PACIFIC ELECTRIC WIRE & CABLE CO LTD v. THE REGISTRAR OF COMPANIES

HCMP 4691/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4691 OF 2003

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J U D G M E N T

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1. This is an originating motion taken out by Pacific Electric Wire & Cable Company Limited ("PEWC"), seeking an order under section 290 of the Companies Ordinance, Cap. 32 that the dissolution of Central Pacific Enterprises Limited ("the Company") be declared void and for consequential relief under section 252 for the appointment of new liquidators. PEWC has sought an urgent hearing in view of the imminent delisting of its shares in the Taiwan Stock Exchange.

2. The background matters may be set out as follows.

3. The Company was incorporated in 1994 and was a wholly owned subsidiary of PEWC. 99.99% of the shares in the Company was held by PEWC as the registered shareholder and the remaining share was held by a nominee of PEWC for its benefit. PEWC is one of the largest listed companies in Taiwan. The principal activity of the Company was to provide financing services to certain PEWC group companies and affiliated companies in Hong Kong and the surrounding region. However, the Company had no operating income and all of its investments and expenses were funded by the subsidiaries of PEWC, including Moon View Ventures Limited ("Moonview"), and the subsidiaries of Moonview. Acting as a treasurer within the PEWC group, the Company received funds from one entity and lent the funds onto another entity. Between 1994 to 1999, the funds channelled through the Company in this way amounted to US$800 million.

4. Until December 1999, the Company and Moonview were managed by Trident Finance (Asia) Limited ("Trident"), which is not associated within the PEWC group.

5. On 29 October 1999, the directors made a declaration of solvency regarding the Company. On 8 November 1999, a special resolution was passed by the members of the Company that the Company be wound up and Mr Lau Dick Pau of D P Lau & Co. ("DP Lau"), the Company's auditors, be appointed as liquidator. The final general meeting was held on 16 August 2001, at which it was resolved that the books, accounts and documents of the Company be retained by the liquidator and at the expiration of 3 months from dissolution, be destroyed. The liquidator's return of the final general meeting was received by the Registrar of Companies on 22 August 2001. Pursuant to section 239(4), the dissolution of the Company became effective on 22 November 2001.

6. Potential irregularities have since come to light, especially relating to US$266 million in receivables shown as due to Moonview recorded in Moonview's accounts. It was only in early 2003 that it was discovered that this sum was in fact due from the Company to 4 subsidiaries of Moonview, being advances made by them to the Company. Faced with the reality that the amount was clearly not recoverable, it was decided to write off the sum in Moonview's accounts for 2002. This led to an equivalent write-off at the group level in PEWC's consolidated accounts for 2002. When the accounts were filed with the Taiwan Stock Exchange and the Taiwan Securities and Futures Commission ("TSFC"), PEWC was required by TSFC in June 2003 to provide an explanation of the investment loss.

7. PEWC engaged its auditors KPMG to investigate the underlying transactions including a special audit of Moonview's financial statements. However, as no records of Moonview were received from Trident, KPMG was unable to uncover any evidence to substantiate the investment loss and was obliged to qualify its audit opinion in the report to PEWC on 25 August 2003.

8. The report of KPMG was provided to the regulatory authorities in Taiwan and resulted in the suspension of trading in PEWC's shares in the Taiwan Stock Exchange on 1 September 2003. PEWC was notified by the authorities that it must satisfy them that the write-off of US$291 million is properly classified as an investment loss by 28 February 2004, failing which the shares of PEWC would be delisted. To do so, PEWC would need to investigate all intra-group transactions.

9. It would further appear form the working papers provided by DP Lau to PEWC in September 2003 that the receivables of the subsidiaries of Moonview had been assigned by them to Mae Sai Enterprises Limited ("Mae Sai"), a company registered in the British Virgin Islands not connected with the PEWC group, and following the purported assignment, most of the claims were set off against debts of US$186 million allegedly owed to the Company and the balance of US$80 million was waived by Mae Sai. PEWC has no knowledge of these transactions prior to the inspection of the working papers of DP Lau. These transactions may be a device by the previous management of the Company to extinguish all creditors' claims before the declaration of solvency which preceded the voluntary winding-up. There may be a potential misappropriation of funds which requires investigation.

10. PEWC instructed Kroll to investigate the transactions involving the Company in September 2003. Preliminary investigations revealed that substantial funds had been transferred to a number of companies registered in the British Virgin Islands unrelated to PEWC for reasons unknown. Kroll has advised PEWC that it is unable to proceed further with this investigation without the Company being resurrected. As the Company's records have been destroyed, it will be necessary to reconstruct the Company's records from counterpart documents held by banks and other third parties and only the Company is entitled to request such documents.

11. On 16 October 2003, the solicitors for PEWC wrote to DP Lau requesting Mr Lau to resign as liquidator in anticipation of the present application, as PEWC intends to appoint new liquidators following the restoration of the Company to assist in the investigation. Mr Lau replied on 17 October 2003 confirming agreement and resigned as liquidator with immediate effect.

12. PEWC clearly qualifies as a "person who appears to the court to be interested" under section 290(1) as the beneficial owner of all the shares in the Company. It has the requisite proprietary or pecuniary interest to bring this application in that the potential irregularities in which the Company was involved have been extremely prejudicial to PEWC and it is necessary for the Company to be revived so that investigation may be carried out to avoid the delisting of the shares of PEWC.

13. The application is made within two years of dissolution as required by section 290(1).

14. The Registrar of Companies is made the respondent in these proceedings and has confirmed by letter he will not oppose the application subject to a slight amendment to the relief sought.

15. The former liquidator has not been made a respondent. However Mr Lau has been notified by letter of the intended application before it was taken out and has noted the application and confirmed his resignation as liquidator with immediate effect. In view of the fact that notice of the application has been given to him and in the light of his response, I do not think it is necessary to join him as a respondent.

16. I am satisfied I ought to exercise my discretion to revive the Company under section 290 to enable PEWC to carry out the necessary investigation into the intra-group transactions involving the Company. I make an order in terms of the draft submitted to me. I also grant the consequential relief to appoint new liquidators to fill the vacancy and conduct the necessary investigation. There will be an order in terms of the separate draft order submitted to me in that regard.