THE OFFICIAL RECEIVER v. CHOW TUNG SHAN

HCMP 1334/2018

[2019] HKCFI 2658

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1334 OF 2018

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BETWEEN

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D E C I S I O N

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INTRODUCTION

1.  On 18 July 2019, Master KH Hui acceded to the application (“the Disqualification Application”) made by the Official Receiver (“the OR”) and ordered that the Respondent (“Mr Chow”) should not, without leave of the Court, be a director of a company, a liquidator of a company, a receiver or manager of a company’s property, or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company, for a period of 1 year. The learned master also ordered Mr Chow to pay costs of the application to the OR. On 9 August 2019, Mr Chow lodged an appeal against this decision (“the Master’s Decision”) by filing a Notice of Appeal.

2.  An appeal against a disqualification order made by a master against a company director is governed by Order 58 and should be made to a judge of the Court of First Instance[1]. It is trite that an appeal within the ambit of Order 58 would be dealt with by a hearing de novo, as if the matter came before the judge for the first time.

3.  By virtue of Order 58 rule 1(3), an appeal against the Master’s Decision should be lodged within 14 days after the Master’s Decision was given. The Notice of Appeal was filed just over 1 week after the deadline stipulated in the rule. Accordingly, Mr Chow would need to seek leave to appeal out of time, and may only proceed with the appeal if such leave is given.

4.  As to whether leave to appeal out of time should be given to Mr Chow, the OR adopts a neutral stance. However, I would not grant leave to appeal to Mr Chow merely because the OR is neutral on this. I have to examine the evidence in accordance with the well-established principles and decide whether leave should be given. The matters to be considered in an application for leave to appeal out of time are as follows:

(1) the length of the delay and the reasons for the delay, in terms of firstly why the original time limit was not complied with and why the application for time extension could not have been made earlier[2];

(2) the chance of the appeal succeeding if leave is given, and where the delay is substantial and inexcusable, the burden of the party seeking leave to appeal to show merits is a very heavy one[3]; and

(3) the prejudice to the other party if the application is granted[4].

5.  After the hearing before the learned master, Mr Chow filed further affidavits in opposition to the Disqualification Application made by the OR. These affidavits cannot be evidence in the appeal hearing (if leave to appeal out of time is granted) unless some special grounds are shown[5]. I am of the view that no special ground has been shown. Accordingly, in considering the merits of the appeal, these affidavits cannot be evidence.

BACKGROUND

6.  I would first set out the factual ground which is not in dispute.

7.  Asia Global Holdings Limited (“the Company”) traded under the name Le Beaumont Language Centre, running various language centres in Hong Kong. Prior to the cessation of its business in February 2014, it had 1 centre in Causeway Bay (“the CWB Centre”). It closed another centre in Tsim Sha Tsui (“the TST Centre”) in January 2014.

8.  Mr Chow was a director of the Company since 3 April 2007. He was also a shareholder of the Company. There is no dispute that Mr Chow was fully responsible for the management of the Company. There were two other directors of the Company, Mr Ng Ying Kit and Mr Chan Siu Cheong Nelson. They ceased to be directors on 25 April 2014. As a matter of fact, both of them had no involvement in the management.

9.  On 15 February 2014, the Company ceased business.

10.  On 4 February 2015, in HCCW 251/2014, a winding-up order was made against the Company. On 4 February 2015, Mr Mat Ng and Mr John Robert Lees (“the Liquidators”) were appointed as the joint and several provisional liquidators of the Company by the OR, and they were subsequently appointed as the liquidators pursuant to an order made by the Court on 3 June 2015.

11.  According to the Statement of Affairs affirmed by Mr Chow dated 27 April 2015, the total amount of liabilities of the Company was HK$5,348,207. The creditors include:

(1) 20 former employees claiming a total of HK$975,317.22;

(2) the landlord of the TST Centre, who was owed HK$1,127,739; and

(3) the landlord of the CWB Centre, who was owed HK$13,706.

12.  The Company went into liquidation at a time when its assets were insufficient for the payment of its debts, and was hence insolvent within the meaning of s.168H(2)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (“CWUO”).

13.  On 30 July 2018, the OR issued to Mr Chow a notice under s.168P of CWUO of her intention to apply for a disqualification order against him.

THE DISQUALIFICATION APPLICATION

14.  In order to succeed in the Disqualification Application, the OR has to show:

(1) Mr Chow has been a director of the Company[6];

(2) The Company has become insolvent[7]; and

(3) Mr Chow’s conduct as a director of the Company makes him unfit to be concerned in the management of a company[8].

15.  There is no dispute that the first 2 requirements have been met. The issue is whether the 3^rd requirement has been established by look at the evidence before the court.

16.  The OR relies on four grounds of unfitness in support of the Disqualification Application, which are as follows:

(1) Failure to ensure that the Company would make due payments of wages to its employees, in breach of his director’s duties and the Employment Ordinance;

(2) Failure to ensure that the Company would make due MPF contributions, in breach of his director’s duties and the Mandatory Provident Fund Scheme Ordinance;

(3) Failure to cause or to procure the Company to take out valid employees’ compensation insurance in accordance with the Employees’ Compensation Ordinance; and

(4) Failure to cause or to procure the Company to comply with the accounting records provisions in the old Companies Ordinance (Cap.32) (“the Old CO”) and the new Companies Ordinance (Cap.622) (“the New CO”).

17.  Each of these grounds will be examined in turn in this decision.

THE PRINCIPLES

18.  In accordance with s.168K of CWUO, in determining whether a person’s conduct makes him unfit to be concerned in the management of a company, the court shall have regard to the matters mentioned in Parts I and II of Schedule 15 to the Ordinance. Those matters include:

(1) Any misfeasance or breach of any fiduciary or other duty by the director in relation to the company[9].

(2) The extent of the director’s responsibility for any failure by the company to comply with, inter alia, s.121 of the Old CO and ss.373 and 377 of the New CO[10].

(3) The extent of the director's responsibility for the causes of the company becoming insolvent[11].

(4) Any failure by the director to comply with any obligation imposed on him by, inter alia, s.274 of CWUO[12].

19.  Although the court has to consider the factors in Schedule 15, the court may take into account other factors when assessing whether a person is unfit to be a director not confined to those listed in that schedule[13].

20.  Mr Julian Lam, counsel for the OR, has helpful summarized the guidance from the authorities on the question of unfitness, and I accept his submissions. The guidance from the authorities is as follows:

(1) Unfitness is a question of fact or what has been referred to as a “jury question”[14].

(2) In addressing the question of unfitness, the court is to decide whether the conduct of which complaint is made, viewed cumulatively and taking into account any extenuating circumstances, has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies[15].

(3) Where the case for a disqualification order is based solely on allegations of incompetence, the OR would need to satisfy the court that the conduct complained of demonstrates incompetence of a high degree[16].

(4) The conduct must be in breach of standards of commercial morality, or some really gross incompetence which persuades the court that it would be a danger to the public if he were allowed to continue to be involved in the management of companies[17].

(5) The reasons for this approach are:

(a) Firstly, the consequence of a disqualification order is serious; the order will prevent the respondent being concerned in the management of any company and involves a “substantial interference with the freedom of the individual”[18].

(b) Secondly, the primary purpose of the jurisdiction for a disqualification order is to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others[19].

(6) Not every breach of duty or impropriety calls for a disqualification order[20]. It would place directors of companies in an unfair and unrealistic position, and would involve going further than the applicable legislation or relative authorities contemplate, if every time a director was found to have failed in his duty, he was liable to be disqualified[21].

(7) If, on the other hand, a director knew or ought to have known that there was no reasonable prospect of the company avoiding going into insolvent liquidation, he may well be held to be unfit. This is particularly the case where he must actually have known this to be the position[22].

21.  In respect of the duty to keep proper books of account,

(1) The significance of accounting records is twofold[23]:

(a) It is to ensure that those who are concerned in the direction and management of companies which trade with the privilege of limited liability do maintain sufficient accounting records to enable them to know what the position of the company is from time to time. Without that information, they cannot act responsibly in making decisions whether to continue trading; and

(b) If the company fails, the accounting records are to enable the liquidator to identify and recover or exploit the company's assets. His task would be made extremely difficult if not impossible if the company had failed to comply with its obligation in s.121(1) of the Old CO.

(2) An active director must accept responsibility for the failure to maintain and produce adequate books of account[24].

22.  The standard of proof is the civil standard of balance of probabilities. The more serious the allegation, the more cogent the evidence the court will require[25].

THE EVIDENCE

23.  The OR has filed 3 reports in support of the disqualification application. By virtue of rule 4(2) of the Companies (Disqualification of Directors) Proceedings Rules, these reports are prima facie evidence of the matters contained therein. Mr Chow has filed 4 affidavits in opposition prior to the hearing before the master. All these are the evidence in relation to the Disqualification Application.

ANALYSIS

Liquidators’ view

24.  In these proceedings, Mr Chow has put forward an argument that these proceedings should not have been brought, for the Liquidators have not filed any report under s.168I(3) of CWUO or otherwise made any critical comments on his conduct.

25.  Mr Lam submits that the Liquidators’ view is in fact irrelevant. The OR has an independent role and responsibility in company insolvencies to conduct investigations and bring proceedings against directors if seen fit. Whilst the OR would obviously pay attention to any report from the liquidators, the liquidators’ subjective views or assessments cannot curtail or diminish the OR’s investigations; and a fortiori they cannot affect the court’s determination. In my judgment, Mr Lam’s submissions must be correct.

26.  Mr Lam further submits that in relation to s.168I(3), if it appears to the liquidator that the conditions for disqualification under s.168H apply to a director, the liquidator has an obligation to report the matter to the OR. This is a reporting provision only, the purpose of which is to ensure that the OR is informed about any wrongdoing. The fact that the wrongdoing of the director concerned was not stated in the liquidators’ report does not mean that wrongdoing did not occur. I agree.

Ground 1 – Non-payment of wages

27.  Nearly all the non-payment of wages occurred in January and February 2014. As a result, 20 employees of the Company filed their claims in the Labour Tribunal, and the total of the amounts claimed was HK$1,004,024.04. Their claims were allowed by consent in the Labour Tribunal.

28.  The OR’s case is that by late 2013, the Company was already in financial difficulties. Mr Chow should have decided not to operate any further, for he knew or ought to have known that the Company would not be able to operate further in reality. By allowing the Company to operate further in January and February 2014, Mr Chow has failed in discharging his director’s duties.

29.  Mr Chow explained that he was finding investors to inject funds into the Company in late 2013, and he was able to secure an investor in December 2013. That investor agreed to inject HK$2,000,000 into the Company, and would issue a cheque to pay the money on 8 January 2014. However, for some reason, the cheque was not issued on 8 January 2014. On 14 February 2014, the investor backed out and refused to honour his promise. As a result, the Company ceased business on 15 February 2014. With the benefit of hindsight, Mr Chow said that he should not solely rely upon a promise made by a single investor.

30.  I have no reason to doubt the truthfulness of Mr Chow’s explanation. In the light of his explanation, in my judgment, Ground 1 is not proved. In late 2013, Mr Chow realized that the Company was in financial difficulties and he was trying to solve the problem by finding investors. He did find an investor, and he had secured a promise of injecting fund into the Company from the investor. Relying upon this promise, Mr Chow allowed the Company to continue to operate in January 2014 and February 2014. At the end, he was let down by that investor. When it became clear that the investor would not honour his promise, Mr Chow immediately stopped the operation of the Company on the very next day. While it may not be wise to solely rely upon an oral promise made by a single investor, I cannot say that the reliance itself is any unbecoming conduct. As said by Cheung JA in Re Citrend Services Ltd[26]:

“Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, or an extreme case of gross negligence or total incompetence.”

31.  Ground 1 is not made out.

Ground 2 – Failure to pay MPF Contributions

32.  It is indisputable that between the period of 1 January 2013 to February 2014 – over a year – the Company failed to pay both the employer’s and employees’ portion of the MPF contributions for 33 of its employees, totalling HK$341,842.99. There were late payments of HK$138,390.90 in May and June 2014, but the sum of HK$203,452.09 (with HK$1,422.90 in surcharges) remains outstanding.

33.  In my view, in respect of the failure under this ground, Mr Chow has not put forward any satisfactory explanation. Mr Chow said that he was unaware of the non-payment of the MPF contributions at the material times. However, this is not a defence. As a director, Mr Chow had the duty to ensure the Company to make the MPF Contributions. I note that no action has been taken by the Mandatory Providence Fund Schemes Authority against the Company or Mr Chow. However, this also cannot be a defence to the Disqualification Application made by the OR under this ground.

34.  It is well established that a director’s failure in ensuring the company to make MPF contributions is a ground for making a disqualification order against that director. See OR v Ng Tin Ming[27]; OR v Ko Kok Hong[28].

35.  Ground 2 is proved.

Ground 3 – Failure to take out valid employees’ compensation insurance

36.  The Company failed to take out an insurance policy for one employee in August 2012. Mr Chow did not deny this. He explained that the Company had an insurance agent taking care of all insurance issues, but that insurance agent overlooked the matter. The Company had rectified the situation as soon as it was discovered.

37.  Ground 3 is proved. However, this is a minor matter. The OR is not saying that this ground alone would justify a disqualification order. The OR is using this as an example showing that Mr Chow’s failure to take the Company’s statutory obligations sufficiently serious, and the cumulative effect of this ground and other grounds would justify a disqualification order.

Ground 4 – Failure to keep proper accounting records

38.  The OR’s case is that Mr Chow has failed to cause or procure the Company to keep proper accounting records. According to the evidence produced by the OR, the OR could not find the audited financial statements or management accounts for the period from 1/2011 to 2/2015 and the general ledgers for the whole period of the relevant 7 years (ie from 2/2008 to 2/2015) in the Company’s accounting documents received by the OR.

39.  It is not disputed that the Company’s accounting documents were delivered by Mr Chow to the Liquidators in 2015. In early 2016, the Liquidators sent the accounting documents to the OR.

40.  Mr Chow’s case is that the Company has kept all the necessary accounting documents. He had sent the accounting documents to the Liquidators. After that, the Liquidators raised a query for 2 missing reports. Subsequently, the 2 reports were also sent to the Liquidators. The Liquidators did not raise any further query. Mr Chow’s argument is that had the Company really failed to keep some important accounting records as alleged by the OR, no doubt the Liquidators would have had pointed out the deficiency and asked Mr Chow to supply the missing documents. However, save and except the query for the 2 reports mentioned in the above, there is no other query from the Liquidators.

41.  Mr Lam submits that the paper trail strongly indicates that the Liquidators had passed all the papers in their possession to the OR. Having examined those papers, the OR finds that the Company’s account records are incomplete. The OR would not speculate as to why the Liquidators did not make any further query, but the Liquidators’ assessment is not binding upon the OR. The OR has the duty to make its own investigation and assessment.

42.  Here, the problem is no documentary evidence showing what documents have been delivered by Mr Chow to the Liquidators at the very beginning. It is not known whether the documents now found to be missing by the OR are among the papers delivered by Mr Chow to the Liquidators or not. Further, the documents found to be missing by the OR are some important accounting documents. It is improbable that the absence of these documents in the Company’s accounting records would escape the Liquidators’ attention. With all these in mind, I accept Mr Chow’s submissions on this issue.

43.  On the balance of probabilities, I am not satisfied that the OR has proved Ground 4. Ground 4 is not established.

Length of the Disqualification Period

44.  In assessing the length of the disqualification period, I bear what has been said by Cheung JA in Re Citrend[29] in mind:

“18. The primary purpose of the section is not to punish the individual but to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others. Therefore, the power is not fundamentally penal. But, if the power to disqualify is exercised, disqualification does involve a substantial interference with the freedom of the individual. It follows that the rights of the individual must be fully protected. Ordinary commercial misjudgment is in itself not sufficient to justify disqualification. In the normal case, the conduct complained of must display a lack of commercial probity, or an extreme case of gross negligence or total incompetence.

19. It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realize that these are inescapable personal responsibilities.”

45.  In Re Citrend, the Court of Appeal has given guidance on the approach to length of disqualification. In that case, Cheung JA said:

“(4) Approach to length of disqualification

22. The decision to disqualify is not a discretion but the period of disqualification within the statutory period of minimum one year and maximum of 15 years under section 168H (4) is a matter of discretion. It must reflect the gravity of the offence. It must contain deterrent elements.

23. The approach is to fix the period of disqualification by starting with an assessment of the correct period to fit the gravity of the conduct, and then allowing for mitigation factors.

(5) Three categories of length of disqualification

24. Regard may be made to the three broad categories of length of disqualification:

(1) The top bracket of disqualification for periods over ten years should be reserved for particularly serious cases. These may include cases where a director who has already had one period of disqualification imposed on him falls to be disqualified yet again.

(2) The minimum bracket of two to five years’ disqualification should be applied where, though disqualification is mandatory, the case is, relatively, not very serious.

(3) The middle bracket of disqualification for from six to ten years should apply for serious cases which do not merit the top bracket.

(6) Relevant factors

25. There is no precise or exhaustive test but the following are relevant:

(1) Is the director likely to offend again?

(2) His general ability.

(3) His conduct as a director.

(4) His age and state of health.

(5) The length of time he has been in jeopardy.

(6) Whether he has admitted that his conduct renders him unfit to be a director.

(7) The length of disqualification of his co-directors.

(7) Citation of cases

26.      Each case has to be decided on its own facts.  So long as a period of disqualification is justified under one of the three broad categories of tariff, the citation of other cases on the period of disqualification will, generally speaking, be unnecessary.”

46.  In this case, only Grounds 2 and 3 are established. As said in the above, Ground 3 is a minor matter. In respect of Ground 2, Mr Chow has arranged partial payments of the outstanding MPF contributions in May and June 2014. I note that Mr Chow intends to restart his business. However, I am also aware of the fact that he is now 74 years old. Bearing all these in mind, I am of the view that this is not a serious case and the minimum period of disqualification specified in s168H(4) would be sufficient, ie 1 year.

No extension of time

47.  Having considered the Disqualification Application as if the matter came before me for the first time, my conclusion and the master’s conclusion on the application are the same. In other words, in my judgment, Mr Chow’s appeal has no merit and cannot succeed. That being the case, granting leave to appeal to Mr Chow would serve no useful purpose.

48.  Although the OR has taken a neutral stance on whether extension of time should be granted, since there is no merit in Mr Chow’s appeal, I decline to grant leave to appeal out of time to Mr Chow.

DISPOSITION

49.  I refuse to grant leave to appeal out of time to Mr Chow and dismiss Mr Chow’s appeal. Costs should follow the event. I order that costs of the appeal be paid by Mr Chow to the OR, and those costs be summarily assessed at HK$60,000.

50.  I thank counsel for the helpful assistance rendered to the Court.