquidators, and an auditor is considered an officer of the company for the purpose of this application (Re New China Hong Kong Group Limited & Others [2003] 3 HKLRD 799 at 810H, paragraph 33).  In my judgment, it is right and proper to order the production of documents and require the officers of the respondent to be examined by the liquidators.

17.  On the documents to be produced, I will order the respondent to produce the documents as specified in a schedule in the terms as related to me by Mr Darton substantially in the terms set out in paragraph 4.1 of the 2^nd affidavit of Mr Borrelli with the amendments given by Mr Darton.  I order the respondent to produce the documents within 28 days hereof.  I also order that the officers of the respondent are to attend before a Master to be examined on matters relating to the affairs of the Company. 

18.  Costs of this application should follow the event.  I order the respondent to pay the liquidators’ costs of this application, including the costs reserved on 25 January 2008.  The liquidators are agreeable to pay the costs of photocopying charges incurred in the production of documents.  Other than that, I decline to make any order in respect of any costs and expenses on the part of the respondent in carrying out work to comply with the order for production.