THE JOINT & SEVERAL LIQUIDATORS OF KONG WAH HOLDINGS LTD. v. THE GRANDE HOLDINGS LTD. AND OTHERS

cacv 306/2005, CACV 307/2005, CACV 308/2005 AND CACV 309/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal noS. 306 of 2005, 307 of 2005, 308 of 2005

AND 309 of 2005

(on appeal from HCCW NOS. 49 of 2000 AND 50 OF 2000)

______________________

HCCW 49/2000

IN THE HIGH COURT OF THE

HONG KONG special administrative region

court of first instance

COMPANIES (WINDING-UP) NO. 49 OF 2000

BETWEEN

HCCW 50/2000

IN THE HIGH COURT OF THE

HONG KONG special administrative region

court of first instance

COMPANIES (WINDING-UP) NO. 50 OF 2000

____________________

J U D G M E N T

____________________

Hon Rogers VP:

1.  These were appeals from a judgment of Kwan J given on 4 August 2005.  The judge had before her applications made under section 221 of the Companies Ordinance, Cap. 32 (“the Ordinance”).  The applicants were the liquidators of two companies namely Akai Holdings Limited (“Akai”) and Kong Wah Holdings Limited (“Kong Wah”).  These will be referred to collectively as the two companies.  The liquidators sought production of documents.  As the judge recorded, in the revised draft order put before the court at the end of the hearing the liquidators made clear that they would only be seeking production of documents and information from the 4 named corporate respondents to the application.  The judge made orders for the production of various categories of documents and for the corporate respondents to provide information in relation to any such documents which were no longer within their possession custody or control.

Background

2.  The two companies in respect of which the documents were sought were formerly part of a group of companies (“the STC group”) under the control of Semi-Tech Corporation Limited.  It is unnecessary to set out the details of the liquidation of the various companies save to say that winding up orders were made both in Hong Kong and Bermuda in August and September 2000.  The matters involved in the case are of no mean public interest.  Prior to the winding up, it was generally considered, on the basis of information available to the public, that there were substantial assets.  Akai had been listed on the Hong Kong Stock Exchange and from 1996 it was the parent company of Kong Wah, which was a wholly-owned subsidiary and had itself previously been listed on the stock exchange.  In turn these companies had, until 1999, been within the STC group.  Semi-Tech Corporation Limited had been listed in New York, apart from other jurisdictions.  The STC group appeared to have liabilities in excess of US$1 billion and few remaining assets which could be realised for the benefit of the creditors.  In the annual report of Akai for 1996, the STC group was described as an international business comprising numerous public companies listed on the world’s leading stock exchanges, with market capitalisations aggregating US$4.5 billion (equivalent to about HK$35 billion), and employing 100,000 people in over 120 countries worldwide.

3.  The winding up of the two companies has thus demonstrated an apparent, and seemingly difficult to comprehend, dearth of any relevant assets. In the judgment, the judge observed that the collapse of the two companies, their subsidiaries and associated companies constitutes the largest corporate insolvency that there has been Hong Kong.  Clearly, the liquidators are under an obligation to use all means at their disposal to locate any assets which rightfully belong to or can be claimed by either of the companies and to determine if the companies have been wrongfully divested of any assets.  Most of the key directors and executives of Akai and its associated and subsidiary companies including Kong Wah, which will be referred to as the Akai Group, have left Hong Kong or were uncooperative with the liquidators and their requests for assistance. 

4.  The difficulties presented to the liquidators stem not least from the fact that there were nearly 300 subsidiary and associated companies of the two companies in question.  Despite this complexity, in the present application liquidators have confined their application to seeking production of documents and, in the absence of documents, information relating to any missing documents, from the four corporate respondents in relation to the current and former subsidiary and associated companies which have been listed.

5.  The documents which were sought fell into 5 broad categories.  The first was under the heading Management Agreement.  That was an agreement dated 12 November 1999.  It was made between Akai and the second respondent.  The second respondent was a wholly owned subsidiary of the first respondent.  Mr Ting, who was the leading light and in apparent control of the two companies and is currently serving a prison sentence, was a director of the first respondent some years previously and there is perhaps reason to believe that there remained some close connection.  He signed the Management Agreement on behalf of Akai.  The fifth respondent, who was an executive director as well as the president and group chief executive and chairman of the first respondent, signed the Agreement on behalf of the second respondent.  The Management Agreement was not disclosed to the shareholders of Akai, nor to the steering committee representing the bank creditors of the two companies, nor to the Stock Exchange of Hong Kong Ltd, nor to the Securities and Futures Commission, nor, indeed, apparently to the court hearing the petitions for the winding up of the two companies.

6.  The judge described the effect of the Management Agreement in paragraphs 13 to 15 of her judgment.  That effect was startling.  The management of Akai was passed to the second respondent.  The finances of Akai and those of the entire Akai Group were in the control of the second respondent.  The fifth respondent, became an authorised signatory of all bank accounts of the Akai Group.  Only directors and other employees of the second and fourth respondents were signatories to the bank accounts to the exclusion of employees of the Akai Group.  Under this agreement, between December 1999 and August 2000 Akai was invoiced on behalf of the second respondent a total sum of HK$13.6 million for “salary and expenses reimbursement” and, indeed of the invoiced amount, the second respondent received HK$11.2 million.

7.  The next matter in respect of which documents are sought is in relation to the engagement of Alpha Capital by letter dated 1 November 1999.  Under that agreement Akai was required to pay an advisory fee of US$5 million up front on the signing of the engagement letter notwithstanding its cash flow problems at the time.  The stated purpose of the agreement was that Alpha Capital was to advise Akai and its subsidiaries on operational, financial and treasury matters pertaining to the Akai Group.  There was a list of various tasks which Alpha Capital was required to perform but to date the liquidators have been unable to locate any work carried out in accordance with the engagement letter.  The engagement letter was signed by the fifth respondent, as president and chief executive of Alpha Capital, and by Mr Ting on behalf of Akai.

8.  The respondents aver that Alpha Capital was sold by the first respondent to an unrelated party and the books and records are no longer with them.  This protestation, when viewed in the light of the fact that the disposal of Alpha Capital was in June 2004, which was more than two years after the liquidators apparently first sought information from the first three respondents, scarcely engenders confidence that there is any willingness to cooperate with the liquidators.

9.  The next group of matters relates to what has been described as assets of the Akai Group.  These include the Trade Marks “Akai”, “Sansui” and “Kawa”, shares held by the Akai Group in the fourth respondent and in Akai Electric Company Ltd, a company listed in Japan, factories in Zhongshan, Guangdong province and shares in companies by the names of Merrywide Ltd and Shenzhen Kaifa Technology Company Limited.  The judge considered the facts relating to all these matters in paragraphs 30 to 42 of her judgment and came to the conclusion that there were valid grounds for the liquidators to investigate these matters and thus to seek all documents relating to them.

10.  The fourth general category in the applications related to payments and receipts of the respondents.  In respect of this the judge said that the liquidators’ investigations had revealed a number of transactions involving the payment of significant but unexplained amounts from the Akai Group’s bank accounts to various recipients including the fourth respondent during the period leading up to the appointment of the liquidators.

11.  Lastly the liquidators seek documents relating to a facility letter dated 15 November 1999 which was signed by Mr Ho, this time on behalf of the fourth respondent, and by Mr Ting, on behalf of Akai, whereby the fourth respondent undertook to extend an on demand revolving loan facility of HK$630 million to Akai to fund its capital requirements.

12.  No mention was made of any security in the facility letter nor in any board minutes of the third respondent which might have been the expected to contain reference to any such security, nor in the announcement on 18 November 1999 by Akai and the first and fourth respondents of an open offer of convertible bonds to existing shareholders of Akai.  Despite this, there were a series of share mortgages in respect of shares in companies which were owned by Akai as well as assignments of account receivables of Akai in favour of Tremendous Springs Ltd (“TSL”) which as a result of these transactions came under the control of the fourth respondent.  In September 2000 TSL was sold or transferred to yet another company, Always Win Ltd, which is alleged by the respondents to be an independent third party.  Further matters in relation to this arose from the fact that in the annual report of 2001, the fourth respondent stated that HK$600 million had been advanced to Akai under this loan facility and that the funding had been made by the first respondent through Prosperous Finance Ltd, which, again, has been averred to have been sold in May 2002 to the first respondent which, nine days later, had resold it to an unidentified allegedly independent party.

13.  In summary, it can be said that the liquidators are not merely justified but under an obligation to investigate all these matters.  The judge made an order, which is too lengthy to set out for convenience in this judgment, requiring that the first, second, third and fourth respondents should provide to the liquidators documents and/or information within their possession, custody and/or control which relate to the two companies in relation to documents relating to these transactions which have been referred to briefly. 

14.  Save for one aspect in relation to the definition, I see no difficulty in the order made.  The order specifically relates to documents and the information sought in relation to the documents which are missing, that latter matter is set out in paragraph 2 of the order which provides that the relevant respondents provide information as to the nature and content of any missing documentation together with relevant information, specifically the dates when the documents ceased to be in the possession or control of the relevant respondent and the persons who gained possession of the documentation and the present whereabouts of it.

15.  Before turning to the submissions made on this appeal reference may be made to section 221 of the Ordinance.  That reads:

“(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.

(4)        If any person so summoned, after being tendered a reasonable sum for his expenses, refuses to come before the court at the time appointed, not having a lawful impediment (made known to the court at the time of its sitting, and allowed by it), the court may cause him to be apprehended and brought before the court for examination.”

16.  It is clearly a highly necessary section which empowers liquidators to learn relevant information and obtain materials from those previously concerned with running a company which has now gone into liquidation:- see in particular In re Arrows Ltd (No. 4) [1995] 2 AC 75 and Shierson v Rastogi [2003] 1 WLR 586.  The purpose and object of this provision has, in my view been accurately set out in footnote 2 to paragraph 95.1255 of Halsbury’s Laws of Hong Kong volume 6(2) which reads:

“The object of the provision in the Companies Ordinance S.221 is to provide assistance to the liquidator to try and ascertain the truth about the affairs of the company as expeditiously and economically as possible; and it is incumbent upon the court to assist the liquidator in carrying out his duties but at the same time to ensure that the order is not oppressive, vexatious or an abuse of the process of the court…. (the provision is not to be used to enable the liquidator merely to improve his position as a litigant in subsisting litigation)…”

17.  On this appeal Mr Yu SC, who appeared on behalf of the first to third respondents took as his main point the argument that section 221 only provided for production of documents and was not directed to an order for discovery.  He commenced his submission with an analysis of the history of discovery and a comparison of the meaning of an order for discovery and an order for production of documents.  The distinction between the two forms of order is perhaps best brought out in the judgment of Sir Donald Nicholls V-C in the case of Panayiotou v Sony Music Ltd [1994] Ch 142.  At page 151C he said:

“The particularity issue

In accordance with English legal procedures, and leaving aside special cases such as Norwich Pharmacal Co. v. Customs and Excise Commissioners[1974] A.C. 133, discovery of documents is obtainable only from persons who are parties to the action. In the normal way, parties are compelled to produce for inspection all their documents relating to matters in issue in the action. Persons who are not parties are not subject to such a wide, far-reaching obligation. They can be compelled to give evidence at the trial, either by way of oral testimony or by being required to produce documents. But it is established that a subpoena to produce documents cannot be drawn so widely as to amount to requiring the witness to give discovery. The object of the subpoena is to compel the witness to produce evidence directly material to the issues in the case. The object is not to require him to produce documents just because they may be useful for the purpose of corroborating or challenging a witness, or because they may lead to a train of inquiry which may result in the discovery of evidence or may, in some other way, advance one party’s case or damage the other’s. Nor is the witness to be required to undertake an unfairly burdensome search through his records to find this or that document or to see if he has any documents relating to a particular subject matter. All this is well established in relation to a subpoena to produce documents at the trial. The position is the same regarding an order to produce documents before the trial, under R.S.C., Ord. 38, r. 13: see rule 13(2) and Elder v. Carter (1890) 25 Q.B. 104.

The English courts apply a similar approach to the production of documents under a letter of request. With regard to incoming letters of request, the matter is the subject of legislation. When ratifying the Hague Convention the United Kingdom Government exercised its right to declare that it would not execute letters of request issued for the purpose of obtaining “pre-trial discovery of documents.” That reservation, in which the Government’s understanding of what that expression meant, was reflected in section 2(4) of the Act of 1975. This subsection limits the scope of an order the United Kingdom courts may make in response to an incoming letter of request:

“An order under this section shall not require a person - (a) to state what documents relevant to the proceedings to which the application for the order relates are or have been in his possession, custody or power; or (b) to produce any documents other than particular documents specified in the order as being documents appearing to the court making the order to be, or to be likely to be, in his possession, custody or power.”

Paragraph (a) excludes discovery. Paragraph (b) narrows the ambit of the order even further.”

18.  What was argued was that an order to produce documents, as opposed to an order for discovery, should not require the parties so ordered to undertake an unfairly burdensome search to find documents nor should they be required to undertake an assessment as to what might be relevant or otherwise.  It was said that in substance the orders that had been made were discovery orders which required the respondents to search for documents which might be in their possession custody or control and then to determine whether they related to the matters set out.  Since the hearing of this appeal, counsel for the first to third respondents caused this court’s attention to be drawn to the case of TajikAluminium Plant v Hydro Aluminium AS and others [2006] 1 WLR 767.  That case involved an application under the Civil Procedure Rule (“CPR”) r 34.2.  Without considering the difference in wording between the CPR and the Ordinance it is sufficient to say that even under the CPR if the documents were identified “with sufficient certainty to leave no real doubt in the mind of the person” who was the subject of the order what he was required to produce that would be sufficient.  That, in my view, is satisfied here.

19.  It was then said that the orders had been made without regard to the question as to whether the categories of documents included in the orders actually existed.  It was pointed out that there had been evidence filed from the director responsible for legal affairs of the first to third respondents’ group that none of the companies in that group had documents which fell within some of the categories of the order.  Reliance was also placed on the fact that, as already noted, some of the companies which had been involved in the affairs of the two companies have themselves been sold.

20.  The third point taken on behalf of the first to third respondents was that the wording of the order was too wide.

21.  In relation to the first point, it is necessary to bear in mind the purpose and object of section 221 to which reference has already been made.  It appears to me that given the purpose of the section, in effect to give the liquidators access to all documents and information in respect of the companies being liquidated, any requirement for over precise identification of the documents required would be misplaced.  It is simply sufficient if the order specified categories of documents which are clear in themselves.  If the persons to whom the order is addressed would have no difficulty in identifying the documents in their possession which fall within those categories I see no objection to an order being made.  The matter is quite different from discovery.  The person to whom the order for production under section 221 is addressed is not required to consider relevance nor is he required to consider whether a document might lead the liquidator on to a chain of inquiry.  What he is required to do is to determine which documents in his possession fall within the parameters of each specific part of the order.  That, in my view, should not present any difficulty.  Admittedly, if there are large numbers of documents the process of gathering them may be time-consuming.  The process may be more difficult if documents of the two companies have been intermingled with other documents.  Such a consideration cannot affect the liquidators’ right to production of the documents falling within the terms of the order.

22.  In relation to the question as to whether the order extends to documents which are no longer in the possession of the respondents, it appears to me that no difficulty arises.  If the documents do not exist no question of production is involved.  The respondents are put in no difficulty and there is no question of any contempt proceedings; this is simply because contempt can only be committed in those circumstances if a document exists and is not produced.  It is accepted that literally hundreds of boxes of records of the two companies have been provided to the liquidators, but that cannot be any ground for disputing the need for production of further documents.  The amount of documentation involved must depend on the nature of the company involved.

23.  Both Mr Yu, on behalf of the first to third respondents, and Mr Ng, who appeared on behalf of the fourth respondent, took issue with the wording of the orders which had been made.  Indeed this matter was the only substantive focus of the appeal on behalf of the fourth respondent.  It seems to me that the difficulties which were pointed out stemmed from what appears to have been an attempt to cover all possibilities.  The difficulty arises because paragraph 1 of the orders defines the Akai Group as being, in relation to the first order, Akai and in relation to the second order, Kong Wah, and continues “and its current and former subsidiaries and associated companies”.  The difficulty posed by this definition is exemplified in paragraph C. (i) which requires the production of “all documents relating to assets of the Akai Group, including but not limited to the following assets:”  There then follows a list of matters in respect of which no objection is taken.  Taken to its logical conclusion this would mean that all companies, including after acquired subsidiary companies, would have to produce all documents relating to any asset, whether that had any relation to the Akai Group or not.

24.  It was pointed out in argument that specific difficulties might arise in relation to 10 subsidiary companies of the fourth respondent which were acquired by the fourth respondent after the two companies had gone into liquidation.  Further discussion revealed that similar difficulties might arise even in respect of the fourth respondent itself, albeit that had been less obviously so, since it too had been a subsidiary of Akai until 27 May 1999 and only ceased to be an associated company of either Akai or Kong Wah in September 1999.

25.  In paragraph 3 of the fourth respondent’s notice of appeal a suggested wording which would limit the production of documents to those which related to matters which occurred during the period 1 January 1997 to 3 November 2000 save and except documents which related to matters and transactions specifically identified by the liquidators in the evidence.

26.  After a short adjournment during the course of Ms Chan’s submissions on behalf of the liquidators a proposal was put forward, in part prompted by a suggestion from the court, that there be included in paragraph C. of the order the following:

“(vi)      in respect of the 10 companies identified in paragraph 93 of the affidavit of Hui dated 12 May 2003 references to documents in paragraphs (i)-(iv) above is limited to documents relating to assets directly or indirectly owned by the company or in respect of which the company has or had a direct or indirect interest.”

27.  In my view there needs to be some limitation to the order.  Whilst it is difficult to be sure that no difficulties would still arise, I consider that the one form of avoiding the difficulties that have at present been articulated is to rephrase the opening words of paragraph C. (i) as follows:

“all documents relating to assets directly or indirectly owned by the company or in respect of which the company has or had a direct or indirect interest, including but not limited to the following assets:…”

28.  I would therefore allow these appeals to that extent.  The first to third respondents also objected to the inclusion of the reference “current and former subsidiary and associated companies”.  However, that reference appears to me to be amply justified.  Objection was also taken to the inclusion of the requirement to produce documents relating to the disposal of Alpha Capital.  But since it is said that there has been nothing found which would have justified the payment of US$5 million to that company, I consider that requirement of production of such documents to be amply justified.

29.  Then it was said that there was no justification for requiring production of documents relating to the “Akai” trademark or the “Kawa” trademark.  It was said that these were owned by subsidiary or associated companies.  Trade Marks are highly important and valuable assets of the manufacturing and trading companies.  Registration of a Trade Mark often represents the official acknowledgement of acquired goodwill.  Trade Marks are frequently registered in the name of subsidiary or associated companies.  The liquidators are clearly entitled to access to all information relating to disposal and dealing with the assets of the two companies.  Unless it is shown that the goodwill is not enjoyed by the two companies and any of their subsidiary and associated companies, I can see no ground from excluding the liquidators from access to documents relating to the Trade Marks and their disposal.

30.  Since the wording of the order was the basis of the appeal by the fourth respondent I consider that there should be an order nisi of costs in favour of the fourth respondent.  Since the appeal by the first to third respondents incorporated other matters which formed the major focus of that appeal and the amendments to the orders do not stem from arguments raised on their behalf, I consider the order should be that there be no order as to costs in relation to their appeal.  I would not alter any of the costs in the court below.

Hon Le Pichon JA:

31.  I agree.