RE WING FAI CONSTRUCTION CO LTD

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 735 OF 2002

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D E C I S I O N

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Introduction

1.  On 25 March 2003, I made an order (the “Examination Order”) that Mr Kam Shing, Ms Kelly Cheng and Mr Robert Yip (the “Examinees”) be examined pursuant to section 221 of the Companies Ordinance in relation to the affairs of Wing Fai Construction Co Ltd (“Wing Fai”) by its liquidators (the “Liquidators”).  Pursuant to that order, the examinations were conducted before Master Woolley on 4 July and 30 July 2003.  The examination of Ms Kelly Cheng was concluded on 30 July 2003 and that of Mr Robert Yip commenced and was then adjourned to 16 February 2004.  By a summons dated 15 January 2004, the Examinees make the present application under Order 45 rule 11 for a stay of execution of the Examination Order on the ground that matters have occurred since the date of that Examination Order which rendered the examination of the Examinees or further examination oppressive.

2.  The application is supported by the affirmation of Ms Kelly Cheng dated 14 January 2004.  The principal ground relied upon by the Examinees is that since the date of the Examination Order there have come into being a number of new actions or proceedings in respect of which the Examinees are either parties or material witnesses.  In addition to these proceedings, the proceedings in High Court Action No HCA 810 of 2003 in which the writ was issued before the Examination Order has progressed to the stage where witness statements are due to be exchanged.  The Examinees are parties to that action. As against these objections, the Liquidators offered an undertaking not to question the Examinees in relation to any action commenced by Wing Fai or its Liquidators where the Examinees are parties to that action or to question the Examinees in relation to evidence that they have filed in any action continuing against companies in the China Rich Group. 

The law

3.  The law applicable to such an application has been succinctly and correctly summarised by Mr Smith, SC, for the Examinees.  This is as follows.  Order 45 rule 11 gives the Court discretion to order a stay of an order where facts or matters have come into existence since the date of the order which might have prevented the order being made: see Du Pont v ENKA [1988] RPC 497 at 509.  The order which is sought to be stayed is an examination order made under section 221 of the Companies Ordinance.  It is well established law that this section is not intended to give the liquidator advantages denied to the ordinary litigant: see Re Esal (Commodities) Ltd (No.2) [1990] BCC 708 at 722C, per Millet J and Re North Australian Territory Co (1890) 45 Ch 87 at 92-93.  Hence, the courts are reluctant to make an examination order when litigation is pending against an intended examinee: see Re Bletchley Boat Co Ltd [1974] 1 WLR 630 at 637, Re Bishopsgate Investment [1994] BCC 732 at 739E, per Hoffmann J (as he then was) and Re Atlantic Computers [1998] BCLC 200 at 208E.  The principles in Re Bletchley Boat Co Ltd have been affirmed by the House of Lords in British & Commonwealth Holdings PLC v Spicer and Oppenheim [1993] AC 426 at 439F.  It has since been consistently regarded as oppressive for the court to order an examination of potential witnesses or parties under the equivalent of section 221 where litigation has been commenced.

4.  Applying these authorities to an application for stay of an examination order, the issue the Court has to consider is this.  The examination having been ordered and begun, the burden is on the Examinees to show the continuation of the examination in the circumstances is oppressive so that had the new proceedings been taken out at the time of the application for examination, the Court would not have ordered examination of the Examinees.

Background

5.  Up until 22 April 2002, Wing Fai was a member of a group of companies (the “China Rich Group”) owned by China Rich Holdings Limited (“China Rich”).  China Rich is a Bermudan company listed on the main board of the Hong Kong Stock Exchange.  It operates through a number of subsidiaries.  The intermediate holding company for the China Rich Group is Benefit Holdings International Limited (“Benefit”).  Until 22 April 2002, China Rich had three construction companies, namely, Wing Fai, Wai Shun Construction Company Limited (“Wai Shun”) and Zhukuan Wing Fai Construction Company Limited (“Zhukuan Wing Fai”).  Wing Fai and Wai Shun were 100% owned by Benefit, while Zhukuan Wing Fai was owned as to 51% by Wing Fai.  All these three construction companies are in compulsory liquidation.  Wing Fai was sold to one of its employees in April 2002.  The Examinees were the persons in control of Wing Fai prior to the sale and were suspected to be in control of Wing Fai even after the change of ownership.  On 6 July 2002, Mr Borrelli and Mr Kennedy, both of RSM Nelson Wheeler Corporate Advisory Services Limited (“RSM”) were appointed as joint and several provisional liquidators of Wing Fai.  A winding up order was subsequently made on 9 December 2002 for Wing Fai to be compulsorily wound up.  A further order was made on 28 February 2003 confirming the appointment of Mr Borrelli and Mr Kennedy as joint and several liquidators of Wing Fai (the “Liquidators”).  On 20 July 2003, Mr Borrelli and Mr Briscoe also of RSM were appointed as liquidators of Wai Shun.  On 6 August 2003, Mr Hill and Mr Briscoe, both of RSM were appointed as liquidators of Zhukuan Wing Fai.

6.  It would be convenient at this stage to refer to Ms Kelly Cheng’s allegation that the Liquidators having obtained their appointments on the basis of a debt of just $1.4 million owed to Enfield Construction Company Limited, attempted to wind up China Rich in Bermuda and Hong Kong and then to issue winding up petitions against both Zhukuan Wing Fai and Wai Shun so as to secure RSM’s appointment as liquidators for these two companies and then embarked on eleven sets of proceedings against the China Rich Group and the Examinees, including the New Proceedings relied upon for the application to stay the examination.  Her suggestion of conspiracy or oppression is groundless as the winding up petitions against Zhukuan Wing Fai and Wai Shun were not issued by the Liquidators, but respectively by a former employee of Zhukuan Wing Fai on 13 December 2002 (who was legally aided) and by Taskforce Collections Inc on 3 September 2002.  Furthermore, the appointments of liquidators for Zhukuan Wing Fai and Wai Shun were not sought by the Liquidators but were made by the Official Receiver under the “Panel T” rotor scheme.  Even if that might be a deliberate choice of the Official Receiver, it involved no input from the Liquidators.  

7.  Since 2 August 2002, the Liquidators made numerous attempts to meet with the Examinees for the purpose of obtaining information about the affairs and property of Wing Fai.  All those attempts were unsuccessful.  The Liquidators experienced inordinate delays and refusals.  This necessitated the Liquidators making an application under section 221 of the Companies Ordinance.  The application was contested.  I granted the Examination Order on 25 March 2003 with costs against the Examinees, which have not yet been settled. 

8.  The first available hearings were set down on 4 and 30 July 2003.  Thus, it took the Liquidators a year to examine two of the three Examinees with the third having yet to be examined at all.  The examination could not be concluded on 30 July 2003 and was adjourned to a date to be fixed.  Unfortunately a date was fixed for October 2003 without consultation with the Liquidators’ diary.  That necessitated a postponement to 16 and 17 February 2004, a further delay of six months.

The new proceedings

9.  Mr Smith, SC, relied on six of the eleven sets of proceedings referred to by Ms Kelly Cheng in support of the application for stay.  The first of these is a summons issued under these proceedings in which the Liquidators sought a declaration that purported payments in the sum of $58,784,000 allegedly made by Wing Fai to Benefit constituted preference and an order that Benefit repay the said sum to the Liquidators.  Pursuant to the direction of Kwan J, the parties filed points of claim, points of defence and reply.  The proceeding has reached the stage of exchange of list of documents.  The Examinees’ main objection is that they will be witnesses for Benefit in that proceeding and it is inappropriate for the Liquidators to be given the opportunity to cross-examine the Examinees on sworn evidence pursuant to section 221 of the Companies Ordinance in relation to matters in that proceeding.  I think the undertaking by the Liquidators would adequately safeguard the interests of the Examinees in those actions.  It would not be oppressive or prejudicial to the Examinees if the examination is to continue.

10.  The second set of proceedings is an action in defamation in High Court Action No 4460 of 2003 taken out by Ms Kelly Cheng against the Liquidators in relation to Mr Kennedy’s letter of 24 November 2003 in which Mr Kennedy commented that he considered Ms Kelly Cheng had perjured herself in both the current proceedings and her section 221 examination and that she had manipulated documentation to support her various claims in the various proceedings for the purpose of defrauding creditors of Wing Fai.  Ms Kelly Cheng’s objection is that Mr Kennedy had no evidence in support of his allegation and it would be inappropriate to proceed with the examination as she is a party and witness to that action.  As against that, Mr Kennedy’s reply is that he stood by his comments and had submitted a report to the Commercial Crime Bureau of the Hong Kong Police for their further investigation and he has no interest in further examining Ms Kelly Cheng in relation to any alleged criminal offences.  Though Mr Kennedy was referring to “alleged criminal offences” and not to the defamation action, as Mr Kennedy’s allegation that Ms Kelly Cheng had committed criminal offences formed the basis of the defamation action, it is clear that Mr Kennedy has no intention to cross-examine her in relation to matters relevant to that action.  There is neither prejudice nor oppression if the examination is to continue.

11.  The third set of proceedings is an application by Benefit dated 25 September 2003 for an order that the decision of the Liquidators in rejecting the amended proof of debt of Benefit filed in the liquidation of Wing Fai for the sum of $40,000,000 to the extent of $39,000,000 be overturned and the said amended proof of debt be ordered to be admitted in full.  The Examinees’ objection is that Ms Kelly Cheng, being a director of Benefit, is a crucial witness in that application and has filed affidavit evidence for the purpose of the application.  Hence, it would be inappropriate for her to be examined under section 221.  However, the hearing of that summons has been adjourned sine die on 14 October 2003 at the request of Benefit.  In my view, the Examinees’ as well as Benefit’s interest would be adequately safeguarded by the undertaking offered by the Liquidators.

12.  The fourth set of proceedings is an application for substitution as petitioner on alleged indebtedness.  This application is related to a petition by the liquidators of Wai Shun to wind up Fitzroya Finance Company Limited (“Fitzroya”), another wholly owned subsidiary of Benefit.  Ms Kelly Cheng is a director of Fitzroya and has filed an affirmation to oppose the petition.  Whatever the merit of that set of proceedings, it has nothing to do with Wing Fai and is irrelevant for the purpose of the present application to stay.

13.  The fifth and sixth set of proceedings were respectively an action by Wing Fai against Fitzroya in respect of a loan and an application for injunction by Business Rootis Ltd, China Rich Properties Ltd and Evergreen Club Ltd against Wing Fai.  These proceedings have been concluded and are therefore have no bearing on the application to stay.

High Court Action No HCA 810 of 2003

14.  In addition to the new proceedings, Ms Kelly Cheng referred to High Court Action No. HCA 810 of 2003.  This action was commenced on 4 March 2003 before the date of the Examination Order.  In this action, the Liquidators claim against each of the Examinees for financial assistance under section 47A of the Companies Ordinance and for damages in common law regarding the disposal by the China Rich Group of its interest in Wing Fai. The Examinees’ objection is that they are parties to the action which has now progressed to the stage where witness statements are due to be exchanged.  As the Examinees will be witnesses in that action, their interests would be adequately protected by the Liquidators’ undertaking.

Conclusion

15.  The primary duty of liquidators is to put the affairs of the company in order and to carry out the liquidation in all its various aspects as effectively as possible, with as little expense as possible and with as much expedition as possible.  For that purpose, they have to get in the assets of the company for the benefit of creditors and decide whether proceedings should be instituted for the recovery of property or damages from third parties. Usually, liquidators are strangers to the affairs of a company which has become insolvent.  When they take possession of the company, books, accounts and records are often incomplete or unavailable.  Often the insolvency may be the result of misconduct or impropriety, rather than mis-management, on the part of those concerned with the management of the company who have obvious motives of being uncooperative with the liquidator’s inquiries.  Likewise, others who are wholly innocent of any wrongdoing may have motives for concealing what was done.  Very often, the information or documents sought are peculiarly within the knowledge or control of these persons, who because of their personal interest are most unlikely to be willing to cooperate with the investigation of the liquidator.  For such inquiries, time is of the essence.  The longer it takes to find out the true state of affairs of the company, the more remote is the chance of recovering the company’s assets and collecting its debts.  Hence, section 221 empowers the court to summon before it and examine 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 dealings affairs or property of the company.

16.  The Liquidators wish to examine the Examinees on a wide range of issues involving the affairs of Wing Fai.  There is no need for me to rehearse the reasons why the Examination Order was made.  Wing Fai was controlled by the Examinees at least until its sale in April 2002.  There is evidence which suggests the Examinees were still in control of Wing Fai even after the sale.  In less than three months after the sale, there were unsecured debts owing to third party unsecured creditors to the extent of $200 million.  There is evidence which suggests that documentation has been manipulated for the purpose of defrauding Wing Fai’s creditors. Thus unless these persons are examined, there is no way the Liquidators can carry out the liquidation in all its various aspects as effectively as possible, with as little expense as possible and with as much expedition as possible.

17.  The Examinees had never been co-operative with the Liquidators.  It had taken the Liquidators a year to have the opportunity of having the Examinees examined.  The examination of one of the Examinee was concluded, while that for another has just begun.  The Examinees have had notice of the upcoming hearing dates for five months.  Yet, it was until a matter of weeks before the hearing that they raised concerns about the appropriateness of the examination.  Two sets of the new proceedings relied on by the Examinees have been completed, while another set had nothing to do with the Liquidators.  The Examinees’ grounds for stay based on these sets of proceedings are not genuine.  Their application to stay bears all the hallmarks of a delaying tactic. 

18.  Of the remaining three sets of proceedings, it is true that the Examinees would be witnesses or are parties.  To that extent, it would be oppressive for them to be examined under section 221 in matters relevant to these proceedings.  However, their interests would be adequately protected by the undertaking offered by the Liquidators.  Having considered the public interest that liquidators should be able to carry out the liquidation as effectively as possible, with as little expense as possible and with as much expedition as possible and the interest of the Examinees, I consider the balance would be best struck by allowing the examination to continue upon the undertaking offered by the Liquidators.   Had all these matters been before me last March when I ordered the examination, I would nevertheless have made the order upon the undertaking of the Liquidators. Accordingly, upon the undertaking of the Liquidators, I refuse the Examinees’ application to stay. 

19.  Had the Examinees promptly complied with the Liquidators’ request for information, the section 221 application would not have been necessary.  Even if it was, the examination would have been concluded before the new proceedings were instituted and this application would never have been made.  The Examinees are trying to take double advantage of their own delay to put an end to the examination.  Their application is unmeritorious.  Accordingly, I dismiss their application for stay with costs.  I make a cost order nisi that the Examinees shall bear the costs of the Liquidators.