THE JOINT & SEVERAL LIQUIDATORS OF KONG WAH HOLDINGS LTD (In Compulsory Liquidation) v. THE GRANDE HOLDINGS LTD AND OTHERS

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

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BETWEEN

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AND

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

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D E C I S I O N

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The application

1.  This is a summons issued on 2 February 2005 by the liquidators of Akai Holdings Limited (“Akai”) and Kong Wah Holdings Limited (“Kong Wah”) (collectively “the Companies”) under section 221 of the Companies Ordinance, Cap. 32.  Initially, the summons was to seek production of documents from four corporate respondents, The Grande Holdings Limited (“Grande HK”), The Grande Group Limited (“Grande Group”), The Grande (Nominees) Limited (“Grande Nominees”) (collectively, “the Grande respondents”) and Omnicorp Limited (“Omnicorp”).  The summons was amended on 9 June 2005 to seek relief against three individual respondents for them to be orally examined.  They are Ho Wing On Christopher (“Mr. Ho”), Ruby Lee Yen Kee (“Miss Ruby Lee”) and Sheryl Simmons (“Miss Simmons”).

The Companies

2.  The Companies were both listed on The Stock Exchange of Hong Kong Limited and were part of the Semi-Tech Corporation Limited group of companies, which was an international conglomerate.  The background of the Companies, their group corporate structure, the events leading up to the winding up of the Companies by the courts in Hong Kong and Bermuda in August and September 2000, their financial position on liquidation, and the extent of the assets once owned or controlled by the Companies, their subsidiaries and associated companies that had been disposed of or transferred to the Grande respondents or Omnicorp had been set out in the two judgments I gave on 11 November 2003 and 7 September 2004, in respect of the applications also made under section 221 by the liquidators against the former auditors of the Companies and the former chairman and chief executive officer of the Companies, James Henry Ting (“Mr. Ting”).  I do not propose to repeat those matters here.

3.  The affairs of the Companies are very complex and substantial, involving a multitude of subsidiaries and associated companies.  As mentioned in my previous judgments, the collapse of the Companies, their subsidiaries and associated companies constitutes the largest corporate insolvency in Hong Kong.  There is difficulty in identifying all the companies that are, or at one time have been, the subsidiaries and associated companies of the Companies.  In the 11^th affidavit of Nicholas Hill, who is one of the liquidators, filed in support of the present application, he listed close to 300 subsidiaries and associated companies of the Companies known to the liquidators in Tab 1 of the documents exhibited.  The liquidators cannot be certain of the exact group structure.  During the course of their investigation, they have uncovered new entities which had dealings with the Companies or their subsidiaries and which further investigation has shown are or were subsidiaries or associated companies.

4.  In the revised draft order placed 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 four corporate respondents that relate to the Companies, their current and former subsidiaries and associated companies as listed in Tab 1, pages 9 to 24 of the documents exhibited to the aforesaid affidavit of Mr. Hill.  In this decision, I will refer to the Companies, their subsidiaries and associated companies identified in this way as “the Akai Group”.

The respondents

5.  Grande HK is a company incorporated in the Cayman Islands and continued in Bermuda and is currently listed on The Stock Exchange of Hong Kong Limited.  Mr. Ho was an executive director of Grande HK from October 1991, its president and group chief executive from at least 1996 to 2001 and is now its chairman.  He is also its major shareholder.  Mr. Ting was a director of Grande HK from November 1990 to November 1992.

6.  Grande Group is a company incorporated in Singapore and a wholly owned subsidiary of Grande HK.  Grande Group has provided legal and corporate secretarial support to Grande HK and its subsidiaries.

7.  Grande Nominees is a company incorporated in the British Virgin Islands and a wholly owned subsidiary of Grande HK.  It was set up to hold shares of various other companies as a nominee.

8.  Miss Ruby Lee is a solicitor and holds the position of “Director of Legal” for Grande HK and its subsidiaries.  She is a director and the company secretary of Grande Group and a director of Grande Nominees.

9.  Miss Simmons is a lawyer trained in the United States and was employed by Grande Group at one time.  Her present whereabouts are not known and the liquidators have not been able to serve this summons on her.

10.  Omnicorp has been previously named Tomei International (Holdings) Limited, Toyo Holdings Limited, 02 New Technology Limited and Omnitech Group Limited.  I propose to refer to it in this decision throughout as “Toyo”, as much of its involvement with the Akai Group took place at a time when it was named Toyo Holdings Limited.  It is a company incorporated in Bermuda and its shares are listed on The Stock Exchange of Hong Kong Limited.  Until 27 May 1999, Toyo was a subsidiary of Akai, it then became an associated company of Grande HK.  Between 11 November 1999 and 30 May 2000, Toyo was a subsidiary of Grande HK.  Until 3 November 2000, Toyo was an associated company of Grande HK.  Between 27 May 1999 and 3 November 2000, Mr. Ho was its executive chairman.  Mr. Ting was a director of Toyo from August 1991 to June 1999.

The transactions under investigation

11.  The matters or transactions for which the liquidators seek information and documents from the corporate respondents in this application may be categorised as follows:

(1) the Management Agreement dated 12 November 1999 made between Akai, on behalf of itself and its subsidiaries and affiliates and Grande Group (“the Management Agreement”) and transactions undertaken pursuant thereto;

(2) the engagement of Alpha Capital Group Limited (“Alpha Capital”; a wholly owned subsidiary of Grande HK at the material time) as the financial adviser of Akai and transactions undertaken pursuant thereto;

(3) the assets of the Akai Group including:

(a) the “Akai”, “Sansui” and “Kawa” trademarks;

(b) the shares held by the Akai Group in Toyo;

(c) the shares held by the Akai Group in Akai Electric Company, Limited (“AECo”; a company listed in Japan);

(d) the factories in Zhongshan, Guangdong province, China; and

(e) the shares held by the Akai Group in Merrywide Limited (“Merrywide”) and Shenzhen Kaifa Technology Company Limited (“Shenzhen Kaifa”);

(4) payments made by the respondents on behalf of or at the direction of or relating to the Akai Group and sums received by them on behalf of or at the direction of or relating to the Akai Group; and

(5) the loan agreement dated 15 November 1999 between Akai and Toyo, the loan facility made thereunder and any security provided in respect of the loan (“the Toyo Loan Facility”).

12.  The Grande respondents and Toyo have filed evidence giving their account of the above matters and transactions.  Whether their account and explanation are to be accepted is not a matter for determination in the present application and I make no findings in this respect.  What I am concerned with is whether the liquidators have demonstrated a genuine case and reasonable need to investigate further the transactions in question.  With that, I turn to each of the transactions under investigation and the involvement of the respondents in these transactions.

The Management Agreement

13.  The Management Agreement was drafted by Miss Simmons, an employee of Grande Group at the time.  It was signed by Mr. Ho on behalf of Grande Group and by Mr. Ting on behalf of Akai.  According to the Management Agreement, Akai

(1) “transferred” to Grande Group all authority to manage “the Business of Akai”, which was defined to mean “all business activities of [Akai, its subsidiaries and affiliates], including without limitation all financial, operational, legal, corporate, administrative and other matters involving [Akai, its subsidiaries and affiliates]”;

(2) authorised Grande Group “to perform all actions, execute all documents, and otherwise conduct the Business of Akai in such a manner as [Grande Group] shall consider appropriate, in the sole discretion of [Grande Group]”; and

(3) approved, ratified and confirmed all actions taken by Grande Group on behalf of Akai, its subsidiaries and affiliates prior to execution of the Management Agreement.

14.  From December 1999 to August 2000, an entity within the Grande group of companies invoiced Akai on behalf of Grande Group a total sum of HK$13.6 million (equivalent to US$1,743,590.00) for “salary and expenses reimbursement” under the Management Agreement, at the rate of HK$1.6 million per month.  Of the amounts invoiced, Grande Group admitted it had received HK$11.2 million.

15.  As a result of the Management Agreement, the Grande respondents would appear to have been in control of the Akai Group and managing the affairs of the Akai Group.  On 3 December 1999, the authorised signatories of all the bank accounts of the Akai Group were replaced in that only the directors, officers and employees of Grande HK and Toyo could sign.  Mr. Ho was made an authorised signatory of all the bank accounts of the Akai Group for an unlimited amount and Miss Ruby Lee an authorised signatory to sign any cheque up to HK$2 million jointly with another signatory.  Between 5 January 2000 and 21 September 2000, Miss Ruby Lee was a director of at least 15 subsidiaries of the Companies; during this period, all litigation and conveyancing transactions relating to the sale of properties of the Akai Group were handled by the Grande respondents, in particular by Miss Ruby Lee, apparently without reference to the Akai Group.  Miss Simmons was also involved in giving instructions on behalf of the Akai Group pursuant to the Management Agreement.

16.  Notwithstanding the significant effect of the Management Agreement, its existence was not disclosed to the shareholders of Akai, the steering committee representing the bank creditors of the Companies, The Stock Exchange of Hong Kong Limited, the Securities and Futures Commission and the court hearing the petitions for the winding up of the Companies.

17.  The liquidators have made the implementation and effect of the Management Agreement a key area of their investigation, especially in relation to transactions mentioned below that took place at about the time this agreement was entered into or subsequent thereto, in relation to substantial assets of the Companies that no longer appear to be available to the creditors.

18.  In the evidence filed on behalf of the Grande respondents, it was asserted that the Management Agreement was prepared with a view to formalise the basis for secondment of staff to Akai by Grande HK and Toyo to assist in the areas of financial, legal, operational and administrative matters and that the staff seconded did not manage the business of Akai.  It was claimed that the seconded staff were answerable to the board of directors of Akai and Mr. Ting was at all material times the central decision maker.

19.  Be that as it may, the full extent of the respondents’ involvement in the affairs and dealings of the Companies, both before and after the signing of the Management Agreement, would clearly require further investigation, not least because of the contradictory statements made by Mr. Ting and by the Grande respondents.  Other than the implementation, the negotiation and drafting of the Management Agreement are areas that should be looked into properly by the liquidators.  The fact that The Stock Exchange of Hong Kong Limited did not make further inquiries with Grande HK regarding the Management Agreement after the correspondence exchanged from June to August 2001 is neither here nor there.

Alpha Capital

20.  By an engagement letter dated 1 November 1999 signed by Mr. Ho as president and group chief executive of Alpha Capital and Mr. Ting on behalf of Akai, Alpha Capital was appointed as financial adviser to Akai, to advise Akai and its subsidiaries on “operational, financial and treasury matters pertaining to the Group”.  It was stated in the engagement letter that Alpha Capital would perform, inter alia, the following services:

(1) “to carry out a complete review of the operations and financial position of all operating units within the Group”;

(2) “to advise [Akai] on various options and strategy for disposing the non-core operations and assets of the Group”;

(3) “to advise [Akai] on various options for re-structuring the financial and treasury operations of the Group”;

(4) “to co-ordinate the work of other professional advisers to [Akai] … on any plan to disposal of non-core assets and injection of funds by outside investors”; and

(5) “to oversee the completion of any disposal of non-core operations and injections of funds by interested investors”.

21.  In respect of the above services, Akai was required to pay a substantial advisory fee of US$5 million upfront upon signing the engagement letter, notwithstanding Akai’s cash flow problems at that time.  The liquidators consider the arrangements contemplated under the engagement letter highly unusual.  Despite their investigations, to date they have not been able to locate any work product resulting from the engagement letter.

22.  The Grande respondents claimed that Alpha Capital has since been sold by Grande HK to an unrelated third party, which was not identified, and its books and records are no longer with them.  The disposal of Alpha Capital was in June 2004, more than two years after the liquidators first sought information from the Grande respondents.  In her 2^nd affirmation filed two days before the hearing, Miss Ruby Yen produced two public notices in relation to the proposed convertible bond open offer to the existing shareholders of Akai in November 1999 and February 2000 and a debt restructuring proposal of the Akai Group in March 2000, being documents in respect of transactions undertaken by Alpha Capital.  These could only have been a very small part of the documents generated from the work of Alpha Capital.

The Toyo Loan Facility

23.  By a facility letter dated 15 November 1999 (“the Facility Letter”) signed by Mr. Ho on behalf of Toyo and Mr. Ting on behalf of Akai, Toyo purported to extend an on demand revolving loan facility of HK$630 million to Akai for funding its operating capital requirements.  It was a term of the Facility Letter that the use of the funding had to be approved by Toyo from time to time and that notice of drawing had to be given by Akai to Toyo.

24.  At a directors’ meeting of Grande Nominees held on 16 November 1999, Miss Ruby Lee reported that Grande Nominees had been appointed the same day as a corporate director of Tremendous Springs Limited (“TSL”; which was then a wholly owned subsidiary of Akai) and it was resolved that any one director of Grande Nominees be appointed as the authorised representative to attend all board meetings and to execute all documents pertaining to all business transactions of TSL on behalf of Grande Nominees as a corporate director.

25.  On 18 November 1999, Akai, Grande HK and Toyo jointly announced the open offer of convertible bonds to existing shareholders of Akai, to raise HK$335 million through the issue of the bonds with Toyo as the underwriter.  Mr. Ho signed the underwriting agreement on behalf of Toyo.

26.  Akai purportedly entered into a series of share mortgages with Toyo and TSL dated 6 December 1999, the same day that the petitioning creditors made a formal demand to Akai for repayment of US$19 million.  No mention was made in the Facility Letter, the minutes of the board meeting of Akai on 15 November 1999, or the joint announcement on 18 November 1999 of any security created by Akai in favour of Toyo, whether in respect of the Toyo Loan Facility or any loans said to have been advanced by Toyo to Akai.  None of the share mortgages and assignments was ever registered at the Companies Registry and none was disclosed to the Companies’ creditors or the liquidators until August 2000.  These share mortgages and assignments, signed by Mr. Ho on behalf of Toyo and TSL, were as follows:

(1) a share mortgage over Akai’s entire beneficial interest in TSL in favour of Toyo, purportedly in consideration for Toyo continuing to extend facilities to Akai pursuant to the Facility Letter;

(2) a share mortgage over Akai’s shares in Guestlink Investment Limited (“Guestlink”) in favour of TSL, purportedly granted as security to TSL for any amounts “which are now or at any time may become payable” by Akai;

(3) a share mortgage over Akai’s shares in Eveland Investments N.V. (“Eveland”) in favour of TSL, the main asset of Eveland was its indirect interest through subsidiaries of Akai’s major stake in AECo;

(4) a share mortgage over Akai’s convertible preference shares in The Singer Company N.V. (“Singer”) in favour of TSL; and

(5) an assignment of accounts receivable over all accounts receivable of Akai in favour of TSL, which extended to all the loans and receivables due to Akai including those owed by Akai’s subsidiaries and associated companies, as security for Akai’s indebtedness under the Facility Letter.

27.  Toyo had obtained control over TSL by enforcing the share mortgage in respect of the TSL shares.  By taking over TSL, Toyo effectively took over the shares in Eveland, Guestlink and Singer, as well as all the accounts receivable due to Akai.  Toyo has given various justifications for enforcing the share mortgage of the TSL shares:

(1) Toyo claimed that it had advanced US$108 million to Akai.  The liquidators do not, however, consider Toyo, Grande HK or TSL to have provided any meaningful explanation for this lending, to what use it was put or why Toyo was entitled to realise the security purportedly created by Akai in its favour.

(2) In the public announcements made by Akai, Toyo and Grande HK from March 1999 to November 2000, Toyo claimed to have advanced over US$108 million to Akai.  It was only after the Companies were ordered to be wound up that the liquidators discovered such of the advances they were able to identify, of approximately US$42.5 million, were made to, or on behalf of, the Companies or their subsidiaries by or through TSL.  Of this US$42.5 million, at least US$36 million related to transactions which the liquidators believe are suspicious.  They do not think the Companies’ books and records available to them are sufficient to substantiate the amounts paid to, or on behalf of, the Companies.

(3) In its annual report for 2001, Toyo stated that HK$600 million had been advanced to Akai under the Toyo Loan Facility, arising from its involvement with the rescue of the Akai Group in late 1999.  It was stated, for the first time, that the funding had been made by Grande HK, at that time the parent company of Toyo, through a subsidiary of Toyo, Prosperous Finance Limited (“PFL”), as a result of which PFL was indebted to Toyo in the sum of HK$600 million.  To settle the matter, PFL issued a promissory note to Toyo, which Toyo in turn endorsed to Grande HK, so Grande HK thereby became a direct creditor of PFL.  The liquidators have not found information in the books and records of the Companies regarding the above transactions described in Toyo’s 2001 annual report.

28.  In September 2000, TSL was sold or transferred to Always Win Company Limited (“Always Win”), which is alleged by the Grande respondents and Toyo to be an independent third party.

29.  On 22 May 2002 Toyo sold PFL, with its parent company Towering Finance Limited (“TFL”), to Grande HK for a nominal price.  Toyo claimed that it had passed on to Grande HK the books and records of TFL and PFL.  Nine days later, Grande HK sold TFL and PFL to an unidentified party alleged to be independent.  Grande HK claimed that all the books and records of PFL were transferred to this purchaser which it has declined to identify.

The AECo shares and trademarks

30.  It was the liquidators’ understanding that AECo had entered into a loan agreement with Toyo on 28 January 2000 whereby Toyo obtained security and subsequently control over the “Akai”, “Sansui” and “Kawa” trademarks, following AECo’s default under the loan agreement.  The liquidators pointed out that according to the annual report of Toyo for the year ended 31 December 2000 and the annual report of Grande HK for the year ended 31 December 2001, the loan said to have been advanced by Toyo to AECo was the Toyo Loan Facility.

31.  Toyo alleged that the above understanding of the liquidators is incorrect in that the Akai trademark was sold by AECo to Toyo pursuant to a sale and purchase agreement dated 28 January 2000, subject to a buy back option exercisable by AECo at a higher price by 28 April 2000.  AECo did not exercise its buy back option.  Toyo further claimed that on 11 September 2000, it had assigned the benefit of the sale and purchase agreement to Phenomenon Agents Limited (“Phenomenon”), which was alleged to be beneficially owned by Toyo.  Toyo had refused to supply a copy of the sale and purchase agreement to the liquidators.  Eventually, a copy of the sale and purchase agreement, a copy of the assignment to Phenomenon and a copy of a sale and purchase supplement dated 14 September 2000 were produced by Miss Ruby Lee for the Grande respondents in her 2^nd affidavit made two days before the hearing.  Miss Ruby Lee had signed the sale and purchase agreement and the assignment on behalf of Toyo.  She further deposed that the sale and purchase agreement was structured in the way it was on the advice of Toyo’s lawyers in Japan.

32.  In November 2000, AECo initiated civil restructuring proceedings in the Tokyo District Court.  The rehabilitation plan was made on the basis of support from Grande HK and its subsidiaries.  Eventually AECo’s existing shares were cancelled and new shares were issued to its creditors.  According to the plan submitted to the Tokyo District Court dated 16 April 2001, the “Akai” trademark was to be taken over by Grande HK in this way:

(1) Toyo was described as the owner of the trademark and whose rights would be transferred to Phenomenon, all the shares of which were held by Grande HK.  Grande HK would contribute all its shares in Phenomenon to AECo and Phenomenon would give AECo the license of the trademark.

(2) Through the rehabilitation plan, Grande HK obtained 85% shareholding in AECo and thus control over the trademark.

33.  As for the “Sansui” trademark, Miss Lee produced belatedly in her 2^nd affidavit a copy of a sale and purchase agreement dated 30 November 1999 made by Sansui Electric Co., Ltd. (“Sansui”; a company listed in Japan, in which Akai acquired a 46.5% interest in 1992) and Toyo by which Sansui sold this trademark to Toyo, also with a buy back option exercisable by Sansui at a higher price by 31 May 2000.  She also produced a supplemental agreement dated 24 December 1999 in which Sansui sold its patents to Toyo, again with a buy back option.  Miss Ruby Lee claimed that the sale and purchase agreement was structured in this manner as advised by Toyo’s Japanese lawyers and as Sansui was unable to exercise the buy back options, Toyo proceeded to deal with the intellectual property rights after the option periods had expired.  On 11 September 2000, Sansui, Toyo and Almaden Agents Limited (“Almaden”; subsequently re-named Sansui Acoustics Research Corporation) entered into an agreement by which Toyo agreed to assign the “Sansui” trademark to Almaden.  All these agreements were signed by Miss Ruby Lee on behalf of Toyo.  Almaden signed the last mentioned agreement by a director who was also a director of Phenomenon.

34.  The “Kawa” trademark was owned by Zhongshan Kawa Electric Group Limited (“ZKEG”; this company is dealt with in the next part of this decision).  In her 2^nd affidavit, Miss Ruby Lee produced an agreement for assignment of trademarks dated 1 January 2003 entered into between ZKEG and a company owned by Grande HK called Tomei Kawa Electronics International Limited.  Pursuant to this agreement, the “Kawa” trademark was sold to the latter entity at RMB 2.9 million.

35.  By January 2003, all the trademarks and patents which were recorded in the audited financial statements of Akai to have a value of US$483.4 million as at 31 January 1999, have been managed by Grande HK.  As with the major assets, the majority shareholding of Akai in AECo and the trademarks were taken away from Akai at a time when the Akai Group was under the control of the Grande respondents and Toyo.  The liquidators wish to investigate if these were bona fide arms length commercial transactions as asserted by the respondents.

The Zhongshan factories

36.  Kong Wah International Company Limited (“KWIC”) was once a subsidiary of Kong Wah and has later become a subsidiary of Akai.  KWIC held at least 75% interest in eight joint venture companies, collectively referred to as the Zhongshan Kawa Group.  The Zhongshan Kawa Group was at one time the largest television manufacturer in Asia, outside of Japan, and forms a large industrial complex in Zhongshan known as the Kawa Electronic City.

37.  In April 2000, when the Akai Group was under the management control of the Grande respondents and Toyo, TWD Asia Limited (“TWD”) successfully applied to the Commission of Foreign Trade and Economic Cooperation to obtain a controlling stake in the issued capital of the Zhongshan Kawa Group.  As a result, KWIC’s equity was reduced to between 39% and 49%.  On 7 July 2000, Grande Nominees acquired 100% of TWD’s issued share capital.

38.  On 10 July 2000, ZKEG, one of the biggest companies in the Zhongshan Kawa Group, resolved to admit TWD as a new investor.  As a result, TWD allegedly invested HK$137 million in ZKEG for a 50.1% equity interest.  Similar dilution of Akai’s shareholding took place in respect of other companies within the Zhongshan Kawa Group.

39.  Miss Ruby Lee claimed in her 2^nd affidavit that Grande HK had injected capital of HK$284 million through TWD to assist in rescuing the Zhongshan factories in August 2000, and that in exchange, TWD was given shares in the Zhongshan Kawa Group.

40.  Although one of the liquidators was appointed a director of ZKEG, the liquidators have not been able to obtain any meaningful information in relation to the companies which comprise the Zhongshan Kawa Group.

Shares in Merrywide and Shenzhen Kaifa

41.  Between November 1997 and August 1998, the Akai Group purportedly invested HK$982.25 million in Merrywide, the major assets of which were shares purportedly purchased in Shenzhen Kaifa.  Some of these purchases were made by Toyo (when it was a subsidiary of Akai) through its wholly owned subsidiary Match Top Limited.  Subsidiaries and associated companies of the Companies, including Toyo, appeared on Merrywide’s share register until April 2001, when those shares were recorded as being transferred to third parties.

42.  Despite the contents of the share register, the liquidators have been advised by a director of Merrywide that Akai and its subsidiaries never had any interest in Merrywide.  The liquidators’ investigations into the payments by the Companies purportedly relating to the investments in Merrywide and Shenzhen Kaifa shares are continuing.  So far, they have not been able to find evidence to indicate that the payments set out in the sale and purchase agreements were made to the owners of the shares.  To date, their work indicates that most of the payments allegedly made in respect of the Merrywide investment would appear to be a “round robin” of payments.

Payments and receipts of the respondents

43.  The liquidators’ investigations have revealed a number of transactions involving the payments of significant but unexplained amounts from the Akai Group’s bank accounts to various recipients, including Toyo, during the period leading up to the appointment of the liquidators.  Some of these substantial payments identified to date, which took place in 1997 and 1998, are set out in paragraph 12.2 of the 12^th affidavit of Mr. Hill.

The applicable principles

44.  The applicable principles by which the court may exercise its discretion to order production of documents and examination of individuals under section 221 are not in dispute.  The liquidators would have to satisfy the court that the information or documents sought are reasonably required in carrying out their functions.  In determining what are the reasonable requirements of the liquidators, and whether the order should be made, great weight should be given to the views of the liquidators as they would have detailed knowledge of the problems which exist in relation to the affairs of the company and the information required.  The purpose of section 221 is to enable the company’s knowledge to be reconstituted, but that is not its sole purpose.  In exercising its discretion, the court must carefully strike a balance between the liquidators’ reasonable requirements and the need to avoid making an order that is wholly unreasonable, unnecessary or oppressive to the person concerned (Re New China Hong Kong Group Ltd. [2003] 3 HKC 252, paragraphs 18 to 26).

45.  Also of relevance to the present situation is that the case for making an order against an officer or former officer would usually be stronger than it would be against a complete outsider.  “Officer” in section 221 is defined in section 2(1) to include “a director, manager or secretary”.  A “director” is defined in section 2(1) to include “any person occupying the position of director by whatever name called”.  A “manager” is defined in section 2(1) to mean “a person who, under the immediate authority of the board of directors, exercises managerial functions …’.  In view of the terms of the Management Agreement set out earlier, I am satisfied that Grande Group, and some of the officers or employees of the Grande respondents and Toyo that had substantial involvement in carrying out the management of the Companies, such as Mr. Ho, Miss Ruby Lee and Miss Simmons, may be regarded as former officers of the Companies for the purpose of section 221.  They are certainly capable of giving information concerning the affairs of the Companies.

Reasonable requirement for information and documents

46.  I have set out in some detail the transactions the liquidators would wish to investigate further and the involvement of the respondents in these transactions.  I have no difficulty in coming to the view that the liquidators have made out a case that the information and documents sought in the summons are reasonably required to enable them to carry out further investigation.  I bear in mind the extent of the insolvency in these liquidations and the public interest involved in investigating the causes of failure of the Companies and the conduct of those involved in the management.  Each of the transactions is a matter in which the Grande respondents or Toyo were substantially involved.  What then are the reasons for denying the liquidators the relief sought in this application?

47.  Mr. Grossman, SC, who appeared for Toyo, and Mr. Carolan, who appeared for the other respondents except Miss Simmons, have advanced these principal objections:

(1) the Grande respondents and Toyo do not have possession of the documents sought and all relevant documents have already been provided to the liquidators;

(2) the respondents have no knowledge of the information sought;

(3) the liquidators are not entitled to some of the information and documents sought;

(4) the exercise of the discretion should be balanced against the consideration that the liquidators may well decide to sue the respondents;

(5) the production of documents and oral examination should be deferred, until after the oral examination of Mr. Ting in August 2005 or after written interrogatories have been served on the individual respondents; and

(6) the scope of the documents sought is too broad, it would be oppressive and unworkable for an order to be made in terms of the draft order.

I turn to consider each of the above objections.

Not in possession of documents

48.  The Grande respondents claimed that all the books and records of the Companies were handed over to the liquidators by Yuen Kin Samuel (“Mr. Yuen”), who was seconded by Grande Group as the corporate controller of the Akai Group.  In January 2000, Grande Group made arrangements to retrieve the books and records of Akai and bring them back to Singapore to be tabulated, collated and organised.  This sorting out exercise in Singapore took almost six months.  All the files and records were handed over to Mr. Yuen in Singapore on 15 June 2000 and he in turn handed them over to the liquidators in June 2001 (214 boxes) and August 2001 (106 boxes).  The liquidators collected another 2,223 boxes of documents, which had all along been kept at a warehouse in Zhongshan, in February 2002.  Miss Ruby Lee exhibited to her 1^st affidavit a list of the tabulation prepared by the legal department of Grande Group of the documents shipped to Singapore and a list prepared by the legal department of the files and documents that were handed over to Mr. Yuen.

49.  No list was given of the documents transferred to the liquidators in June and August 2001 at the time of the transfer.  The liquidators said they had requested a list during the transfer.  Mr. Yuen alleged in his affidavit made two days before the hearing that the liquidators did not agree to give them time to compile a list.  The fact remains that no list of any kind was ever provided to the liquidators until the 1^st affidavit of Miss Ruby Lee was served in April 2005, notwithstanding that the Grande respondents had in their possession two lists already prepared by the legal department.

50.  The liquidators have reviewed these lists and identified in Tab 4 of the documents exhibited to the 4^th affidavit of Cosimo Borrelli the documents which had been taken by Mr. Yuen but not returned to the liquidators.  Mr. Borrelli set out in paragraph 19 of his affidavit some examples of the documents which have not been provided to the liquidators and are crucial to their investigations.  He also pointed out that the documents listed are incomplete.  One obvious example is the bank documents of the Akai Group.  To the liquidators’ knowledge, the Akai Group had maintained over 200 bank accounts with 50 banks.  The liquidators have only been able to locate a handful of incomplete company secretarial files and some of the accounting files, after a thorough review of the documents returned by the Grande respondents.

51.  The Grande respondents also claimed that much of their involvement in the affairs of the Akai Group under the Management Agreement was conducted orally.  This would seem unlikely, having regard to the departments and number of staff involved; the fact that Miss Ruby Lee was able to give details of transactions that took place more than six years ago, some of which she was not even involved in; and there must have been documents generated in dealing with the numerous suits brought against the Akai Group especially in the United States, other than the correspondence sent on Akai’s letterhead which the liquidators have been able to locate. 

52.  As for the documents belonging to entities that had been sold by the Grande respondents which they have refused to identify, the disposals all took place after the liquidators had first sought information and documents from the Grande respondents since March 2002.  At the very least, the Grande respondents should have in their possession, custody or control documents relating to the disposal of PFL, TFL and Alpha Capital.

53.  As pointed out by Miss Linda Chan for the liquidators, the Grande respondents have claimed all along that any further documents requested by the liquidators had all been returned and it was not until two days before the hearing when Miss Ruby Lee made her 2^nd affidavit and Mr. Yuen his 1^st that some additional documents were produced.  Even in Miss Ruby Lee’s 2^nd affidavit, it would appear that steps are still being taken to ascertain if the Grande respondents would have any further documents.

54.  I do not agree with Mr. Carolan’s submission on behalf of the Grande respondents that to order production of documents in such circumstances would be a pointless exercise.  The Grande respondents have not confirmed on oath that they do not have possession, custody or control of the documents sought in this application.  The liquidators seek an order that the Grande respondents be required to procure parties who have possession of relevant documents to produce them to the liquidators, this would cover the former auditors of the Companies and regulatory authorities.  In respect of transactions which involved both Akai and the Grande respondents, I do not agree with Mr. Carolan’s suggestion that the liquidators should have already obtained all necessary documents and information from the source of Akai and there would be no need to probe into the source of the Grande respondents.  I agree with Miss Chan that for the liquidators to discharge their duties properly, they should review the documents and information held by all parties involved in the events and transactions.

55.  Toyo also claimed that all documents relating to the liquidators’ inquiries have already been provided to them and there is nothing further which Toyo can provide.  It denied involvement in any transactions identified by the liquidators prior to the rescue of the Akai Group in about November 1999, other than the change in Akai’s shareholdings in Toyo in May and September 1999.  TSL was sold by Toyo to Always Win in September 2000.  After the current management took over the board of Toyo in November or December 2000, Toyo had disposed of TFL and PFL to Grande HK in May 2002.  Hence, Toyo is unable to provide information and documents relating to the funding movements of the Toyo Loan Facility made through TSL.

56.  Miss Chan pointed out that from the affirmations filed on behalf of Toyo in this application, made by its deputy chief executive officer Hui Tung Wah (“Mr. Hui”), it would appear that Mr. Hui has had “full access” to “the documents in the possession” of Toyo relating to the matters identified by the liquidators and has reviewed such documents and public documents for the purpose of making his three affirmations.  She submitted that at the very least, Toyo should have in its possession or control the following documents relevant to the liquidators’ investigation:

(1)     documents relating to the foreclosure of the TSL shares and the onward sale of TSL to Always Win;

(2)     documents relating to the loan allegedly advanced by Grande HK to Toyo for the purpose of the Toyo Loan Facility, the subsequent repayment of the loan and the sale of TFL and PFL to Grande HK; and

(3)     each of the payments or receipts by or on behalf of Toyo to the Akai Group pursuant to the Toyo Loan Facility.

57.  I am inclined to agree with the above submissions.  As stated earlier, it was a term of the Facility Letter that the use of the funding had to be approved by Toyo from time to time and Akai had to give notice of the drawing to Toyo.  I note also that Toyo was able to give details of the loans advanced by or through TSL in its annual report for 2001 and in its correspondence with the liquidators.  It is quite clear from the evidence filed by Toyo that firstly, it has within its power and control documents relevant to the liquidators’ investigation that have not been released to the liquidators, such as the documents in the possession of its present and former auditors; and secondly, as admitted in the affirmations of Mr. Hui, Toyo has in its possession “documents relating to the settlement of loan due to [Grande HK] and the sale of TFL and PFL to [Grande HK]”, and documents and information relating to “a reconciliation of the gross advance [to the Akai Group] of HK$908 million, the provision of HK$308 million and the resulting net amount of HK$600 million”, but has objected to production of any of these documents on the ground that the liquidators are not entitled to see documents that related to “internal matters” of Toyo.

58.  I reject the suggestion that since the Toyo Loan Facility was mentioned in the annual reports of Toyo and Grande HK which had been audited by their auditors, it would not be necessary for the liquidators to review the primary documentation relating to the funds alleged to have been provided by Grande HK, as this would be to assume that the information and documents provided by Toyo and Grande HK to their respective auditors were complete, true and accurate.

59.  In this connection, Toyo has produced letters dated 27 August 2003 to its past and current auditors, Ernst & Young and Moore Stephens respectively, seeking information and documents requested by the liquidators regarding inter alia the Toyo Loan Facility.  No reply was received apparently, and Toyo wrote nearly two years later on 11 May 2005 to chase for response.  However, the liquidators had received a letter from the solicitors of Ernst & Young earlier dated 8 November 2004 stating that Toyo has refused to consent to the release of the audit working papers of Ernst & Young relating to Toyo to the liquidators.  The solicitors suggested that the liquidators should seek a court order for the release of the audit working papers, to ensure that Ernst & Young would not be held to have breached its duty of confidentiality to Toyo.  Ernst & Young also alluded to this letter when they replied to Toyo’s letter dated 11 May 2005.  In response to Ernst & Young, Toyo stated in its letter dated 29 June 2005 that it did not think it necessary for the liquidators to review all the working papers of the auditors; further, although it has “no objection in principle” to production of working papers in respect of the Toyo Loan Facility, Toyo would require to review the relevant working papers before any release to the liquidators.

60.  I reject Mr. Grossman’s submission that it would be a pointless and time wasting exercise to make an order for production of documents in the possession, power and custody of Toyo.  In view of Toyo’s instructions to Ernst & Young in its letter dated 29 June 2005 that Toyo must review the working papers before release, I do not think it justifiable for Toyo to complain that it would be unduly burdensome to require them to give production of documents.

No knowledge of information sought

61.  Mr. Grossman submitted that there had been substantial changes in the shareholdings and management of Toyo since November 2000 and the present management of Toyo has no knowledge of the information and documents sought by the liquidators.  I do not think this is a material consideration.  The present management can seek the assistance of the employees or the former officers to enable them to comply with the court order.

No entitlement to information and documents

62.  Toyo asserted that the liquidators are not entitled to obtain these documents:

(1)     documents relating to the shares in AECo and the trademarks, as these transactions were not between Toyo and the Akai Group and “fall outside the scope of the liquidators’ powers under section 221”; and

(2)     documents relating to treatment of the loan advanced to Akai under the Toyo Loan Facility, the settlement of the loan due to Grande HK and the sale of PFL and TFL, as these are “internal matters” of Toyo.

63.  I agree with Miss Chan that these objections are not well founded.  The AECo shares and the trademarks were at one time very valuable assets of the Akai Group.  Akai had acquired 55% of the shares in AECo in February 1995 and its shareholding was increased to 74.4% in December 1999.  The AECo shares and the trademarks were taken away when the Akai Group was under the management and control of the Grande respondents and Toyo.  Even with the documents produced in the 2^nd affidavit of Miss Ruby Lee, not all the documents relating to Akai’s shares in AECo and the trademarks have been produced.  As for the documents relating to the loans advanced to Akai under the Toyo Loan Facility, they formed the very basis upon which Toyo had relied to take over the most valuable assets of the Companies.

64.  I see no basis for the contention that the liquidators are not legally entitled to production of documents which clearly relate to the Companies.

Litigation contemplated against the respondents

65.  This was a contention advanced by Mr. Carolan.  He submitted that it was reasonable to infer that the purpose of this application was for the liquidators to better arm themselves for litigation.  The liquidators had long since been provided with lots of documents and it was apparent from the correspondence exchanged since March 2002 that they were just seeking to fill in the missing details to perfect their formulation of recovery claims.  I was referred to Cloverbay Ltd. v. B.C.C.I. Ltd. [1991] Ch. 90.  The court should be circumspect in granting relief under section 221 in these circumstances.

66.  The liquidators are still at the stage of investigating the transactions, which are of some complexity.  It does not appear from the evidence that the liquidators are seeking to dot the i's and cross the t’s of fairly clear claims by seeking production of further documents and examination of the individual respondents.  I do not think the risk of possible oppression should out weigh the reasonable requirements of the liquidators in this situation.  I also take into account that Grande Group was not a third party in view of the powers and responsibilities conferred on it under the Management Agreement.

Production of documents and oral examination be deferred

67.  Both Mr. Grossman and Mr. Carolan submitted that production of documents should be deferred until after the examination of Mr. Ting, which is to take place in August 2005.  It was contended that with the information that may be provided by Mr. Ting in his examination, the liquidators may become more “focused” in their investigation and this may narrow the scope of the inquiry they would wish to pursue with the respondents.

68.  The benefit envisaged by counsel may or may not happen.  I do not regard that as a sufficient reason to defer the reliefs sought against the respondents.

69.  The application for oral examination was also opposed for a number of reasons:

(1)     The application was made only in June 2005, notwithstanding that the liquidators have been seeking documents and information from the respondents for three years.

(2)     Mr. Ho has offered to answer written questions but the liquidators declined to provide any questionnaire for this purpose.

(3)     No case has been made out for requiring the individual respondents to be examined orally.  The mere fact that Mr. Ho and Miss Ruby Lee had signed various documents investigated by the liquidators is not sufficient to show how they were personally involved in the affairs of the Companies.  There was no or no adequate explanation why they can be reasonably expected to insist the liquidators in the transactions under investigation.

(4)     Both Mr. Ho and Miss Ruby Lee are resident in Singapore.  In the exercise of its discretion, the court should decline to order these individuals to attend for an examination in Hong Kong.

70.  I reject each of the above contentions.  The lateness of the application for oral examination is neither here nor there.  Having regard to the matters to be investigated, it is clearly inappropriate for the investigation to proceed solely by way of written questionnaire.  A round or several rounds of written questions and answers would not have dispensed with the need for oral examination, so I see no particular advantage in deferring examination until after this method has been tried out.  I do not agree with the suggestion that the involvement of Mr. Ho and Miss Ruby Lee in the transactions under investigation was minimal.  They and Miss Simmons are clearly in a position to provide material information.  In view of the extent of their involvement in the affairs of the Companies, I do not think this is a proper case to decline to order Mr. Ho and Miss Ruby Lee to attend for examination notwithstanding they are resident outside Hong Kong.

The scope of the order

71.  Both Mr. Grossman and Mr. Carolan submitted that even though the liquidators have put forward a revised draft order to meet the criticism that the scope of the documents sought is far too wide, the draft order is still unworkable and unduly oppressive.

72.  In the revised draft order, the liquidators have limited the number of subsidiaries and associated companies to nearly 300 entities as listed in the exhibit that I have mentioned.  They have also put a limit as to the time for which the documents are sought, from 1 January 1997 up to present.  I recognise that the ambit of the documents sought is still very wide, but at least it is not open ended as to time, the identity of the entities involved, or the transactions in respect of which production of documents is required.

73.  Toyo also pointed out that of the nearly 300 entities listed in the Akai Group, ten of them are current subsidiaries of Toyo, they were acquired from independent third parties not connected with the Companies (which have not been identified) or were formed after 4 November 2000 at the earliest (when Toyo ceased to be an associated company of Grande HK).  It was asserted that as none of these companies could have been involved in the transactions under investigation, it would be wholly inappropriate to make any order in respect of these companies.  Of these ten subsidiaries, the liquidators are aware that Vandyke Limited is associated with investigations by the Commercial Crime Bureau. 

74.  I am not persuaded it is appropriate or feasible to cut down the scope of the documents sought, having regard to the substantial involvement of the Grande respondents and Toyo in the affairs of the Companies, the nature and ambit of the transactions that would require investigation, and the massive insolvency in these liquidations.

Conclusion and orders

75.  For the above reasons, I grant the reliefs sought by the liquidators in the amended summons.  There will be an order in terms of paragraphs 1 to 8 of the revised draft order with the following changes:

(1) In paragraph 1, the time for compliance with the order is changed from “14 days” to 28 days.

(2) In paragraph 1, the period within which documents are to be supplied to the liquidators is to run from 1 January 1997 up to the date of the order herein.

(3) In paragraph 2, the time for compliance with the order is changed from “14 days” to 28 days.

76.  As Miss Simmons was absent at the hearing, I give her leave to apply to set aside the order for her oral examination, this is provided for in the revised draft order.

77.  Regarding the costs of this application, I make an order nisi that the liquidators’ costs of the application and of the hearing on 13 and 14 July 2005 are to be paid by the 1^st to 6^th respondents, to be taxed if not agreed.  I have noted the stance adopted by the Grande respondents in the letters of their solicitors, that the affidavit of Miss Ruby Lee was stated to be filed “in reply” to the supporting evidence of the liquidators and not “in opposition”.  The fact remains that the Grande respondents did not consent to an order for production of documents against them and have raised a number of reasons at the hearing why relief should not be granted at all or should be deferred.  The liquidators have succeeded to a large extent on their application.  There is no reason why costs should not follow the event.

78.  Mr. Grossman sought an order that the liquidators should indemnify Toyo for its expenses in complying with the order to search for and produce documents, especially as Toyo was “a stranger to the litigation against whom no allegations are made”.  He cited the decision of Chu J in Shanghai Merchants Holdings Ltd (in receivership) & Anr. v. Great Center Ltd., HCA No. 2433 of 2003, 21 October 2004.  There the receivers of the plaintiff companies sought a Norwich Pharmacal type of order against some of the defendants and orders were made by consent providing that the plaintiffs should reimburse these defendants their reasonable costs of complying with the discovery orders on an indemnity basis.  It was not an application under section 221 and the decision does not provide any support that the costs for complying with an order to produce documents under section 221 should be paid out of the assets of the company in liquidation.

79.  The liquidators have indicated their willingness to pay photocopying charges incurred by the respondents in providing documents to them.  I am not inclined to allow any other expenses incurred by the respondents in complying with the order.