PINEMILL CO LTD v. LAI HONG SAN AND OTHERS

HCCW 19/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) NO. 19 OF 1998

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R U L I N G

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1. On 10 May 2000, Yuen J made an order under section 221 of the Companies Ordinance, Cap. 32 on the application of Pinemill Company Limited ("Pinemill"), a creditor of Weihong Petroleum Company Limited ("WHP"), that the 1st to 5th respondents do appear before a judge to be orally examined on oath "respecting the affairs of WHP, particularly and without limiting the generality of the foregoing, the purported dealings of WHP with Evernew Consultants Limited, Fancifull Profits Limited and Top Smile Investment Limited, Grand Petroleum Holdings Limited and Fenning International Limited and Weihong (Holdings) Company Limited". The respondents were also ordered to file a list of documents in their custody or possession "in anywise relating to WHP" and serve a copy on Pinemill and the liquidators of WHP within 14 days thereof. The private examination of the five respondents took place before me over a period of 20 days in several sittings from 10 to 14 and 16 to 19 July 2001, 5 to 7 September 2001, 22 to 25 and 29 to 30 January 2002, and 5 February 2002. During the examination of the 1st to 4th respondents, the liquidators sought disclosure from each of these individuals of their assets and liabilities. The 2nd respondent did so without objection and no court order was made in that respect. The 1st respondent had initially indicated through his solicitors that he would not agree to provide an affidavit of his assets and liabilities and the matter would have to be argued. Subsequently, the 1st respondent agreed to do so and an order was made by consent on 3 December 2001. The 3rd and 4th respondents refused to provide the affidavit and it was agreed that it would be more convenient for me to hear submissions and rule on this matter at the end of the examination of the last of the respondents. I heard arguments on this from Mr Kinnison for the liquidators, Mr Remedios for the 3rd respondents and Mr Shieh for the 4th respondent on 6 and 7 February 2002 and I am indebted to counsel for their submissions and research.

2. I propose to give only a brief background of WHP and its affairs insofar as it is necessary to make my ruling comprehensible, in case there may be proceedings in future against some of these respondents.

3. Pinemill presented a petition to wind up WHP in January 1998, having obtained a default judgment of over HK$19 million in July 1997. Pinemill had supplied petroleum products to WHP and the latter sold them to customers in the mainland at a profit. A winding-up order was made in March 1998 and the liquidators were appointed in June 1998. Notwithstanding two statements of affairs were filed in May and June 1998, the liquidators had not been able to carry out a proper review of these statements because most of the books and records of WHP were missing. Questionnaires were served by Pinemill on the former directors but the replies received were inadequate for the liquidators to gain a proper understanding of the operations and activities of WHP. Hence, Pinemill applied for an order under section 221 to examine the respondents. It was the only creditor that had submitted a proof of debt in the liquidation.

4. WHP was incorporated on 6 June 1995. On 13 December 1995, Weihong (Holdings) Company Limited ("WHH") and Yue Chun Shan, the 2nd respondent herein, were appointed directors. WHH and the 2nd respondent together owned beneficially the entire issued share capital of WHP. Lai Hong San, the 1st respondent herein, is the majority shareholder and a director of WHH. Before July or August 1996, the 1st and 2nd respondents were responsible for the running of WHP. The 2nd respondent had resigned as a director on 14 November 1997. WHH remained as a director at the time WHP was wound up.

5. In December 1995, WHP had entered into a joint operation contract with a Chinese entity known as Weizhou Daya Bay Bonded Oil Terminal to carry out operations involving the import and export of petroleum products at Weizhou, Daya Bay. In May 1996, WHH entered into an equity joint venture contract with a Chinese entity known as Weizhou Daya Bay Import and Export Corporation pursuant to which an equity joint venture company known as Weizhou Weihong Petrochemicals Storage and Pier Company Limited ("the EJV Company") was established. The EJV Company had entered into various construction contracts to build storage facilities for petroleum products and a pier at Weizhou, Daya Bay.

6. Tong Chi Keung and Liu Ying Shing Claudius, the 3rd and 4th respondents herein, were appointed directors of WHP on 29 October 1996. They had however operated the business of WHP on a trial basis from about August 1996 before their formal appointment as directors, as they have said in their oral examination. They both resigned on 20 November 1996, not long after a shareholders' agreement dated 11 November 1996 relating to Grand Petroleum Holdings Limited ("GPH") was made between Fenning International Limited ("Fenning"), New Bright Enterprises Limited ("New Bright"; which is owned by the 1st respondent), Tierce Development Limited ("Tierce"; which is owned by the 2nd respondent) and GPH. The shareholders of Fenning were Evernew Consultants Limited ("Evernew"; which is owned by the 3rd respondent), Top Smile Investment Limited ("Top Smile"; which is owned by the 4th respondent) and Fancifull Profits Limited ("Fancifull"; which is owned by one Alex Wong Ching Ping).

7. It was recited in the shareholders' agreement that HK$105 million was advanced to WHP by Evernew, Top Smile and Fancifull as at the date of the agreement to enable WHP to meet its working capital requirements. Whether they had done so was a matter that had been gone into in considerable length in the examination of the respondents. The respondents have disclosed a number of receipts issued by WHP for some of the payments alleged to have been received by WHP from the shareholders of Fenning but the liquidators have not been able to identify such payments from the bank records of WHP.

8. By the shareholders' agreement, Fenning, New Bright and Tierce became shareholders of GPH, holding 49%, 31% and 20% respectively and the 1st to 4th respondents were appointed the first directors of GPH. The shareholders' agreement also provided for the funding of GPH. There was to be an initial funding of HK$105 million and it was to be provided in this manner: (1) WHP was to "repay" to the shareholders of Fenning the sum of HK$105 million; (2) the shareholders of Fenning were to advance to Fenning immediately HK$105 million; (3) Fenning was to advance to GPH immediately HK$105 million; and (4) GPH was to advance to WHP immediately HK$105 million, which would be interest free and repayable on demand. It was further provided that such interests of WHP and WHH in the petroleum business, including their interests in the contracts concluded with the various Chinese entities referred to above, were to be transferred to Grand Petroleum Company Limited (a wholly owned subsidiary of GPH) and the EJV Company and that WHP was to cease trading by 31 March 1997.

9. It is the liquidators' contention that the business interests of WHP were transferred away for a nil consideration, in view of the round robin arrangement for the funding of GPH as provided in the shareholders' agreement. The liquidators seek a full disclosure of the assets of the 3rd and 4th respondents to find out whether they had received any secret profit or commission from the transferees or other entities for sanctioning the transfer of the interests and assets of WHP. This is the first ground for seeking an affidavit on assets and liabilities of the respondents. I shall refer to this as the "secret profit" ground.

10. In August 1996, the 3rd and 4th respondents were added as signatories to the existing bank accounts of WHP at the Kincheng Banking Corporation and the new accounts opened at the Liu Chong Hing Bank Limited. The 4th respondent was the sole signatory of the group B signature in the Liu Chong Hing Bank accounts and his signature was required on every cheque drawn on those accounts. Based on the materials supplied by these banks, the liquidators have identified certain material transactions that would require explanation from the 3rd and 4th respondents. I shall refer to these as "questionable transactions" and they would be dealt with in detail in due course. Although copies of the cheques of WHP for the questionable transactions were obtained by the liquidators who would have known the payees of the cheques or the identity of the person who had endorsed the cash cheques, the liquidators would wish to see the bank statements of the 3rd and 4th respondents to find out how the money was spent after the funds were received by the respondents. The liquidators were not satisfied with the explanation given by these respondents in the oral examination as to how the funds were spent and they wish to verify the respondents' answers by looking at their bank statements. This is the second ground upon which the liquidators would require an affidavit from these respondents disclosing their assets and liabilities.

11. The third and last ground on which the liquidators would require disclosure of the assets and liabilities of the 3rd and 4th respondents is to ascertain whether it is worth pursuing them to judgment. I shall refer to this as the "powder and shot" ground. On that basis, the disclosure sought is along similar lines as an order for disclosure against a judgment debtor under Order 48 of the Rules of the High Court.

The disclosure sought

12. I attach as a schedule to this ruling the terms of the draft order sought by the liquidators for ease of reference. It is noted that the respondents are required to give disclosure of information on affidavit and to produce relevant documents or to give authorisation to the liquidators to approach the relevant bodies to obtain such documents, insofar as they are not in the possession of the respondents.

13. For the disclosure sought on the "powder and shot" ground, the liquidators would require disclosure to be given from some time in 1996 up to present. The scope of the disclosure sought is very wide indeed. The respondents are required to disclose all assets beneficially owned by them or by any entity in which they held 25% or more of the interest. Assets include bank accounts, wages or other emoluments, shares and all real and personal property with a value of over HK$50,000.00. They are required to disclose all outgoings and liabilities relating to the affairs of WHP over the six year period and as at the date hereof, details of their own outgoings and liabilities exceeding HK$10,000.00. I understand from counsel that they have not been able to find any reported case in England or Australia in which the court had ordered disclosure and production of documents of such a wide ranging nature under similar legislation in a companies winding up.

14. In respect of the disclosure sought on the "secret profit" ground, the liquidators seek disclosure and production of documents from one or two months of three alternative start dates: 8 February 1996 (the date when the 3rd respondent's wife Wong Miu Yee signed a contract with WHP to purchase 49% interest of WHP in the projects of the bonded oil terminal and pier in Weizhou, Daya Bay for the sum of HK$200 million), July 1996 (when the 3rd and 4th respondents and Alex Wong Ching Ping were approached to invest in WHP according to a letter of the 4th respondent's solicitors to the liquidators dated 26 November 1998), or 1 September 1996 (the date when WHP's interest in the joint operation contract was cancelled and a substitute joint operation contract was made between Grand Petroleum Company Limited and the Chinese entity). The end date of the disclosure and production of documents sought is one to two months from 15 to 31 October 1997 (15 October 1997 was the date when a shareholders' agreement relating to GPH was made between Fenning, Tierce and GPH by which the terms regulating the participation of the shareholders in GPH were set out after Fenning had purchased the entire shareholding of New Bright in GPH). Under this ground, the liquidators would only seek an order under paragraphs 1 and 2 in the schedule, limited by the start and end dates as I have mentioned.

15. For the disclosure and production of documents sought on the "questionable transactions" ground, the liquidators seek a start date of one to two months before the transaction in question during August to November 1996 and an end date of one to two months from 16 January 1997 (the date of the last questionable transaction made from the bank account of WHP to GPH). The liquidators seek an order in terms of paragraphs 1, 2 and 7 in the schedule, limited by the start and end dates in the way as described.

16. I propose to consider the disclosure sought first on the "powder and shot" ground, then on the "secret profit" ground, and lastly on the "questionable transactions" ground. I would first deal with the legal principles involved before I apply them to the applications I am concerned with.

17. As there is apparently no local decision on the scope of an examination and the production of documents under section 221 of Cap. 32, I have been referred by counsel to English and Australian cases. In these jurisdictions, legislation similar to our section 221 has been enacted. The wording of the foreign legislation is not identical. It has long been recognised that the power conferred under section 221 requiring a person to attend court to be privately examined and produce documents is an unusual and extraordinary power that is inquisitorial in nature and it must be carefully exercised. In considering whether the principles developed in the English and Australian cases should be applied in Hong Kong in respect of such an extraordinary power, it is important to bear in mind the differences in the legislation enacted in the three places.

The legislation in Hong Kong, England and Australia

18. Of the three places, the legislation in Hong Kong is the most restrictive. I set out the relevant provisions in section 221 of Cap. 32 as follows:

"(1) The court may, at any time after the appointment of a provisional liquidator or the making of a winding-up order, summon before it any officer of the company or person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs, or property of the company.

(2) The court may examine him on oath concerning the matters aforesaid, either by word of mouth or on written interrogatories, and may reduce his answers to writing and require him to sign them.

(3) The court may require him to produce any books and papers in his custody or power relating to the company, but, where he claims any lien on books or papers produced by him, the production shall be without prejudice to that lien, and the court shall have jurisdiction in the winding up to determine all questions relating to that lien."

19. The equivalent English legislation is section 236 of the Insolvency Act 1986 and the relevant provisions are as follows:

"(2) The court may, on the application of the office-holder, summon to appear before it -

(a) any officer of the company,

(b) any person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or

(c) any person whom the court thinks capable of giving information concerning the promotion, formation, business, dealings, affairs or property of the company.

(3) The court may require any such person as is mentioned in subsection (2)(a) to (c) to submit an affidavit to the court containing an account of his dealings with the company or to produce any books, papers or other records in his possession or under his control relating to the company or the matters mentioned in paragraph (c) of the subsection."

20. The Australian Corporations Law gives the widest power in this area and this is essential to understanding the relatively liberal approach adopted by the Australian courts in the scope of an examination allowed under the legislation. The relevant provisions in the Corporations Law may be given as follows:

"596B(1) The Court may summon a person for examination about a corporation's examinable affairs if: ...

(b) the Court is satisfied that the person:

(i) has taken part or been concerned in examinable affairs of the corporation and has been, or may have been, guilty of misconduct in relation to the corporation; or

(ii) may be able to give information about examinable affairs of the corporation."

"596D(1) A summons to a person under ... section 596B is to require the person to attend before the Court: ...

(b) to be examined on oath about the corporation's examinable affairs.

(2) A summons to a person under ... section 596B may require the person to produce at the examination specified books that:

(a) are in the person's possession; and

(b) relate to the corporation or to any of its examinable affairs."

21. The term "examinable affairs" is defined in section 9 of the Corporations Law as follows:

" 'examinable affairs", in relation to a corporation, means:

(a) the promotion, formation, management, administration or winding up of the corporation; or

(b) any other affairs of the corporation (including anything that is included in the corporation's affairs because of section 53); or

(c) the business affairs of a connected entity of the corporation, in so far as they are, or appear to be, relevant to the corporation or to anythisng that is included in the corporation's examinable affairs because of paragraph (a) or (b)."

22. One must then turn to section 53 which is a lengthy provision and the material part of it reads as follows:

"For the purposes of the definition of 'examinable affairs' in section 9..., the affairs of a body corporate include:

(a) the promotion, formation, membership, control, business, trading, transactions and dealings (whether alone or jointly with any other person or persons and including transactions and dealings as agent, bailee or trustee), property (whether held alone or jointly with any other person or persons and including property held as agent, bailee or trustee), liabilities (including liabilities owed jointly with any other person or persons and liabilities as trustee), profits and other income, receipts, losses, outgoings and expenditure of the body;"

23. The word "property" in section 53 is defined in section 9 to mean "any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real and personal property of any description and includes a thing in action".

The discretion of the court

24. It is not in dispute that where an order for examination is made under section 221 and in the course of the examination, which is presided over by a judge or a master, the court does have discretion whether to allow a question put to the person under examination. See section 62(1) of the Companies (Winding-up) Rules. This discretion to limit the ambit of the examination is recognised by the English and Australian courts, notwithstanding the difference in the wording of the legislation, to ensure fair play and to avoid oppression. As stated by Street J in Re Hugh J. Roberts Pty. Ltd [1970] 2 N.S.W.R. 582 at 585:

"It is not without significance that the Master or Deputy Master in Equity presides over the examinations. The type of examination which could be vexatious, oppressive or harassing will not be difficult to recognize. If counsel is appearing for the party being examined, he will no doubt take objection where necessary. And if the examinee is unrepresented, one can be confident that the Master himself would intervene were a situation to develop where the examination departed into a field which is abusive of the process of the court."

25. Similarly, in Re Castle New Homes Ltd [1979] 1 WLR 1075 at 1092, Slade J had this to say:

"The court generally trusts the liquidator to put only such questions as are necessary in the interests of the company: see Re North Australian Territory Co. (1890) 45 Ch D 87 at 91 per Cotton LJ. In this context it is further important to remember that the court in ordering an examination does not give carte blanche in relation to the questions which may be asked of the witness at the examination. If a particular line of enquiry is oppressive or if there are good reasons why particular questions should not be answered (for example, perhaps, if questions of privilege arise), it is the right and duty of the registrar presiding to limit the enquiry."

26. In the exercise of this discretion, the court must perform a balancing exercise between the competing public and private interests. There is the need to assist the liquidator to obtain information to carry out his duties in the liquidation with as little expense as possible and with as much expedition as possible. There is also the need to take into account the interests of the person being examined. In the words of Lord Slynn in British and Commonwealth plc (joint administrators) v. Spicer & Oppenheim [1993] AC 426 at 439 to 440,

"... it is plain that this is an extraordinary power and that the discretion must be exercised after a careful balancing of the factors involved: on the one hand the reasonable requirements of the administrator to carry out his task, on the other the need to avoid making an order which is wholly unreasonable, unnecessary or 'oppressive' to the person concerned. The latter was stressed by Bowen LJ in Re North Australia Territory Co. (1890) 45 Ch D 87 at 93:

'That is an inquisitorial power, which may work with great severity against third persons, and it seems to me to be obvious that such a section ought to be used with the greatest care, so as not unnecessarily to put in motion the machinery of justice when it is not wanted, or to put it in motion at a stage when it is not clear that it is wanted, and certainly not to put it in motion if unnecessary mischief is going to be done or hardship inflicted upon the third person who is called upon to appear and give information.'

Such an approach was stressed more recently by Brightman J in respect of oral examination in In re Bletchley Boat Co. Ltd [1974] 1 WLR 630.

The protection for the person called upon to produce documents lies, thus, not in a limitation by category of documents ('reconstituting the company's state of knowledge') but in the fact that the applicant must satisfy the court that, after balancing all the relevant factors, there is a proper case for such an order to be made. The proper case is one where the administrator reasonably requires to see the documents to carry out his functions and the production does not impose an unnecessary burden on the person required to produce them in the light of the administrator's requirements. An application is not necessarily unreasonable because it is inconvenient for the addressee of the application or causes him a lot of work or may make him vulnerable to future claims, or is addressed to a person who is not an officer or employee of or a contractor with the company in administration, but all these will be relevant factors, together with no doubt many others."

27. There is also useful guidance in the following dicta of Sir Nicolas Browne-Wilkinson in Cloverbay Ltd (joint administrators) v. Bank of Credit and Commerce International SA [1991] Ch 90 at 102:

"It is clear that in exercising the discretion the court has to balance the requirements of the liquidator against any possible oppression to the person to be examined. Such balancing depends on the relationship between the importance to the liquidator of obtaining the information on the one hand and the degree of oppression to the person sought to be examined on the other. If the information required is fundamental to any assessment of whether or not there is a cause of action and the degree of oppression is small (for example in the case of ordering premature discovery of documents) the balance will manifestly come down in favour of making the order. Conversely, if the liquidator is seeking merely to dot the i's and cross the t's of a fairly clear claim by examining the proposed defendant to discover his defence, the balance would come down against making the order. Of course, few cases will be so clear: it will be for the judge in each case to reach his own conclusion."

The production of documents

28. As I have mentioned earlier, the liquidators seek disclosure on affidavit and the production of documents in this application. I propose to deal with production of documents first.

29. It is pertinent to note that the power to examine on oath is provided in sections 221(1) and (2) and the power to require production of documents is provided in section 221(3) and that the two powers are not coextensive. The power to examine on oath extends to information "concerning the promotion, formation, trade, dealings, affairs, or property of the company." In contrast, the power to order an examinee to produce documents is in respect of "any books and papers in his custody or power relating to the company", not "concerning the matters aforesaid", as provided in subsection (2). Thus, in the order of Yuen J requiring the respondents to attend court to be examined, it was stipulated that they were to be examined respecting the affairs of WHP, particularly and without limiting the generality of the foregoing, the purported dealings of WHP with Evernew, Fancifull, Top Smile, GPH, Fenning and WHH. As for the order of Yuen J requiring the respondents to file a list of documents, this was in relation to documents in the custody or possession of the respondents "in anywise relating to WHP".

30. The Hong Kong legislation is different from the English and Australian legislation as regards the power to order production of documents in an examination of this kind. It is clearly provided in section 236(3) of the Insolvency Act that an examinee may be ordered to produce documents relating to the company or the matters mentioned in subsection (2)(c), i.e. concerning the promotion, formation, business, dealings, affairs or property of the company. Likewise, section 596D(2) of the Corporations Law provides that an examinee may be required to produce documents that "relate to the corporation or to any of its examinable affairs."

31. I turn to the documents that the liquidators seek from the 3rd and 4th respondents as set out in the schedule hereto. The documents sought relate to the bank accounts, management and audited accounts of the 3rd and 4th respondents or to any firm, business or company in which either respondent held an interest of 25% or more; the receipt of wages or emoluments of these respondents (other than from WHP, for which disclosure has been given); the share certificates held by these respondents; the real and personal property owned by them; the tax liability of these respondents; the outgoings and liabilities relating to the affairs of WHP and their own outgoings and liabilities. With the possible exception of the outgoings and liabilities "relating to the affairs of WHP", I am unable to see how any of the other documents sought would be within my power to order production of, even if I were to interpret liberally the words "relating to the company" in section 221(3).

The "powder and shot" ground

32. I turn to consider the first of the grounds for which the liquidators seek extensive disclosure of the personal assets and liabilities of the respondents in question over a six year period.

33. I was referred to the decision of the Federal Court of Australia in Grosvenor Hill (Queensland) Pty. Ltd v. Barber and Anr. (1994) 120 ALR 262, which applied the decision of the Supreme Court of South Australia in Gerah Imports Pty. Ltd v. The Duke Group Ltd (1994) 12 ACSR 513. The discovery sought was for the production of insurance policies for professional indemnity, taken out by the accountants to the company in one instance and by the valuers to the company in another instance. The liquidators sought production of the policies to help them to determine the likely possibility whether any judgment obtained against the potential defendants would be met.

34. It was held in these two cases that the "examinable affairs" of a company would include the company's choses in action, by virtue of how that phrase is defined in sections 9 and 53 of the Corporations Law and the definition of the word "property" in section 9. The potential claims against the accountants or valuers comprised a chose in action of the company and a potential asset in the winding up. Information about whether any judgment would be met by the potential defendants was about the company's property and thus fell within its "examinable affairs". Production of the policies was ordered in both instances as the documents "are relevant to matters to which the examination relates or will relate", as provided in section 597(9) of the Corporations Law. It should be noted that the information sought to evaluate the company's prospects of recovery was limited and readily available in the hands of the examinees.

35. Mr Shieh for the 4th respondent has not sought to argue that the information sought on the assets and liabilities of the individual is not within the ambit of section 221 but expressly reserves his position to argue this point if the matter should proceed further. He submitted that if it were within the court's power to order full financial disclosure, the application should be refused as a matter of discretion. As I have not heard submissions on this, I prefer to leave open the question whether the worth of a potential defendant may be regarded as "concerning the ... affairs, or property of the company" as provided in section 221(1), which has a narrower operation than "examinable affairs" in the Corporations Law in Australia. I shall assume in favour of the liquidators that I do have the power to order full financial disclosure of the respondents and consider whether I ought to do so in the exercise of my discretion.

36. In giving a broad and generous interpretation to "examinable affairs" in the Corporations Law to include the financial worth of a potential defendant, the Full Court in Grosvenor Hill was alive to the possibility that the provision might be used oppressively to the private interests of the examinee. At page 272 of the report, the Full Court referred to the "floodgates" argument that to adopt such a construction would permit the examination of all persons against whom the company had a claim as to their personal financial details, on the basis of ascertaining the examinee's ability to satisfy any judgment in the company's favour. Whilst the Full Court had concluded that the ambit of the power as construed would be sufficiently wide to enable such information to be sought from a potential defendant, the court emphasised that it is important to bear in mind the circumstances in which the power will be exercised and that "the court retains a discretion in appropriate cases to refuse to exercise the power or to make its exercise subject to stringent conditions."

37. I do not doubt that the concern of the liquidators as to whether any judgment against these respondents could be satisfied is realistic and practical, particularly as legal proceedings against the respondents are likely to be long and expensive. It must not be overlooked that the respondents are not judgment creditors, as the liquidators have sought to equate them to, nor are they contributories so that they would have come under an undoubted obligation to pay to the company the amount due by way of contribution, as in the cases mentioned in Grosvenor Hill, supra. at 268 where the Full Court referred to a power of long standing in which the courts have allowed "a third party or a banker to be examined as to the financial affairs of a contributory including requiring the production of banker's books relating to any account which the contributory had with the bank ... to ascertain the worth of the contributory as a matter incidental to making a decision to pursue the contributory for the amount due by way of contribution." This is not a case of ordering premature discovery as liability on the part of the respondents to the company has yet to be established.

38. Even without the production of documents relating to the financial worth of the respondents (which I have held is not within my power to order), I am inclined to think that the disclosure on affidavit sought in paragraphs 1 to 7 of the schedule is oppressive. Full financial disclosure is burdensome and intrusive to these respondents. Balancing the reasonable requirements of the liquidators and the relative importance of the information sought against the oppression to the respondents, I am of the view that the potential for oppression outweighs any perceived advantage to the liquidators. In the exercise of my discretion, I refuse to order disclosure on affidavit of paragraphs 1 to 7 of the schedule on the "powder and shot" ground.

The "secret profit" ground

39. In essence, what the liquidators seek to do is to find out whether these respondents had received any profit or commission from any entity, other than WHP, for transferring the assets and business interests of WHP to the wholly owned subsidiary of GPH and the EJV Company at apparently no consideration, as alleged by the liquidators. For that purpose, the liquidators wish to look at the bank accounts, audited and management accounts of the respondents and any firm or business or company in which they held an interest of 25% or more. I have ruled that it is not within my power under section 221(3) to order production of such documents, as they are not documents "relating to the company". As submissions were made by the respondents that production of these documents should not be allowed as the discovery sought is a fishing expedition, on the assumption that it would be within my power to order disclosure, I would also deal with this objection of the respondents.

40. There is a divergence in the English and Australian cases as to whether questions of a fishing nature should be allowed in an examination of this kind. To conduct a fishing expedition in this context is to begin an examination without any clear suspicions and to conduct an examination to determine if any matters or facts might emerge which may be of interest or assistance (see McPherson's Law on Company Liquidation, by Andrew Keay, 2001 ed., page 798). The respondents have urged me to follow the approach of the English courts, which have disallowed fishing questioning in an examination under a similar provision in the Bankruptcy Act 1914 (Re Maundy Gregory [1935] 1 Ch. 65 at 74) and in the context of the winding up of a company (Re James McHale Automobiles Ltd [1997] 1 BCLC 273 at 278). The liquidators have submitted that the more liberal approach of the Australian courts in allowing questions of a fishing nature should be followed (Re Hugh J. Roberts Pty. Ltd, supra. at 586; Re Rothwells Ltd (No. 2) (1989) 15 ACLR 168 at 182; Douglas-Brown v. Furzer (1994) 13 ACSR 184 at 191).

41. I am more inclined to follow the English approach because this is more in keeping with our legislation, which is more restrictive in language. In doing so, I wish to emphasise two points.

42. Firstly, as explained in two subsequent decisions concerned with the Bankruptcy Act 1914 section 25 (Re A Debtor (No. 472 of 1950) [1958] 1 WLR 283 and Re A Debtor (No. 12 of 1958) [1968] 1 WLR 788), it is provided that the court may summon before it "any person known or suspected to have in his possession any of the estate or effects belonging to the debtor, or supposed to be indebted to the debtor" and as the statutory provision speaks of "suspicion and supposition", it is not necessary to require proof or even a prima facie case to be made out to require the examinee to give information. The wording in section 221(1) is similar in this respect. Thus, as long as the liquidators can demonstrate some reasonable ground for suspicion, they should be permitted to conduct the examination and the enquiry would not be regarded as fishing.

43. Secondly, in disallowing fishing questions, it does not mean that a liquidator is not permitted to probe the circumstances relating to those on which the examination is centred, in the hope of determining whether there is another line of enquiry which should be pursued to ascertain the truth (McPherson's Law on Company Liquidation, op. cit., page 815; Re Spedley Securities Ltd (1990) 1 ACSR 726 at 741).

44. Applying the above principles to the present application, I am not satisfied that the enquiry sought by the liquidators is founded on reasonable suspicion. It is not without significance that the possibility that these respondents might have received secret profit or commission from the transferee was simply not canvassed in the thorough and extensive examination before me. This was put forward for the first time in the liquidators' written submissions for this application, after the conclusion of the examination. Mr Shieh submitted that the "secret profit" ground was put forward by the liquidators to salvage their application, because they were driven to come up with some explanation for seeking the disclosure. I do not need to go as far as that. Suffice it to say that the enquiry was purely speculative. I agree with the submissions of Mr Shieh that one must look at the commercial reality and ask who would be likely to be making payments to these respondents to induce them to transfer away the assets and business interests of WHP. If, as suggested by the liquidators, the transferee might have done so, this would be GPH and the entities associated with it, such as Fenning. The same individuals are involved in GPH and the associated entities, i.e. the 3rd and 4th respondents and Alex Wong Ching Ping. It would be unreal to suggest that these individuals might have paid a profit or commission to themselves in order to facilitate the transfer of WHP's assets to an entity owned by them.

45. For the above reasons, I refuse to order production of the documents in paragraphs 1 and 2 of the schedule on the ground that it is not within my power to do so. Alternatively, if it were within my power to do so, I decline to exercise my discretion to so order because the enquiry is of a fishing nature.

The "questionable transactions" ground

46. On the production of documents in paragraphs 1, 2 and 7 in the schedule, I have already ruled that it is not within my power to make this order because the documents sought, with the possible exception of outgoings and liabilities relating to the affairs of WHP, are not documents relating to the company.

47. I would still need to make a ruling whether disclosure on affidavit of the matters sought in paragraph 7 should be ordered. Further, as submissions had been made by the respondents that I should not exercise my discretion to order production of documents on the assumption that I had power to do so, I propose also to deal with the question whether I should exercise my discretion on that assumption. I would need to consider the position of the 3rd and 4th respondents separately, as they were required to explain different transactions regarding the payments made out of the bank accounts of WHP.

The 3rd respondent

48. I would deal with the "questionable transactions" affecting the 3rd respondent under the following heads.

(i) 2 cheques totalling HK$1 million drawn on 13 and 15 August 1996

49. These were two cash cheques drawn on WHP's account at the Kincheng Banking Corporation. In a general ledger account activity detail report of WHP compiled by Tsang Yung Edwin, who is the 1st respondent's employee and the accountant of WHH, it was stated that two sums of HK$600,000.00 and HK$400,000.00 were paid to the 3rd respondent on 13 and 15 August 1996. However, the cheque numbers were not given in that report. The bank statements of WHP showed that two cash cheques in these identical sums were paid out of the account on the same dates as stated in Tsang's report. The 2nd respondent had commissioned a report from Fan Mitchell & Company and the auditors stated in the balance sheet of their report that the 3rd respondent had owed WHP HK$1 million as at 6 September 1996, the basis for that would appear to be the report compiled by Tsang, as it could not be ascertained from the bank records of WHP that the total sum of HK$1 million was paid to the 3rd respondent.

50. The 3rd respondent was questioned by counsel for Pinemill and by Mr Kinnison whether he had received the two sums totalling HK$1 million. He denied that he owed WHP this sum as stated in the internal report of WHP and in the Fan Mitchell report. He could not remember if the two cash cheques were received by him and he stated that if he had received the money, he would have taken the money in cash to China to pay the contractors engaged in the construction work of the oil terminal and pier in Daya Bay. In the course of the 3rd respondent's examination, counsel had asked him on two occasions if he would be willing to write to his bank to ascertain if these sums had indeed been paid to him. This was objected to by Mr Remedios and I had declined on each occasion to order that the 3rd respondent should verify with his bank if the cash cheques had been paid into his account and provide the information after verification. This was before I had the benefit of considering the cases referred to by counsel in this application and I had disallowed the questioning on the basis that there was no prima facie case to support the allegation that the 3rd respondent had received the funds. Now that I have considered the authorities and as I accept that the liquidators would only need to demonstrate they have some reasonable ground of suspicion that the 3rd respondent had received the funds, I think I was in error in not allowing this line of questioning in the examination.

51. I would not order the 3rd respondent to produce his bank statements for the period in question for the liquidators to verify if he had received the money. What I would do is to order the 3rd respondent to provide an affidavit giving information whether the two cheques in question had been paid into any of his bank accounts, and, if so, the particulars of the withdrawal he had made in respect of the sum, after he has made due enquiry and verification with his bank or banks. The 3rd respondent is to provide this affidavit within 14 days hereof.

(ii) Cheque for HK$2 million drawn on 27 August 1996

52. This is also a cash cheque and it is admitted by the 3rd respondent that he had received the money as he had signed on the back of the cheque. He claimed that the money paid into his account was withdrawn and cash was taken to China to pay for the construction work. No receipts or vouchers were disclosed by the 3rd respondents of the sums he had allegedly paid to the contractors. He had agreed in this instance to write to his bank to verify if the sum had been paid into his account and if so whether it was withdrawn in the manner as he had claimed. That being the case, I decline to order any further disclosure in the exercise of my discretion. I would not have ordered production of the 3rd respondent's bank statements any way, as I do not think it is within my power to do so.

(iii) Various cheques payable to the 3rd respondent, Evernew and Lewell Properties Ltd

53. It is admitted by the 3rd respondent that the funds were received by the payees of these cheques. He has been questioned in his examination about each of them and given an explanation why the cheques were issued to these payees.

54. In respect of the cheques payable to the 3rd respondent, there was a cheque for HK$2.4 million on 4 October 1996 and his explanation is that this was the return on his investment or the dividends paid to him as a result of the operation of the business of WHP by the three investors on a trial basis. However, in an earlier answer he gave to a questionnaire served on him, he had stated that he had no recollection as to the purpose of the payment. The other cheques payable to the 3rd respondent, according to his answers in the examination, were to reimburse him for travelling, hotel and entertainment expenses. The total sum was HK$560,000.00. No receipts or vouchers were disclosed by the 3rd respondent of the expenses allegedly incurred by him for which he was reimbursed by WHP.

55. I do not think it is within my power to order disclosure of the bank statements of the 3rd respondent. In any event, I am not satisfied that any useful purpose would be served in ordering further disclosure as to how the HK$2.4 million was utilised by the 3rd respondent, who has admitted receipt of the money for his own benefit. As for the payments allegedly incurred on behalf of WHP, he had already answered on oath what they were and that all the receipts or vouchers had been handed over to WHP when he was reimbursed. I do not think any further disclosure of the liabilities relating to the affairs of WHP would be appropriate in the circumstances.

56. There were two cheques payable to Evernew, in the sum of HK$2.5 million (31 October 1996) and HK$42 million (20 November 1996). For the first amount, the 3rd respondent's answer in the examination was the same as the cheque payable to him in the sum of HK$2.4 million. I decline to order any further disclosure for the same reason. For the cheque of HK$42 million, it is clear from the bank records that this formed part of the round robin arrangement in four steps that I have described in the earlier part of this ruling, when a series of cheques in the total sum of HK$105 million, all drawn and cleared on 20 November 1996, were paid out of WHP's account and eventually a cheque in the sum of HK$105 million was paid into WHP's account the same day after a full circle. The 3rd respondent has answered on examination that this arrangement was done on the advice of the 5th respondent, the solicitors who prepared the shareholders' agreement. I am not satisfied that any further disclosure is reasonably required by the liquidators from the 3rd respondent regarding this cheque in the circumstances. I wish also to point out that the bank statements of Evernew would be covered in an order made by consent in which the 3rd respondent is to give discovery of various documents.

57. The cheques payable to Lewell Properties Ltd ("Lewell") were in the total sum of HK$634,083.14. The 3rd respondent said in his examination that these were reimbursement by WHP for the decoration expenses and rent incurred by GPH when the latter rented an office for the operation of the business of WHP on a trial basis. Lewell is owned by the 3rd respondent and his wife. According to the 3rd respondent, all the receipts were given by Lewell to WHP when it was reimbursed. I decline to exercise my discretion to order further disclosure on affidavit from the 3rd respondent for the same reason as regards the cheques payable to the 3rd respondent for reimbursement of expenses.

The 4th respondent

58. I would deal with the "questionable transactions" involving the 4th respondent under the following heads.

(i) Cheque payable to Top Smile

59. This was a cheque in the sum of HK$31.5 million drawn on the account of WHP on 20 November 1996 and formed part of the circular arrangement that I have described. For the same reason as regards the cheque issued to Evernew, I decline to order any further disclosure from the 4th respondent. Further, the 4th respondent has disclosed the bank statements of Top Smile in his latest list of documents.

(ii) Cheques payable to the 4th respondent

60. There were three cheques, one was for HK$3 million drawn on 9 September 1996 and the other two were in the total sum of HK$220,000.00 drawn on 31 October and 29 November 1996. The 4th respondent has filed an affirmation on 7 February 2002 in the course of this application disclosing his bank statements showing the deposits of these sums. He has given an explanation in his examination why these cheques were issued to him, the HK$3 million being the return of his investment and the other two sums were reimbursement of expenses incurred. I decline to order further disclosure from the 4th respondent for the same reason as regards similar cheques payable to the 3rd respondent.

(iii) Cheques payable to Fenning and GPH

61. There were six cheques payable to Fenning, one was for the sum of HK$28 million issued on 14 October 1996 and the other five were for the total sum of HK$15,441,452.76. Eight cheques were issued to GPH. I need to be concerned only with the five cheques for substantial payment in the sums of HK$10 million, HK$1.6 million, HK$213,411.40, HK$105,400.00 and HK$733,791.50. The 4th respondent was required to give further disclosure on the ground that he was the sole signatory in the group B signature and he had signed each of these cheques.

62. The 4th respondent was questioned about each of these payments in his examination and in essence his explanation was that the more substantial payments made to Fenning (being HK$28 million, HK$10,350,000.00 HK$520,000.00 and HK$4.5 million) were for letters of credit for the purchase of petroleum products. He has no recollection about the two smaller amounts in the sums of HK$18,392.76 and HK$53,060.00. As for the payments to GPH, he said that the five substantial payments were all for letters of credit issued for the same purpose.

63. I have no power to order the 4th respondent to produce the bank statements, audited and management accounts of Fenning and GPH as these are not documents "relating to the company". In the course of his examination, the 4th respondent has agreed to write to the bank that had issued the letter of credit for HK$28 million for further documents. I should also mention that the 3rd respondent has agreed to an order for specific discovery disclosing on affidavit the documents in his possession, custody or power including the corporate documentation and financial records of GPH and Fenning and documents relating to the shipment of gas oil in October 1996. Similarly, in a letter of the solicitors for the 4th respondent to the liquidators' solicitors dated 4th January 2002, it was stated that the 4th respondent was prepared to provide an affidavit dealing with all the documents in the draft order put forward by the liquidators without consenting to any formal order. In the circumstances, I decline to exercise my discretion to order further disclosure from the 4th respondent in this respect.

Summary

64. Save for one request under the "questionable transactions" involving the alleged receipt by the 3rd respondent of HK$1 million in August 1996, I decline to order any further disclosure or production of documents by the 3rd and 4th respondents. The costs of this application are reserved to the adjourned hearing in which I will hear all the parties involved in the examination of each of the respondents regarding the costs incurred in the examination and various applications arising therefrom for which two days have been reserved.

Schedule

Terms of the draft order sought

IT IS ORDERED THAT, within 14 days of the date hereof, the [3rd/4th] Respondent do make and file an Affidavit, giving full information as to his assets and liabilities as at the date hereof, and of the following facts and matters, including production of all relevant documents in or exhibited to that Affidavit:-

1. For the period from [ ] to [ ], and as at the date hereof, details of all bank accounts in Hong Kong or elsewhere, held in his sole name or jointly with any other person, or of any firm or business or company of which he is or was a partner, sole proprietor or officer, and in which he held, during the aforesaid period, and/or as at today's date, an interest of 25% or more, or in which he held, during the aforesaid period, and/or as at today's date, 25% or more of the issued shares of any such firm or company, either legally or beneficially together with:-

a. Copies of all available passbooks and bank statements; and

b. Provision of a written authorisation to the liquidators to approach the relevant banks and obtain copies of the said passbooks and bank statements, insofar as the said passbooks and bank statements are not now in the possession of the [3rd/4th] Respondent (with confirmation in that authorisation that any costs or expenses which might be incurred or required by any bank will be paid by the [3rd/4th] Respondent or reimbursed by him to the liquidators).

(For the avoidance of doubt, references in this Order to a "bank" include any other financial institution, including, without limitation, a building society, and any reference in this Order to the singular includes the plural, the vice versa).

2. For the period from [ ] to [ ], and as at the date hereof, management and audited accounts of any firm or business or company of which the [3rd/4th] Respondent is or was a partner, sole proprietor, or officer, and in which he held, during the aforesaid period, and/or as at today's date, an interest of 25% or more, or in which he held, during the aforesaid period, and/or as at today's date, 25% or more of the issued shares of any such firm or company, either legally or beneficially.

3. Details of all wages or other emoluments or benefits paid to or for the use or benefit of the [3rd/4th] Respondent, with production of any wage or salary slips from his employer.

4. Details of all shares and stock certificates held in the name of the [3rd/4th] Respondent or on his behalf.

5. Save as already provided pursuant to paragraph 4 above, full details of all real and personal property with a value over HK$50,000, owned by the [3rd/4th] Respondent legally or beneficially, and either in his own name or with any other person, or any firm or business or company, together with:-

a. production of certified copies of the deeds or Land Registry entries in respect of any real property as aforesaid;

b. registration details of all vehicles owned by or in his name; and

c. full details of any sale of such real or personal property.

6. Details of all revenue bodies or authorities anywhere in the world to which the [3rd/4th] Respondent has submitted Tax Returns, or from which he has received an assessment, together with:-

a. Provision of copies of all available Tax Returns and assessments; and

b. Provision of a written authorisation to the liquidators to approach the Inland Revenue Department in Hong Kong, and to approach any other revenue body or authority elsewhere in the world, to obtain details and copies of all of the [3rd/4th] Respondent's personal Tax Returns and assessments in Hong Kong and elsewhere in the world, from that department and/or from any such body or authority (with confirmation in that authorisation that any costs or expenses which might be incurred or required by the Inland Revenue Department in Hong Kong, or by any other revenue body or authority elsewhere in the world, will be paid by the [3rd/4th] Respondent or reimbursed by him to the liquidators).

7. For the period from [ ] to [ ], details of all outgoings and liabilities relating to the affairs of WHP, and, as at the date hereof, details of their own outgoings and liabilities (exceeding HK$10,000), including production of copies of all documents evidencing the same, and production of copies of any Judgments or Court Orders which may have been entered against his name anywhere in the world.