XCHRX Re King Kong (Groups) Ltd.

HCCW 1026/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO. 1026 OF 2000

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REASONS FOR DECISION

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1. This is an application under s. 206(2) of the Companies Ordinance and Companies Winding-up Rule 45 for the determination by the Court of the difference between the determinations of the meetings of the creditors and of the contributories in respect of the appointment of a Liquidator in place of the Provisional Liquidator.

2. The Company King Kong (Groups) Limited was wound up by order made on 19 February 2001. In May 2001, the meeting of the creditors took place. It was attended by proxy by one creditor, namely Guangdong International Trust and Investment Corporation Hong Kong (Holdings) Limited (In Creditor's Voluntary Liquidation) (hereafter referred to as "Gitic"). At that creditors meeting, it was determined that Mr Matthew O'Driscoll and Mr Stpehen Liu, both of Messrs Ernst & Young, be appointed joint and several liquidators of the Company in place of the Official Receiver and that there should not be a committee of inspection. Three other creditors are associated with the contributories. The last creditor is China Merchants.

3. A meeting of contributories was also held on 17 May 2001. The meeting was inquorate and was adjourned until 24 May 2001.

4. At the adjourned first meeting on 24 May 2001, two contributories attended (by proxy) holding the entire shareholding of the Company. That meeting of contributories was unanimously of the opinion that no application be made to the Court for appointing a liquidator in place of the Official Receiver and that there should not be a committee of inspection.

5. In view of the differences in the determinations between the meeting of the creditors and the meeting of the contributories, it was necessary for the difference to be decided by the Court. To this end, I gave directions to the Official Receiver and Provisional Liquidator in June 2001 that there should be a notice of the hearing of determination to be given to creditors and contributories by advertisment in one English language newspaper and one Chinese language newspaper published in Hong Kong and the said notice to advise that creditors and contributories intending to appear at the determination hearing should file evidence in Court not later than 21 days prior to the hearing.

6. Until the start of the hearing on the morning of 10 October, there was no indication that the contributories intended to appear. On 21 September 2001, Gitic had given notice that it would appear to support the Official Receiver's application that Mr O'Driscoll and Mr Liu be appointed joint and several liquidators. In any event, no evidence was filed on behalf of Gitic.

7. At 10:00 a.m. on the morning of 10 October, counsel for the contributories appeared before me with two unsworn affirmations on behalf of the contributories. The matter was consequently adjourned to the afternoon when the affirmations were sworn and when the Official Receiver and solicitors for Gitic had some time to consider the points being made.

8. It would appear that there were two points made on behalf of counsel for the contributories. First, it was said that efforts are being made by the contributories to salvage the Company, in which event, the contributories would be applying for a stay of the winding up so that any appointment of liquidators would be a waste of time and costs. Secondly, it was submitted that Mr O'Driscoll and Mr Liu should not be appointed liquidators because Ernst & Young had been the auditors of the China Merchants group of companies including a company called "Daily On", the shares of which represent the most realisable assets of the Company.

9. Mr Korff, solicitor for Gitic, submitted that there would be no conflict because Ernst & Young were only auditors up to the financial year ended 31 December 1999. In any event, they were the auditors only of a company in which the Company is interested. Having said that, Price Waterhouse Coopers has also been approached by Gitic as an alternative.

10. Dealing with the first submission made on behalf of the contributories, I appreciate that after the winding-up order was made, the debt on which the petition was based was paid. However, subsequently, a judgment in favour of Gitic was obtained against the Company. Although an appeal has been lodged, that judgment is still extant, such that the contributories have withdrawn an application for stay of the winding-up. The contributories can continue with their efforts to salvage the Company from winding-up if they can. But in the meantime, the winding-up order having been made, it is important that liquidators should be put in as soon as possible given that the Official Receiver has indicated that due to lack of resources and manpower, his office is not in a position to deal with assets of the Company that are outside the jurisdiction of Hong Kong and that private sector practitioners are in a much better position to deal with such issues. Therefore it is clear that the determination of the contributories at the first meeting, i.e. that the Official Receiver continue as the liquidator, is not viable.

11. As to whether partners of Ernst & Young should be appointed, I take the view that due to a possible conflict of interests, or at least a viable claim of conflict, that they should not be appointed. The primary asset of the Company is its shareholding in Daily On. The other main joint venture shareholder of Daily On is a company within the China Merchants Group. However, all is not well between the contributories and the China Merchants Group. The China Merchants Group is in litigation with Jing Guang Enterprises in the group of companies with which the Company in these winding-up proceedings is associated. Attempts made to obtain financial statements and other documents from Daily On have apparently been met by resistance.

12. Further, the value of the shares in Daily On is a matter apparently of some dispute. In so far as the liquidators may be required to ascertain the value of the shares in Daily On, it would be inappropriate for the accountants who have been the auditors of the China Merchants Group (including Daily On) to take up that post. The contributories may well feel in these circumstances that the proposed liquidators have too close an association with China Merchants to perform their duties in the best interests of the Company without embarrassment and conflict.

13. In the circumstances, in the exercise of the Court's undoubted discretion, I appointed Mr Rainier Lam and Mr David Hague to be the joint and several liquidators of the Company. I further ordered that there should not be a committee of inspection and that the remuneration of the joint and several liquidators be charged on the time cost basis and, subject to leave of the court, be paid out from the assets of the Company.

14. I was confident that I could make the above order at the hearing because all creditors and contributories have been notified of this hearing, at which there was at least a possibility of appointment of liquidators other than those determined at the meetings of creditors and contributories.

15. As for costs, I ordered that the costs of the creditor who appear, i.e. Gitic, be costs in the liquidation and that the Official Receiver's costs should also be costs in the liquidation. As for the costs of the contributory, no order for his costs had been sought, nor would I have granted any costs even if they had been sought, due to the very late stage at which evidence was presented to the Court notwithstanding previous directions for evidence to be filed well in advance and in the absence of any good reason for such substantial delay.