XCHRX Re Boyu Trading Ltd.

HCCW474/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.474 OF 1996

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R E A S O N S

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1. This is an application by the Official Receiver pursuant to section 222(1)(b) of the Companies Ordinance for an order that two individuals named in the report be publicly examined as to their conduct and dealings as officers of Boyu Trading Limited ("the Company").

2. On 28 October 1999, the Official Receiver submitted a report seeking a section 222(1)(b) order. It was a paper application made ex parte. On 11 November 1999, the court intimated that a hearing was required. A further report was submitted on 11 January 2000. A chambers hearing was held on 14 February 2000 at which a section 222(1)(b) order was made.

3. As the application involved 'novel' issues, it seemed desirable to set them out together with the reasons for my determination. They appear below.

The statutory provision

4. Section 222(1) provides as follows :

" (1) Where an order has been made for winding up a company by the court, and the Official Receiver has made a further report under this Ordinance stating that in his opinion-

(a) a fraud has been committed by any person in the promotion or formation of the company or by any officer of the company in relation to the company since its formation; or

(b) in the case of an insolvent company, a prima facie case exists against any person that would render him liable to a disqualification order under Part IVA in relation to the affairs of the company,

the court may, after consideration of the report, direct that that person or officer shall attend before the court on a day appointed by the court for that purpose and be publicly examined as to the promotion or formation or the conduct of the business of the company or as to his conduct and dealings as officer thereof."

When first enacted, section 222(1) which substantially mirrored section 8(3) of the Companies (Winding-up) Act 1890 dealt with fraud only and did not have paragraph (b). Section 222(1)(b) was added to the Hong Kong ordinance in 1984 to reflect the recommendation of the Companies Law Revision Committees' Second Report (para.8.20) having regard to the criticism referred to in the Jenkins Report that the original section did not deal adequately with fraud and incompetence of directors. See Tomasic and Tyler, Hong Kong Company Law at [10577]. Section 222 has to be read in conjunction with section 191, given the genesis of those sections which is as follows :

1890 Act	Cap.32
s.8(1)	s.191(1)
s.8(2)	s.191(2)
s.8(3)	s.222(1)(a)

Subsections (2) and (3) of section 191 provides :

" (2) The Official Receiver may also, if he thinks fit, make a further report, or further reports, stating the manner in which the company was formed and whether in his opinion any fraud has been committed by any person in its promotion or formation, or by any officer of the company in relation to the company since the formation thereof, and any other matters which in his opinion it is desirable to bring to the notice of the court.

(3) If the Official Receiver states in any such further report as aforesaid that in his opinion a fraud has been committed as aforesaid, the court shall have the further powers provided in section 222."

The report submitted on 28 October 1999 was the "further report" within section 191(2). Section 191(3) has no corresponding English section. It serves to link section 191 with section 222 having regard to the fact that the provisions of a single section under the 1890 Act were split into two seemingly unrelated sections in Cap.32.

5. It would appear that when section 222(1) was amended in 1984 to add liability to disqualification under Part IVA as a reason for public examination, the need to amend section 191(3) at the same time was overlooked. If section 191(3) is read literally, unless it is a case also involving fraud, the further powers provided in section 222 cannot be triggered. If this were the true construction, section 222(1)(b) can virtually never take effect. That cannot have been the intention of the legislature. Faced with the choice, I am bound to strive to give effect to section 222(1)(b) rather than to adopt a construction that would destroy the purpose of the amendment.

6. In my judgment, where the further report the Official Receiver states a prima facie case under paragraph (b) of section 222(1), the court's power under section 222(1) is triggered notwithstanding the absence of fraud. In other words, in those circumstances, section 191(3) is no bar to the exercise of the court's powers under section 222(1). Parenthetically, I understand from the Official Receiver that the apparent "oversight" is being addressed in the current Companies Bill.

Whether application may be ex parte

7. The relevant procedure is set out in Companies (Winding-up) Rules 49-57. Of particular relevance are rules 51 and 52 as well as Form 29. These rules provide :

"51. Consideration of report

The consideration of the report shall be before a judge personally in chambers, and the Official Receiver shall personally, or by counsel or solicitor, attend the consideration of the report, and give the court any further information or explanation with reference to the matter stated in the report which the court may require.

52. Order for public examination

An order under section 222 of the Ordinance directing any person or persons to attend for public examination shall be in Form 29 with such variations as circumstances may require."

In considering the effect of similar English provisions, the English Court of Appeal in In re Trust and Investment Corporation of South Africa and In re Bertram Luipaard's Vlei Gold Mining Company [1892] 3 Ch 332 were unanimous in concluding that the application is one that may be made ex parte :

" With regard to the other point as to whether this application may be made ex parte, a point which on the previous occasion we did not decide, I am of opinion that the application may be made ex parte. I came to that conclusion not only for the convenient working of these provisions, but also in consequence of words that I find in sect.8, sub-sect.3, and also rule 72, which was made under the Act, and the form under the Rules, Form 37. Sect.8, sub-sect.3, says : 'The Court may after consideration of any such report.' Rule 72 says : 'If the Court makes an order pursuant to sub-sect.9 of sect.8 of the Companies (Winding-up) Act, 1890, directing any person to attend for public examination'; and Form 37 is this: 'Upon the application of the Official Receiver in the above matter, and upon reading the report of the Official Receiver made to the Court.' All that shews that this is an application which may be made ex parte..."

per Lopes LJ at 344. See also Lindley LJ at 341 and A. L. Smith LJ at 345. Section 8(3) of the Companies (Winding-up) Act 1890 to which he referred corresponds to section 222(1) save that there is no English equivalent to paragraph (b) in section 8. Form 37 and rule 72 substantially correspond to our Form 29 and rule 52 respectively. Further, an order made would not preclude the person against whom it is directed from applying to discharge the order for want of jurisdiction. See the Bertram Luipaard case (supra). In this connection, section 222(6) requires the Official Receiver to furnish a copy of his report to the person to be examined prior to the examination.

8. Given that the Hong Kong provisions are virtually identical to the English provisions, those observations apply with equal force to the Hong Kong provisions. It is to be noted that the fairness of the English practice has not been the subject of any challenge. Prima facie, there would not appear to be any reason why the Hong Kong practice should be any different.

9. In re Hing Wah Blanket Company Limited v. Wibert Investments Limited 1994, No. MP2745 (unreported) 27 October 1994, a case concerning an application for examination under section 221 of the Companies Ordinance, it was held that section 221 applications should in normal circumstances be made on notice to the person to be examined. The question which arises is whether the practice of applications being made ex parte under section 222 is affected by the Hing Wah decision and notice is to be given of the hearing of the application to the persons to be examined.

10. While both sections provide for the examination of persons, they are materially different. First, section 221 provides for a private examination for the purpose of enabling a liquidator to gather information about the affairs of a company. A section 222 application on the other hand concerns fraud or misconduct by any person that would render him liable to a disqualification order under Part IVA of Cap.32. There are thus wider public interest considerations (where the element of secrecy can understandably be necessary) that do not arise in section 221 applications. Second, procedurally, there is a specific set of rules governing section 222 applications which do not apply to section 221 applications. These rules contemplate ex parte applications. Indeed, the absence of rules requiring applications under section 221 to be made ex parte was one of the reasons why the learned judge in Hing Wah considered that notice should be given. Third, a section 222 application may only be made by the Official Receiver who has to file reports which must state the facts showing a basis for the Official Receiver's opinion and warranting the judge in calling upon the person implicated for an examination. See In re Civil, Naval and Military Outfitters, Limited (1899) 1 Ch 215 and Ex parte Barnes [1896] AC 146. Although a section 221 application is normally made by a liquidator, any creditor or contributory may apply. Indeed, the court may make an order for examination of its own motion.

11. In my judgment, in view of those differences, I see no compelling reason to extend the holding in Hing Wah to section 222 applications. Hing Wah is in any event further distinguishable on the facts since in that case the need for secrecy was totally absent given the extensive correspondence between the liquidator and the person sought to be examined.

How application is initiated

12. It would be convenient at this point to mention a procedural matter. As noted earlier, this was a paper application. But when one reads the relevant rules, and in particular Rules 51 and 52, the better practice is for a summons to be issued and an appointment taken out for the consideration of the report rather than to make a paper application : in fact, the Official Receiver is mandated either personally or by counsel or solicitor to "attend the consideration of the report and give the court any further information or explanation...". An oral hearing is clearly envisaged. In future, a summons should be taken out and an appointment obtained for the consideration of the report by the court.

Merits

13. As regards the substantive merits of the application, I am more than satisfied that a strong prima facie case has been made out in calling upon the persons implicated for an examination. One was a director of the Company. The other was in all but name a director. Having regard to the definition of "shadow director" and "officer" in sections 168C and 168G respectively of Cap.32, the persons identified in the report are persons capable of being liable to a disqualification order under Part IVA of Cap.32.