THE COMMISSIONER OF INLAND REVENUE v. FULLBRIGHT CO LTD AND ANOTHER

HCCW 208/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 208 OF 2008

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J U D G M E N T

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The petition and the summons

1.  I have before me a summons to defer the date of the dissolution of a company under section 248(4) of the Companies Ordinance, Cap. 32 and a petition to wind up compulsorily a company that is in creditors’ voluntary liquidation.  Both are taken out by the Commissioner of Inland Revenue.  The subject company is Fullbright Company Limited (“the Company”).  The liquidator of the Company, Fung Wing Yuen of W Y Fung & Co, CPA, is the 2^nd respondent to the summons.  The matters arose in this way.

2.  In December 2005, the Commissioner reviewed the basis of tax assessment of the Company and required the tax representative of the Company to provide further evidence to substantiate the exclusion of 50% of its profits from assessable profits under offshore claim.  Having considered the tax representative’s reply dated 20 January 2006, the Commissioner was of the view that the Company derived its profits from operations carried out in Hong Kong and considered the full amount of its profits should be chargeable to tax.  So additional assessment for the year of assessment 1999/2000 was issued on 28 March 2006 (“the 1^st additional assessment”).  The tax demand was due on 9 May 2006.

3.  On 18 August 2006, default judgment was entered against the Company in the District Court in respect of the demand on the 1^st additional assessment.

4.  In October 2006, recovery notices were issued by the Commissioner to various bankers of the Company, but no sums were recovered for the 1^st additional assessment.

5.  By a special resolution of the Company passed on 13 November 2006, the Company was put into creditors’ voluntary liquidation and the liquidator was appointed.

6.  On 23 February 2007, the Commissioner issued four additional assessments for the years of 2000/01 to 2003/04 to disallow the claimed 50% offshore profits. The tax demands were due on 10 April 2007.

7.  The total tax payable by the five additional assessments amounted to $2,855,046.  To date, none of this has been paid.

8.  At the final meeting of creditors on 27 September 2007, the liquidator advised the Commissioner’s representatives realised assets were only $5,000.  The meeting was adjourned to 25 January 2008 at the request of the Commissioner to deal with her queries relating to the payment of $26 million as interim dividend mentioned in the audited financial statements of the Company for the year ended 31 March 2006.

9.  The liquidator rejected all claims for tax of the Commissioner by the letters dated 3 and 12 October 2007.

10.  On 24 January 2008, the Department of Justice wrote to the liquidator stating that the Commissioner intended to present a petition to wind up the Company within 7 days and requested the liquidator to further adjourn the final meeting of 25 January 2008 pending hearing of the petition.  The liquidator only replied on 30 January 2008 stating that the final meeting was already held on 25 January 2008, and asserting that the Commissioner is no longer a creditor as all claims for tax have been rejected in full.  Pursuant to section 248, the liquidator shall send to the Registrar of Companies a copy of the accounts of the winding up and shall make a return of the holding of the final meeting, and the Registrar on receiving the accounts and the return shall register them and the Company shall be dissolved on the expiration of 3 months from the registration.

11.  On 26 March 2008, the Commissioner issued a determination to the Company covering all the objections for the years of assessment from 1999/2000 to 2003/04 and confirming the assessments of the total tax demands.

12.  The Commissioner presented a winding-up petition against the Company on 16 May 2008 on the grounds that the Company is unable to pay its debts and it is just and equitable to wind up the Company compulsorily, as the creditors’ voluntary liquidation cannot be satisfactorily carried out with due regard to the interests of the Commissioner and there are matters which require investigation.

13.  The Commissioner issued a summons on the same day seeking an order that the dissolution of the Company be deferred sine die until after such further directions to be given upon the hearing of the petition.

14.  The petition and the summons are opposed by the Company and the liquidator.

The legal principles

15.  The legal principles are not in dispute.  They have been helpfully set out in the submissions of Mr William Wong, who appeared for the Commissioner.

16.  In respect of the application to defer the dissolution of a company under section 248(4), this may be made by the liquidator or “any other person who appears to the court to be interested”.  A person with a “proprietary or pecuniary interest in resuscitating a company” would be regarded as an interested person (Re Mercator Trading Company Limited, HCMP 2927 of 1994, 10 May 1995, Yam J).

17.  For the court to exercise its discretion to defer the dissolution of a company, it is necessary to show there is still some aspect of the company’s business which has not come to a conclusion, such as assets being found, or disagreement between the creditors and the liquidator as to whether the liquidator’s work is completed.  In other words, the company is anything other than a shell (Re The Working Project Limited [1995] 1 BCLC 226 at 231e to g; Morris v Harris [1927] AC 252 at 258).

18.  In Kelso Enterprises Limited v Liu Yiu Keung [2007] 3 HKLRD 266 at 270J to 271B, para 13, Rogers VP set out the approach and matters that should be taken into account in the exercise of a discretion of this nature as follows:

“In my view the correct approach to the question of whether a dissolution should be deferred under section 239(4) must start with the question of what it is hoped, and what is likely, to be achieved by deferring the dissolution.  Hence the reasons put forward by the applicant must be considered first.  In this regard, of course, the interests of the creditors would be very important.  The court must also have regard to the public interest.  That public interest includes the proper and effective administration of the liquidation.  That, in turn, includes the need that there be investigations into possible past misconduct by those running and responsible for the running of the company.  The court must then consider whether there is likely to be any detriment to any party by deferring the dissolution.”

19.  There is no difference in the discretion to defer dissolution conferred under section 239(4) in a members’ voluntary winding up and the discretion exercised under section 248(4) in a creditors’ voluntary winding up.

20.  As to whether a voluntary liquidation should be allowed to continue or whether the company should be wound up compulsorily, the court has an unfettered discretion to be exercised judicially, taking into account all material factors, including 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 (Re Goldcone Properties Ltd (in creditors’ voluntary liquidation) [1999] 4 HKC 602 at 612H, 615A to C).

21.  Where the majority in value of the creditors support the petition, it would be an important factor which, in the absence of contrary reasons, would incline the court towards the making of a compulsory order (Re Goldcone Properties Limited, supra. at 615G to I).

22.  Where the petitioner requires the issues concerning the company’s liquidation to be investigated further, the court would ask itself if there is sufficient prima facie evidence raising issues which rational creditors could think need investigation and in which the outcome might be financially favourable for them (Re Goldcone Properties Limited, supra. at 617H to 619C).

23.  Another factor that should be given significant weight in the exercise of the discretion is that liquidators must not only act independently and impartially, they must be seen to be doing so, particularly where possible wrongdoing by the directors have to be investigated and possibly pursued in litigation, to avoid leaving any part of the independent creditors with a sense of grievance (Re Goldcone Properties Limited, supra. at 631G to 634G).

The locus of the Commissioner

24.  There is no doubt about the locus of the Commissioner to make an application to defer the dissolution of the Company.  The Commissioner is a judgment creditor, having obtained a default judgment, which has not been set aside, in respect of the demand on the 1^st additional assessment.  As for the other additional assessments, they became payable on or before the due date of the demands on 10 April 2007.  All the additional assessments were lawfully issued to the Company.  The fact that the Company had raised objections to the additional assessments does not postpone or suspend its payment obligations (sections 71(1) and (2) of the Inland Revenue Ordinance, Cap. 112).  Furthermore, the Commissioner issued the determination for all the additional assessments on 26 March 2008.  The Company has failed to give notice of appeal against the determination within 1 month of the transmission to it of the written determination, pursuant to section 66(1) of Cap. 112.  The Company and/or the liquidator are barred from exercising the right of appeal.

25.  The disagreement or objection of the Company to pay the demands on the additional assessments does not affect in any way its liability to pay the tax demanded of $2,855,046.  The liquidator has wrongfully rejected the demands for tax.

26.  The Commissioner clearly has a pecuniary interest in resuscitating the Company and has locus to make the application.

Allegations of misconduct of the directors

27.  The Commissioner alleged there are indications to suggest the directors had caused the Company to ring-fence its assets from the reach of the Commissioner in these ways.  The Company had disposed of its landed property to a related company, and it had purportedly declared interim dividends of $26 million.

28.  On 30 March 2006, 2 days after the tax demand for the 1^st additional assessment was issued, the Company entered into a sale and purchase agreement to dispose of its property in Tsuen Wan at $2.8 million to its related company, Fortune Decade Limited.  The sale and purchase agreement was signed by a common director in dual capacities.  The property was acquired by the Company in April 2003 at the total consideration of $2,444,000.  The Commissioner was informed by the solicitors for the purchaser that a sum of $1,245,581.73 was paid to the mortgagee for redemption of the mortgage and there was no payment made by the purchaser to the Company through the solicitors.  The liquidator explained that no cash proceeds were received by the Company from Fortune Decade Limited because the latter had mortgaged the property to the same mortgagee bank.

29.  In view of the close proximity in time between the issue of the demand for the 1^st additional assessment and the execution of the sale and purchase agreement, Mr Wong submitted an inference is to be drawn that the disposal of the property was to put this out of reach of the Commissioner.  Besides, the property was disposed of when the Company was apparently insolvent, according to the audited accounts as of 31 March 2006, which recorded net liabilities of $2,911,165.55.  Whether the disposition constituted unfair preference under section 266 would require further investigation.

30.  The Company asserted an interim dividend of $26 million was declared in a directors’ meeting held on 1 April 2005.  The effect of this was to distribute almost the whole retained earnings of the Company as of 31 March 2005 of $26,597,457 to the shareholders.

31.  The minutes of board meeting were typed save for the date of the meeting which was filled in by hand.  The meeting was purportedly held at the office of the Company’s auditors in Lockhart Road, Wanchai.  According to the movement records of one of the directors, Madam Tse Yuet Yu, who purportedly attended the meeting, she entered Hong Kong via Lok Ma Chau at almost 9 p.m. that day.  The Commissioner queried if the board meeting was indeed held in the office of the auditors in the late evening on 1 April 2005.  The minutes did not mention when the meeting started and finished.  And the Company did not produce a copy of the relevant entry of the minutes book required to be kept under section 119, showing the signature of every director who was present as required under Article 88 of Table A.

32.  Madam Tse has filed an affirmation alleging the Company intended to close down the business because of the abolishment of the quota system of members of the World Trade Organisation by 1 January 2005 and that was why the Company decided to pay dividends to shareholders on 1 April 2005.  No relevant accounts considered by the directors in the alleged meeting on 1 April 2005 for the determination of the distribution of profits were produced, the audited accounts for the financial year ended 31 March 2005 were not issued until 4 November 2005.  There is no documentary evidence to substantiate the payments of dividends allegedly made on 1 April 2005, such as general ledgers, journal vouchers, proof of payments and receipts.

33.  Moreover, in the audited financial statements for the financial year ended 31 March 2005 issued on 4 November 2005, the Company did not disclose dividends were declared after the balance sheet date, contrary to para 77c of the Statement of Standard Accounting Practice (“SSAP”) 1 issued by the Hong Kong Institute of Certified Public Accountant, and paras 11 and 12 of SSAP 9.  As for Madam Tse’s assertion the Company decided to close down the business of the Company in April 2005, there is nothing in the audited accounts for the financial year ended March 2005 or March 2006 to indicate that going concern was no longer a valid assumption in the preparation of accounts, nor had the auditor made a qualification in the auditor’s report, contrary to para 13 of SSAP 9.

34.  I am inclined to agree with the Commissioner there is sufficient prima facie evidence to suggest that the directors had caused the Company to ring-fence its assets from the reach of the Commissioner and that the allegations would require investigation.

35.  There is also an element of public interest involved.  It is in the public interest that the alleged misconduct should be thoroughly investigated, there should be proper and effective administration of the liquidation and the interests of the creditors must be protected (Kelso Enterprises Limited, supra. at 271B and E, paras 13 and 15).  On the evidence before me, I am not satisfied the liquidator has administered the liquidation in a proper manner.  By a letter dated 30 March 2007, the Official Receiver required the liquidator to report under section 168I(3) of Cap. 32 any conduct of directors unfit to be concerned in the management of a company, and the liquidator reported by Form D2 that he was not aware of any matter which would require him to report.  He did not carry out any investigation into the declaration and payment of the interim dividend in the substantial sum of $26 million, notwithstanding the queries raised by the Commissioner in September 2007.  He ignored the legal obligation of the Company to pay the tax demanded on the additional assessments and wrongfully rejected the claims of the Commissioner.  He went ahead with the final meeting on 25 January 2008, ignoring the request of the Commissioner for a further adjournment to allow the Commissioner to present the winding-up petition.

36.  On behalf of the liquidator and the Company, Mr James Cheng submitted that the court should not exercise its discretion to defer dissolution, on account of delay on the part of the Commissioner to take action for a long time.  The final meeting was first convened on 27 September 2007, it was adjourned to 25 January 2008 at the Commissioner’s request, and the summons and the petition were not issued until 16 May 2008.  I do not consider the delay complained of to be excessive in the circumstances.  The delay in making the application is not an absolute bar, the court would need to consider if third party rights are likely to be affected by the delay (Kelso Enterprises Limited, supra. at 271H to 272C, para 17).  It does not appear to me in the present case that third party rights would be so affected.  The Commissioner has all along actively maintained the right to demand the tax on the additional assessments and this was known to the liquidator and the Company at all times.

Winding up by the court

37.  Applying the legal principles mentioned earlier, I am satisfied that my discretion should be exercised in making a compulsory winding-up order.  The insolvency of the Company is established.  There are transactions which require investigation by an independent liquidator.  It is appropriate to attach weight to the wishes of the Commissioner, as the Commissioner is the largest creditor.  The liquidator was appointed by the directors whose conduct should be investigated.  Refusal of a compulsory order would deprive the Commissioner of the opportunity to ensure that the necessary investigation is properly carried out and would leave the Commissioner with a justifiable sense of grievance.

Orders

38.  For the above reasons, I order the Company to be wound up by the court and the dissolution of the Company is to be deferred until the further order of the court.

39.  The petitioner's costs in this petition and in the summons are to be paid out of the assets of the Company.