THE OFFICIAL RECEIVER v. CHAN MAN WAI AND ANOTHER

HCMP 3297/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3297 OF 2004

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J U D G M E N T

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Application

1. This is an application by the Official Receiver for disqualification orders under section 168H of the Companies Ordinance against both Respondents.

Background

2. The 1st and 2nd Respondents are husband and wife.  At all material times, they were directors of Diman Holding Company Limited (“Holding”) and Diman High Fashion Company Limited (“Fashion”).  The 1st Respondent was also director of Transgreat Developments Limited (“Transgreat”).  The 3 Companies went into Liquidation under HCCW 496/2001, HCCW 903/2000 and HCCW 590/2001 respectively and were all found insolvent.

Particulars

	Proof of Debts (HK$)	Assets (HK$)
Holding	$18,041,451.22	Nil
Fashion	$3,009,221.77	$385.68
Transgreat	$820,362.54	Nil

3. Upon investigations, the Liquidators reported to OR a number of unfit conducts on the part of the Respondents.

Particulars

Company	Relevant provision(s) in Companies Ordinance	Unfit Conduct(s)
Holding	S190	Failure to submit Statement of Affairs
	S121 and S274	Failure to keep Accounting Records from 1 April 1999
	S122	Failure to prepare Audited Accounts from 1 April 1999
	Parts I and II of the 15th Schedule	Misapplication of substantial amount of Assets in breach of fiduciary duties
Fashion	S190	Failure to submit Statement of Affairs
	S121 and S274	Failure to keep any Accounting Records
	S122	Failure to prepare Audited Account from 1 April 1998
	Parts I and II of the 15th Schedule	Breach of fiduciary duties in granting guarantee to Diman Fashion Wholesale Company
	Parts I and II of the 15th Schedule	Failure to co-operate with the Liquidators in the administration
Transgreat	S190	Failure to submit Statement of Affairs
	S121 and S274	Failure to keep Accounting Records from 1 January 1998
	S122	Failure to prepare Audited Accounts from 1 January 1998
	Parts I and II of the 15th Schedule	Failure to co-operate with the Liquidator in the administration

4. On 24 June 2005 the matter went before Master Kwang for call-over and leave was granted for the Respondents to file and serve affirmation in support of their mitigation.  Both Respondents did so on 25 July 2005.  However, they only informed this Court that:

“因借款給合顆人及友人，投資生意及投資樓宇虧損，引致本人無法取回款項。”

5. Substantive hearing of the application was fixed to be heard by me on 11 November 2005.  Ms. K. Tsui of Acting Senior Solicitor represented the OR while both Respondents appeared in person.  Upon hearing from them, I reserved my judgment to be handed down.

Ruling

6. Upon considered the evidence authorities and submissions before me, I have decided that the appropriate period for disqualification is five years.  Here are my reasons.

(a)	The division of the 15-year disqualification period into 3 brackets, as per Dillion J in Re Sevenoaks Stationers (Retail) Ltd [1996] BCC 765 CA has been followed in Hong Kong:
	“I would for my part endorse the division of the potential 15-year disqualification period into three brackets, ……

	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. (page 771 to page 772 of the judgment)”

(b)	Useful guidance can be found in Re Westmind Packing Services Ltd (No. 3) [1998] BCC 836, at page 837-838:
	“The following should be taken as general guidance as to what is relevant and admissible evidence for the purpose of determining the length of a disqualification period ……

	1.	It was 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.
	2.	……
	3.	The primary purpose of disqualification is to protect the public against the future conduct of companies by person whose past records as directors of insolvent companies showed them to be danger to creditors and others.  Despite the fact that the courts have said disqualification is not a ‘punishment’, in truth the exercise that is being engaged in is little different from any sentencing exercise.  The period of disqualification must reflect the gravity of the offence.  It must contain deterrent elements.  That is what sentencing is all about, and that is what fixing the appropriate period of the disqualification is all about.  In relation to the period of disqualification the facts of the offence are obviously important but many other factors ought (and in reality do) come into play.
	……
	7.	A wide variety of matters – including the former director’s age and state of health, the length of time he has been in jeopardy, whether he has admitted the offence, his general conduct before and after the offence, and the periods of disqualification of his co-directors that may heave been ordered by other courts – may be relevant and admissible in determining the appropriate period of disqualification as may any period of the facto disqualification ……
	8.	The appropriate period of disqualification is something which, like the passing of sentence in a criminal case, ought to be dealt with comparatively briefly and without elaborate reasoning.  It is obviously undesirable for the judge to be taken through the facts of previous cases in order to guide him as to the course he should take in the particular case before him.  The principles applicable to the court’s jurisdiction under the Act are now reasonably clear.  The application of those principles to the facts of the particular case is a matter for the trial judge.  The citation of cases as to the period of disqualification will, in the great majority of cases, be unnecessary and inappropriate.
	9.	……”
(c)	Further, Kwan J. succinctly summarized the proper approach to be adopted by this Court in Re Copyright Ltd [2004] 2 HKLRD at page 123:
	“29.	Any misconduct of the respondent qua director may be relevant to the finding of unfitness, even if it does not fall within a specific provision of the statute (Re Bath Glass Ltd (1988) 4 BCC 130 at p.133).  Unfitness may be demonstrated by conduct which does not involve any breach of duty (Secretary of State for Trade and Industry v Baker (No 6) [1999] 1 BCLC 433 at p.486E).  The court must first make findings of fact whether the allegations of misconduct are made out, and if so whether the proven allegations would render the director unfit.  In addressing the question of unfitness, the court is to decide whether the conduct of which complaint is made by the Official Receiver, “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” (Secretary of State for Trade and Industry v Gray [1995] 1 BCLC 276 at p.284F).
	30.	To reach a finding of unfitness, the court must be satisfied that the established misconduct of the director is sufficiently serious (Re Bath Glass Ltd (1988) 4 BCC 130 at p.133).  Where the case for a disqualification order is based solely on allegations of incompetence, the Official Receiver would need to satisfy the court that the conduct complained of demonstrates incompetence of a high degree.  Various expressions have been used by the courts to emphasise this high burden in establishing unfitness based on incompetence, such as “total incompetence”, incompetence “in a very marked degree”, “some really gross incompetence” (Secretary of State for Trade and Industry v Baker (No 6) [1999] 1 BCLC 433 at pp.483I-484B).”
(d)	The complaints by the Official Receiver against the Respondents have been proved or have not been contradicted.
(e)	I agree with Miss Tsui that the appropriate punishment should be 5 years in the circumstances.

	(i)	With respect to both Respondents, they did not, do not and will not know how to run a limited company.  By saying so, I certainly do not mean that the duties of a director cannot be delegated to others.  However, it is the “obligations” of the director that can never be delegated.  In my view, there is a real need to protect the public against the ‘ignorant’ (and hence ‘dangerous’) conduct of the Respondents in carrying on business through the vehicle of limited companies.
	(ii)	The mitigation raised by the Respondents lacks particulars.  They also fail me because it is nothing more than bare allegation without any supporting evidence or at all.
	(iii)	Even if I would accept that both Respondents were facing serious financial problems at the material times because of the Asian economic crisis and property slump thereafter, they should not simply run away and leave the Liquidators and the OR to investigate and administer the estates of the 3 Companies without any assistance.

Orders

7. In conclusion, I will make the following orders.

(a)  The Respondent shall not, without leave of the Court,

(i)    be a director of a company;

(ii)   be a liquidator of a company;

(iii)  be a receiver or manager of a company’s property; or

(iv)  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 5 years effective from the 21st day after the date hereof.

(b)  There be an order that the costs of the Official Receiver incidental to and of this application be borne by the Respondent, to be taxed if not agreed.