RE GREAT WALL CYBERTECH LTD

HCCW341/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.341 OF 2003

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REASONS FOR DECISION

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Introduction

1. On 21 June 2003, I made an order appointing Messrs Derek K.Y. Lai and Joseph K.C. Lo, both partners of Deloitte Touche Tohmatsu ("DTT Hong Kong"), as provisional liquidators of Great Wall Cybertech Limited ("the Company"). By a summons dated 18 July 2003, they apply for directions regarding their continuous appointment as provisional liquidators of the Company. At conclusion of the hearing on 25 July 2003, I allowed the application. These are the reasons of my decision.

The relevant circumstances

2. The circumstances leading to this application may be summarised as follows.

3. Before the appointment, the provisional liquidators had carried out a conflict search, which did not reveal any real of potential conflict of interest. However, on 7 July 2003, they came to realise that Deloitte Touche Tohmastu in France ("DTT France") is the present auditor of Great Wall France SAS ("Great Wall France"), a wholly owned subsidiary of the Company, upon receiving for the first time the financial statements of Great Wall France. For 2001 and 2002, the assets of Great Wall France represented about 4.2% and 5% of the Company's consolidated assets and its value of sales represented about 9.9% and 14.2% of the Company's consolidated value of sales respectively.

4. Though they share the same trade name, DTT Hong Kong and DTT France are two separate firms of partnerships. They are independent of each other, having their own management and operation. They have independent source of funds, income and profit as well. There is, however, an arrangement under which certain member firms of DTT may in certain circumstances obtain a financial benefit from the performance of other member firms. DTT France is not legally part of this arrangement but its membership to this arrangement will have retrospective effect once it executes the relevant documentation. When DTT France becomes a member of this arrangement, any benefit derived by DTT Hong Kong from this arrangement depends on the overall performance and profitability of its member firms and is nor referable to any particular engagement of DTT France by any client, including Great Wall France. In 2001 and 2002, Great Wall France paid EURO 25,916.35 and EURO 27,400 respectively to DTT France for their professional fees.

The relevant principles

5. Mr Wong, counsel for the provisional liquidators, have helpfully set out the relevant principles in his written submissions. They are :

(1) The guiding principle in appointment of a liquidator is that he must be independent and must be seen to be independent : Re Stewden Nominees No.4 Pty Ltd (1975) 1 ACLR 185 at 187.

(2) While it is usually undesirable to appoint a person who has been an auditor of the company or his partner as liquidator, the same consideration do not apply to the appointment of a member of a firm of auditors to be the provisional liquidator (as opposed to liquidator) of a company since his duties are more limited in scope. In other words, the degree of independence (whether actual or apparent) demanded from a liquidator is higher than a provisional liquidator : Re Stewden Nominees No.4 Pty Ltd at 188.

(3) In considering whether it should refuse appointing or remove a provisional liquidator on the ground of conflict of interest, the court usually takes into consideration the following matters :

(a) whether there is actual (as opposed to potential) conflict of interest;

(b) whether the assets of the company, for which provisional liquidators are appointed, will be affected or placed in danger by reason of the position of conflict of the provisional liquidator; and

(c) whether it would be more costs effective to appoint or affirm the appointment of a person who is more familiar with the affairs of the company as a provisional liquidator.

See : Re Arrows Ltd [1992] BCC 121 at 123C-124A; Re Texxan Industries Ltd (in liquidation) [1990] 2 HKC 347 at 353F, 356A; and Re I-China Holding Limited, unrep., HCCW 1321/2002, 11 December 2002, per Deputy Judge Barma S.C. at paras.31-32.

(4) It would appear from the authorities that the court's general approach is this :

(a) it would appoint or confirm the appointment of provisional liquidators where there is only potential (as opposed to actual) conflict of interest; and

(b) any actual conflict of interest that may arise in the future will be dealt with by way of seeking further directions from the court.

See : Re Arrows Ltd and Re I-China Holding Limited.

6. With these principles in mind, I now turn to consider the application.

The application

7. There is nothing to suggest that there is any actual or potential conflict of interest arising from the position of DTT Hong Kong and DTT France. Although they share the same trade name, DTT Hong Kong and DTT France are for all practical purposes two separate and independent firms. It is arguable that possible conflict may arise if DTT France decides to join the scheme of arrangement for sharing of profits. However, whether any conflict of interest, actual or potential, will in reality arise depends on the circumstances of the time. At this stage, it remains speculative. In the circumstances, it is undesirable to remove the provisional liquidators purely because of this rather remote possibility of conflict of interest, which is contingent upon DTT France joining the scheme of arrangement and the relevant circumstances at the time. Costs and time would be wasted if other accountants were to be appointed to replace them. In my view, the position will be adequately safeguarded by the provisional liquidators undertaking that upon DTT France joining the said scheme of arrangement, they shall apply to court for further directions as soon as reasonably practicable. The provisional liquidators are willing to give such an undertaking to the court.

8. For the above reasons, I allow the application subject to the aforesaid undertaking by the provisional liquidators.