THE OFFICIAL RECEIVER v. YEN CHING WAI, DAVID (aka DAVID YEN CHING WAI) AND ANOTHER

HCMP 1871/2022

[2024] HKCFI 546

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1871 OF 2022

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J U D G M E N T

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1.  There is before the court an application made by the Official Receiver (“OR”) for a disqualification order against Mr David Yen and Mr Stephen Liu, both of Ernst and Young Transactions Limited (“Respondents”), pursuant to s.168G of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“Ordinance”). The application is made by Originating Summons filed on 15 November 2022 (“OS”) and is supported by the OR’s 1^st Report made on the same date (“1^st Report”).

2.  The parties have agreed to dispose of the application by way of Carecraft procedure and have signed a Statement of Agreed Facts (“Statement”) for such purpose.

3.  The OR submits, and the Respondents agree, that having regard to the nature and severity of the breaches of duty and misconduct and the various mitigating factors set out in the Statement, a disqualification period of 6 years would be appropriate.[1]

A.  BACKGROUND

4.  Luen Tat Watch Band Manufacturer Limited (“Luen Tat”) was a family company operated by the “Li Family”.[2] It was founded by the late Mr Lee Sai Nam (“Father”). Three of his children, Mr Li Shu Chung (“Ken”), Mr Lee Shu Hang (“Richard”), and Ms Li Sin Man (“Seline”) were also involved in Luen Tat’s business.[3]

5.  Ken through his corporate vehicle held 51% shareholding in Luen Tat, while Father held the remaining 49% through his corporate vehicle, Allied Ever Holdings Limited (“Petitioner”).[4]

6.  The Li Family also operated other companies set up by Father, which included Lianda Metal Watchband (Shenzhen) Co Ltd (“Shenzhen Lianda”), a manufacturing entity, as well as Yuen Hing Enterprise Macao Commercial Offshore Ltd (“Yuen Hing”), a company incorporated in Macao for tax purposes.[5]

7.  The Li Family eventually fell out, with Father, Richard, and Seline in one camp (“Father’s Camp”), and Ken in the other. Ken, being the sole director of Luen Tat, gradually ousted his siblings and usurped control of Luen Tat.[6] Father commenced HCA 1711/2009 (“Main Action”) to seek a declaration that he was the sole beneficial owner of all the shares in Luen Tat.[7]

8.  At the same time, both Father (through the Petitioner) and Ken sought to put Luen Tat into liquidation. Luen Tat was wound up by the court on 6 July 2010,[8] and the Respondents were appointed as liquidators, having been appointed as provisional liquidators on 24 June 2010.[9]

9.  After a full trial in the Main Action, on 9 December 2015, DHCJ Leung handed down his judgment (“Leung Judgment”) finding that Father was the sole beneficial owner of all the shares in Luen Tat.[10] Ken’s appeal against the judgment was dismissed by the Court of Appeal on 19 January 2017.[11]

10.  On 26 May 2016, the Petitioner applied for a stay of the winding up of Luen Tat, and to remove the Respondents as liquidators (“Removal Application”).[12] The applications were heard by DHCJ To on 13 July 2017. In his judgment dated 27 November 2017 (“Judgment”), the learned Judge ordered a permanent stay of the winding up proceedings in respect of Luen Tat,[13] and found that the Respondents had committed 6 categories of misconduct which justified an order to remove them from office.[14]

11.  In the Judgment, the Judge found that in contesting the Petitioner’s application, the Respondents “have been actively attempting to mislead this court”, which could not have been the result of an error in judgement. The Judge expressed “strong indignation and condemnation” for the Respondents’ conduct, which he considered “put shame on the court”.[15]

12.  At §131 of the Judgment, the Judge remarked that in view of his comments, the only course was to remove the Respondents from their appointment with “an advice to the Official Receiver to review their suitability as liquidators”.

13.  The Respondents appealed against the Judgment. The appeal was dismissed by the Court of Appeal by judgment dated 27 April 2021 in CACV 11/2018 (“CA Judgment”).[16] The Respondents did not appeal against the CA Judgment.

14.  Following the removal, there was a dispute between Luen Tat (controlled by Father’s Camp) and the Respondents over the return of documents in HCMP 1071/2018.[17] This resulted in the judgment given by DHCJ Le Pichon dated 7 October 2020[18] where the learned Judge criticised the Respondents’ conduct over the slow return of documents, remarking that their conduct “inevitably casts doubt on their suitability for appointment as liquidators” and that “they have conducted themselves disgracefully in this saga, and deserves sanction”.[19]

15.  The Respondents applied for a stay of the order made by DJHC Le Pichon pending their intended appeal,[20] which was refused by Recorder Houghton SC in his Decision dated 31 March 2021.[21]

16.  In light of the above judicial comments, the OR commenced an investigation into the Respondents’ conduct as liquidators in relation to the liquidation of Luen Tat to assess their suitability as liquidators.[22] In doing so, the OR made enquiries with the Respondents as to, inter alia, the 6 categories of misconduct identified in the Judgment. The Respondents, through their solicitors, provided their explanations in writing.[23]

17.  Having considered the relevant court judgments and the Respondents’ explanations, the OR took the view that the Respondents had misconducted themselves and acted in breach of their duties which justify the imposition of a disqualification order under s.168G of the Ordinance. The OS was thus issued and the 1^st Report filed in support.

18.  Although the judgments referred to above (and their findings therein) formed the basis of the OR’s investigation, the OR came to her independent conclusion following her own investigation.[24] In the 1^st Report, the OR explains that having considered the further information and explanations provided by the Respondents after the Judgment and the CA Judgment, she came to different views in respect of 2 matters which formed part of the misconduct identified in the Judgment.[25]

19.  The Respondents initially opposed the application and sought multiple extensions of time to file evidence in opposition[26]. It was only until 28 July 2023 that the Respondents (and the OR) agreed to dispose of the application by way of Carecraft procedure on the basis of the agreed facts set out in the Statement.

B.  APPLICABLE PRINCIPLES

20.  The principles are well established and have been set out in the submissions of Ms Sara Tong SC[27], counsel for the OR.

21.  S.168G(1)(b) of the Ordinance provides that the court may make a disqualification order if a liquidator has been guilty of any fraud in relation to the company or of any breach of his duty.

22.  As regards Carecraft procedure:

(1)  The court will assess whether a disqualification order is justified on the basis of the agreed facts, and if so, for what period.

(2)  The court is not entitled to make findings upon materials other than the agreed facts. It is not obliged to make a disqualification order and would not be bound by the agreed period of disqualification.

(3)  The court is also entitled to consider a wide range of matters in mitigation (Official Receiver v Wong Ping Kuen [2021] HKCFI 1735, §§2-4).

23.  As for period of disqualification:

(1)  the maximum period of 15 years[28] is to be divided into 3 brackets: (a) the top bracket of over 10 years should be reserved for “particularly serious cases”; (b) the middle bracket of 6-10 years for “serious cases which do not merit the top bracket”; and (c) the minimum bracket of 2-5 years for “relatively not very serious” cases (In Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164, 174E-G[29]).

(2)  The court takes into account a broad spectrum of considerations with dual objectives of protecting the public and deterrence (Re Styland Holdings Ltd [2011] 1 HKLRD 96, §6). Mr Jose Maurellet SC[30] submits that the former looks into the past while the latter is forward looking as a disqualification order stops the respondent from continuing to act as liquidator.

(3)  Considerations to be taken into account include (a) the nature and seriousness of the conduct complained of, (b) the risks to others from the continuation of the Respondents as liquidators, (c) the Respondents’ experience, skill, competence and honesty, (d) hardship to the Respondents and their personal commercial interests, (e) the Respondents’ admission of their misconduct, and (f) other mitigating factors (SFC v Shandong Molong Petroleum & Ors [2021] HKCFI 497, §21; Wong Ping Kuen, §21).

(4)  The court is not bound by the regulator’s suggestion as to the length of the disqualification orders but would give due weight to its view (SFC v Wong Kam Leong [2020] HKCFI 606, §51).

24.  Mr Maurellet accepts that the court is by no means bound by any agreement reached between the OR and the Respondents but submits that it may nevertheless still “be guided by their agreement”. The practice stems from the court’s recognition that a “responsible regulator would have reached an agreement as to the appropriate sanction to be imposed” (SFC v Chin Jong Hwa [2019] HKCFI 2735 §32).

25.  As for the approach towards the period of disqualification, Mr Maurellet submits (and I agree) that:

(1)  the guidelines used for determining disqualification periods under s.168H (in relation to unfit directors) are also applicable to s.168G as both sections are intended “to protect the public against persons who, by their past conduct” have proven to “be a danger to creditors and others”; and

(2)  the disqualification period must reflect the gravity of the misconduct, be effective to protect the public and serve as a deterrent. A broad-brush approach is used, and comparison with disqualification periods in the past is inappropriate (Official Receiver v Chan Kin Hang Danvil, HCMP 1202/2010, 7 September 2011, §§30, 32, 35-36).

26.  Ms Tong refers to 3 cases where the court had to decide the length of disqualification of liquidators:

(1)  In Re Asegaai Consultants Ltd [2012] Bus LR 1607, the court disqualified a liquidator for 12 years in light of the fact that he had “dishonestly caused sums to be paid for his benefit over an extended period in respect of some 36 companies” (§87).

(2)  In Official Receiver v Chan Kin Hang Danvil, the court disqualified a liquidator for 7 years for, inter alia, making false declarations in taking up the appointment as liquidator, failing to report and remit sums to the OR in accordance with statutory obligations, failing to report progress of the liquidation and proceed with the liquidation expeditiously, and failing to comply with various court orders (§§14, 37).

(3)  In Re Well Bond Group Ltd [2008] 5 HKLRD 147, the court disqualified a liquidator for 6 years for, inter alia, failing to comply with statutory obligations (such as submit liquidator’s account, provide security to the OR, take steps to declare and distribute dividends to creditors), failing to proceed with the liquidation with due expedition, ignored enquiries raised by the OR, and failed to comply with various court orders (§§12-19, 24).

C.  RESPONDENTS’ BREACHES OF DUTY

27.  The OR conducted her own investigation into the misconduct identified in the Judgment and upheld by the Court of Appeal. Most but not all of such misconduct have been included in the Statement as agreed facts. The Respondents accept that they committed 6 categories of misconduct and breaches of duty as liquidators of Luen Tat as further described below.

C1.  Entertaining 3 proofs of debt

28.  The way the Respondents entertained and dealt with 3 proofs of debt (“POD”) submitted to Luen Tat were found by the court as (1) given rise to a perception of bias in favour of Ken, and/or (2) as having been motivated by their own desire and interest to stay in office as liquidators.[31]

C1.1  Ken’s POD

29.  In the Main Action, Ken claimed that he was entitled to HK$53,602,977.76 from Luen Tat as profits.[32] His claim was rejected after trial in Leung Judgment.[33]

30.  In August 2016, Ken submitted a POD for HK$52,879,963.53 on the basis that he was entitled to certain profits of Luen Tat derived from sales to Apple Inc.[34] The Respondents did not admit or reject Ken’s POD. In May 2017 (i.e. 2 months before the hearing of the Removal Application), the Respondents wrote to Ken to ask for further documentary evidence.[35]

31.  In the Removal Application, the Respondents argued that although Ken’s claim as beneficial owner of Luen Tat was rejected by the court, Ken’s POD could still be justified on the basis that he was entitled to Luen Tat’s profits as former employee and/or agent.[36]

32.  DHCJ To held that the Respondents acted wrongfully in entertaining Ken’s POD as they should have followed the Leung Judgment and rejected the POD instead of keeping it alive for 9 months to support their case that Luen Tat was insolvent and to justify their continuation in office.[37] This demonstrated the Respondents’ bias in favour of Ken and against the Father’s camp.[38] The findings were upheld by the Court of Appeal.[39]

33.  The OR agrees with the findings of the Judge and his view that Ken’s POD should not have been entertained at all given that:[40]

(1)  Ken never suggested that he was entitled to Luen Tat’s profits as employee/agent, which first appeared in David Yen’s affidavit filed on 28 November 2016 in the Removal Application. This was a new argument raised by the Respondents to justify Ken’s POD.[41]

(2)  Ken’s POD was inconsistent with his own case in the Main Action.[42]

(3)  Instead of rejecting the POD, the Respondents asked Ken for further documentary evidence just 2 months before the hearing of the Removal Application in an attempt to show that Luen Tat was insolvent.[43]

34.  The Respondents accept the OR’s criticisms that their treatment of Ken’s POD was influenced by their own interest to stay in office and gave rise to a perception that they were biased in favour of Ken.[44]

C1.2  SML’s POD

35.  On 13 August 2012, Sun Moral Limited (“SML”) (a company controlled by Wong Shun Chiu (“Wong”)) filed a POD which included a claim for HK$2,649,634.11 allegedly as fees for quality control services.[45]

36.  While the OR considers that there were grounds to investigate SML’s POD, there was insufficient information for the Respondents to adjudicate upon it.[46] Nevertheless, the Respondents admitted SML’s POD just 2 months before the hearing of the Removal Application.[47]

37.  DHCJ To considered that SML’s POD was “bogus” (and should have been rejected), and the Respondents’ decision to admit it was “perverse”.[48] The Court of Appeal upheld the finding.[49]

38.  In the Statement, the parties have not adopted DHCJ To and the Court of Appeal’s findings in full. The OR takes the view that there was some basis for the Respondents to investigate SML’s POD (which was based on a profit sharing arrangement), it was wrong for the Respondents to have admitted the same as there was insufficient information for them to adjudicate upon it. This was precisely the reason relied on by the Respondents in applying for an order for production of documents, which was granted by DHCJ Manzoni SC in his Decision dated 17 June 2015.[50]

39.  The Respondents accept that they should not have admitted SML’s POD when there was insufficient information to adjudicate upon it. They also accept the OR’s criticisms that they admitted SML’s POD shortly before the Removal Application for the purpose of showing that Luen Tat was insolvent and to justify their continued appointment.[51]

C1.3  Wong’s POD

40.  In March 2016, Wong submitted a POD for HK$36 million on the basis that he had made capital contributions to acquire the land held by Shenzhen Lianda.[52] The claim was made in reliance on certain Chinese notes dated 1994 and 1995, which was raised by Ken for the first time when appealing against the Leung Judgment, to support his case that Wong was a shareholder of Shanghai Lianda. The Court of Appeal rejected such argument.[53]

41.  The Respondents did not accept or reject Wong’s POD, but relied on it in the Removal Application to show that Luen Tat was insolvent and to justify their continuation in office.[54]

42.  DHCJ To was highly critical of the Respondents for entertaining Wong’s POD and keeping it alive when any reasonable liquidator would have rejected it forthwith in the face of the Leung Judgment and the CA Judgment.[55] The Judge held that (1) the Respondents’ conduct gave rise to a perception of bias in favour of Ken as there was clear evidence that Ken and Wong were “in cahoots with each other”;[56] (2) the Respondents wrongfully kept the POD alive to boost Luen Tat’s insolvency and to justify their continuation in office.[57] The Court of Appeal upheld such findings.[58]

43.  The OR takes the view (and the Respondents accept) that the Respondents ought to have rejected Wong’s POD, especially in light of the findings in the CA Judgment. There was no basis for Wong to claim that his alleged capital contributions to Shenzhen Lianda could be converted into a debt claim against Luen Tat, when Luen Tat held no shares in Shenzhen Lianda. In any event, Wong’s case was inconsistent with Ken’s position in the Main Action namely, that (1) he and his father were the only contributors in setting up Shenzhen Lianda, and (2) Wong’s contributions went to the establishment of Hong Kong Pak Tat Trading Co (another company set up by Father).[59]

44.  The Respondents accept the OR’s criticisms that their attitude towards Wong’s POD was influenced by their desire to stay in office, and gave rise to the perception of bias.[60]

C2.  Reliance on alleged hidden tax liability

45.  Prior to its liquidation, Luen Tat ran a re-invoicing scheme for tax purposes. Li Family did so by interposing Yuen Hing (a Macao entity) between the sales from Shenzhen Lianda (manufacturing entity) and Luen Tat itself. Luen Tat’s profits were captured by Yuen Hing and therefore not subject to Hong Kong tax (“Tax Scheme”).[61]

46.  Ken reported the Tax Scheme to the Inland Revenue Department (“IRD”) in September 2010.[62] In May 2012, Luen Tat and the IRD reached a settlement whereby Luen Tat agreed to pay HK$13.1 million to the IRD as additional tax and penalty (“2012 Settlement”).[63]

47.  In October 2014, Stephen Liu stated in his affirmation that the Respondents discovered that Luen Tat might have additional tax liabilities, which were further explained in David Yen’s affidavit filed in the Removal Application.[64]

48.  Having raised the additional tax liability issue in October 2014, the Respondents did not take any action for almost 3 years. Instead, in June 2017 (one month before the Removal Application hearing), the Respondents reported the additional tax liability to the IRD and asked the IRD to submit a fresh POD.[65] The Respondents relied on such additional tax liability as one of the grounds to resist the Removal Application.[66]

49.  DHCJ To was highly critical of the Respondents’ conduct. He found that the Respondents were “actively misleading” the court by presenting the discovery of 2 sets of accounts kept by Shenzhen Lianda as “recent” discoveries.[67] The Judge also criticised the Respondents for raising issue about “commercial morality” and “smeared” the Li Family to justify their need to stay in office so that they could investigate the additional tax liability.[68] The Court of Appeal upheld such findings and held that the Respondents’ handling of this tax issue by reporting it again to the IRD on the eve of the hearing of the Removal Application “reflected most badly on their conduct as liquidators”.[69]

50.  The OR does not adopt DHCJ To’s criticism that the Respondents presented the discovery of 2 sets of accounts in Shenzhen Lianda as “recent” discovery[70], given that (1) Yuen Hing’s expenses did not match either of Shenzhen Lianda’s 2 sets of accounts[71]; and (2) the public/private accounts only affected the extent of Yuen Hing’s understated expenses.

51.  Nonetheless, the OR takes the view (which the Respondents accept) that the Respondents’ treatment of this issue draws criticisms:

(1)  First, the Respondents sat on the issue for 2 ½ years and only reported the matter to the IRD one month before the Removal Application hearing and relied on it to justify their continuation in office. They even invited the IRD to submit a further POD in order to establish Luen Tat’s insolvency.[72]

(2)  Second, the Respondents exaggerated the importance of this liability. David Yen went so far as to suggest that the IRD had been misled in the negotiations leading up to the 2012 Settlement. In fact, both sets of accounts in Shenzhen Lianda had been placed before the IRD, and the additional tax liability could have been discovered at the time the 2012 Settlement was reached.[73]

(3)  Third, the Respondents relied heavily on the additional tax liability to justify their continued appointment, going so far as to allege that Luen Tat had engaged in “tax evasion” such that their continued appointment was justified on the basis of “commercial morality”. However, the matter had already been reported to the IRD, and it was for the IRD, not the Respondents, to carry out further investigation.[74]

52.  The Respondents accept the OR’s criticisms that they relied on the alleged tax liability to justify their continued appointment as liquidators of Luen Tat, and they did so for their own interest.[75]

C3.  Providing documents to Ken during the Main Action

53.  The Main Action was fought over a 20-day trial which took place between March and August 2014.[76] The Respondents sent representatives to attend the entire trial, but were not able to identify any written instructions given to staff or any reports or attendance notes prepared by them.[77]

54.  When Seline was giving evidence, Ken requested the Respondents to provide him with documents to rebut her evidence.[78] The Respondents provided Ken with extracts of Luen Tat’s ledger, and a one-page summary compiled by their staff.[79]

55.  DHCJ To was critical of the Respondents’ conduct in providing to Ken a document compiled by themselves. In so doing, they were not assisting the court or advancing Luen Tat’s interest but were assisting Ken personally.[80] The finding was upheld on appeal.[81]

56.  The OR takes the view (which the Respondents accept) that the Respondents’ conduct draws criticisms:

(1)  The Respondents did not inform Father’s Camp that they had provided documents to Ken, when they knew that Ken would use the documents against Father’s Camp.[82]

(2)  The Respondents knew that requests of documents by shareholders of a company in liquidation was a sensitive matter and required careful handling and in appropriate circumstances, sanction by the court. When Seline asked for documents, she was only allowed to inspect Luen Tat’s documents pursuant to a court order and subject to an undertaking that the information would not be used for litigation purposes.[83]

57.  The Respondents accept that the provision of documents to Ken gave rise to a perception that the Respondents were biased in favour of Ken. The Respondents accept that they should not have prepared and provided documents in response to a request from Ken in the Main Action.[84]

C4.  Refusal to forward documents to Commercial Crime Bureau

58.  When the Respondents were appointed, they discovered that many records in Luen Tat’s computers had been deleted.[85] The Respondents initially took the view that Ken deleted those computer files.[86] Later, in their report dated 3 May 2013, they concluded that they could not be sure who did it, and no further action was taken.[87]

59.  In January 2017, Seline requested the Respondents to forward Luen Tat’s papers to the police to re-open the investigation against Ken. The Respondents refused.[88]

60.  DHCJ To criticised the Respondents’ refusal, and held that this was a further example of the Respondents’ bias in favour of Ken and their antagonism against Father’s Camp.[89] Such findings were upheld on appeal.[90]

61.  The OR agrees with the findings in the Judgment and the CA Judgment that the Respondent’s conduct gave rise to the perception of bias in favour of Ken. The Respondents accept the OR’s criticisms.[91]

C5.  Insisting on pursuing legal actions against Father’s Camp

62.  The Respondents obtained sanction from the court to commence various actions against Father’s Camp and Yuen Hing which included HCA 1428/2012, HCA 2137/2012 and HCA 220/2015.[92]

63.  On 15 November 2013, Father’s Camp obtained an order to stay HCA 1428/2012 and HCA 2137/2012 pending resolution of the Main Action.[93]

64.  Instead of respecting the stay order, the Respondents appealed against it. The appeal was heard over a 3-day hearing running in parallel with the trial of the Main Action, and was dismissed on 25 July 2014.[94]

65.  DHCJ To held that it was not appropriate for the Respondents to pursue the appeal against the stay order, particularly when the trial of the Main Action was imminent.[95] If Father was successful in the Main Action, he would be the sole beneficial owner of Luen Tat, and there would be no point in continuing the actions.[96] The Judge held that the Respondents pursued the appeal to create work for themselves and/or to put pressure on Father’s Camp, and that gave rise to the perception of bias in favour of Ken.[97] The findings were upheld on appeal.[98]

66.  The OR agrees with DHCJ To’s findings that it was not appropriate for the Respondents to pursue the appeal against the stay order when the trial in the Main Action was imminent. The Respondents accept the OR’s criticisms, and accept that they should have waited for judgment in the Main Action, instead of appealing against the stay order.[99]

C6.  Exaggerating Seline’s non-compliance with production order

67.  The Respondents obtained a production order for the purposes of verifying certain PODs. In the Removal Application, and in order to justify their continuation in office, the Respondents alleged that Seline was in breach of the production order, which would not be enforced if the liquidation of Luen Tat was stayed.[100]

68.  DHCJ To held, and the Court of Appeal agreed, that the Respondents had exaggerated Seline’s non-compliance with the production order to justify their continued appointment as liquidators.[101]

69.  The OR takes the view (and the Respondents accept) that the Respondents exaggerated Seline’s alleged non-compliance for their own interest in order to justify their continued appointment as Luen Tat’s liquidators, rather than furthering the interests of Luen Tat.[102]

D.  DISQUALIFICATION ORDER

70.  As submitted by Ms Tong, the Respondents are officers of the court and are fiduciaries.

(1)  They owe fiduciary duties to the company which require them not to allow their private interest to conflict with their duties; to exercise their powers in good faith and for a proper purpose; and to act with complete impartiality as between various interested parties at all times (McPherson & Keay’s Law of Company Liquidation, 5^th ed., §§8-049 – 8-057).

(2)  The liquidators are held to very high standards. They are entrusted with the reputation of the court for impartial and proper dispatch of duties and, in that regard, no lesser standard is to be expected of them than of a court or judge. Not only should they be independent and impartial, they should also be seen to be so (Re Legend International Resorts Ltd, HCCW 1139/2004, 7 March 2011, §30).

71.  Ms Tong submits that the Court can be satisfied that the Respondents’ conduct has fallen below the standard of probity and competence one would expect of a liquidator and is sufficiently serious to warrant a disqualification order being made against them (Official Receiver v Wong Ping Kuen, §20) in that:

(1)  It is of paramount importance that the Respondents acted impartially in the context of the dispute within the Li Family. However, they repeatedly acted in such a way that gave rise to a perception of bias in favour of Ken and against Father’s camp.

(2)  Their bias towards Ken was not confined to a single incident. The Respondents began to assist Ken in the trial of the Main Action in 2014 and up until 2017 when Ken had lost the Main Action and his appeal was dismissed. Even then, the Respondents continued their antagonistic attitude towards Father’s Camp, and refused to hand over documents to the police to re-open the investigation against Ken.

(3)  The Respondents persistently acted in their own interest instead of the interest of the company. They took various steps to bolster their case that Luen Tat was insolvent in order to justify their continuation in office.

(4)  The Respondents wrongfully portrayed their continued appointment as necessary so that they could continue their investigation against Father’s Camp in respect of the alleged hidden tax liability, and enforce Seline’s alleged breach of the production order. In doing so, they were motivated by their self-interest and rather than the interest of Luen Tat.

(5)  The Respondents’ conduct has drawn criticism from 2 High Court judges and the Court of Appeal and called into question their suitability as liquidators.[103] The Respondents’ misconduct also casts doubt on their integrity.

72.  As regards the period of disqualification, Ms Tong submits that:

(1)  While the Respondents may not have been guilty of dishonesty warranting the top bracket (cf. Re Asegaai), their conduct casts serious doubt on their independence and impartiality, and consequently their integrity. These are fundamental qualities expected of liquidators as officers of the court who owe fiduciary duties to Luen Tat.

(2)  The OR is of the view that the starting point of the period of disqualification should be at the high end of the middle bracket or the low end of the top bracket, bearing in mind the dual objective of protecting the public and deterrence (Re Styland, §6). In particular, a high starting point is necessary for the court to send a message to the public that liquidators, as officers of the court, will be held accountable for their misconduct.

(3)  The OR recognises that there are the following mitigating factors:

(a)  The misconduct stems from a single appointment. The Respondents have been insolvency practitioners for many years and have taken on many insolvency cases in their career, and have not been previously disqualified.[104]

(b)  The Respondents have cooperated with the OR during the liquidation and over her investigation.[105] The Respondents drew to the OR’s attention the Judge’s request that the OR should review their suitability.[106]

(c)  The Respondents agreed to dispose of these proceedings by the Carecraft procedure, accepting responsibility for their actions.[107]

(d)  The Respondents have been subject to disciplinary action by their respective professional bodies and accepted responsibility for their conduct.[108]

(e)  The Respondents have been excluded from appointments under Panel A Scheme since 22 December 2017, and have effectively been put out of action.[109]

(f)  The Respondents have contributed to the insolvency profession over the years.[110]

73.  In light of the aforesaid mitigating factors, the OR submits that the length of disqualification should be brought down to the lower end of the middle bracket, and invites the court to grant a disqualification order of 6 years.[111]

74.  Mr Maurellet submits that a 6-year disqualification order is appropriate as the present case falls within the lower end of the “middle bracket” for the reasons set out in §§75-81 below.

75.  First, a “lack of dishonesty will usually be an important factor which either reduces the seriousness of a case or amounts to a mitigating factor”. The “top bracket” is typically applied to cases characterised by “dishonesty, serious lack of probity or repeat disqualification” (Mithani: Directors’ Disqualification (Issue 103), §1594).

76.  The Respondents have no history of previous disqualifications.[112] Nor were there any allegations of dishonesty. Instead, the OR's criticisms focus on the Respondents’:

(1)  pursuit of their self-interest in attempting to remain in office as liquidators of Luen Tat, as evidenced by their conduct in the PODs,[113] hidden tax,[114] and exaggeration issues[115]; and

(2)  behaviour in ways that led Father’s Camp to perceive a bias towards Ken, as evidenced by their conduct in the assistance,[116] non-investigation,[117] and prosecution issues.[118]

77.  The OR’s criticisms are centred on the Respondents’ self-interested actions and their lack of independence or impartiality. Though such conduct is admittedly unbecoming for independent liquidators, it does not constitute dishonesty or fraud.

78.  Second, the low probability of the Respondents’ repeating these failings in future can properly be regarded as a mitigating factor (Re First China Financial Network Holdings Ltd [2015] 5 HKLRD 530, §§22-24). In the present case:

(1)  The risk of repeated misconduct is low as the failings[119] stand out as an unfortunate episode in the Respondents’ longstanding careers as insolvency practitioners. In particular:

(a)  David Yen, an insolvency practitioner since 1994, has undertaken hundreds of appointments as a liquidator and receiver, with no instances of disqualification.[120] His service to the insolvency field extends beyond his professional duties, evidenced by his years of voluntary service to the Hong Kong Institute of Certified Public Accountants (“HKICPA”), including the Executive Committee of HKICPA’s Restructuring and Insolvency Faculty and its cross-border subcommittee.[121]

(b)  Stephen Liu, an insolvency practitioner since 1983, has undertaken more than a thousand appointments as a liquidator and receiver – again, all without disqualification.[122] His contribution to the field also includes voluntary work on the Approval Committee for Insolvency Practitioners under Panel A Scheme and the Advisory Group on Modernisation of Corporate Insolvency Law. He also assisted in the OR’s contracting-out program – first implemented in the 1980s.[123]

(2)  With 3 to 4 decades of experience in the insolvency field,[124] the Respondents are now in their 50s and 60s. Given that a 6-year disqualification likely signifies the end – or at least close to the end – of their “active participation” in insolvency work, the risk of recurring infractions is reduced (Re First China, §24).

79.  Third, the duration of jeopardy faced by the Respondents is a mitigating factor, although no discount would be given if “the respondent was not aware of any possible proceedings hanging over his head” (OR v Philip Tose, HCMP 112/2002, 4 March 2009, §§29, 32).

(1)  Since the publication of the Judgment in 2017, the Respondents have been fully aware of potential disqualification proceedings.[125]

(2)  The OR has since 22 December 2017 refrained from putting the Respondents forward for panel appointments as liquidators, provisional liquidators or trustees in bankruptcy, or supporting any appointments, or allocating cases to them under Panel A Scheme.[126]

(3)  The Respondents have thus been effectively disqualified from new appointments for over 5 years. The period where they have been “effectively … put out of action”,[127] may be considered as a mitigating factor. In Secretary of State v Bloch [2013] CSOH 57, the defendant’s jeopardy, manifested as a loss of “offers of directorships”, between “the conduct in question and the present proceedings” was seen as a mitigating factor (§§51-52).

80.  Fourth, “proper co-operation by the defendant will amount to mitigation and may reduce the period of disqualification that might otherwise be imposed against him” (Mithani, §1693). The Respondents showed initiative by:[128] (1) forwarding the Judgment to the OR and highlighting the Judge’s recommendation to reassess their suitability to act; (2) inviting the OR to investigate Luen Tat’s liquidation and undertaking to give full cooperation in the investigations.

81.  Fifth, consideration should also be given to the early admission of wrongdoing, particularly if the Carecraft procedure was adopted (Mithani, §1692A(4)(5)). This factor is particularly pertinent here, given that it was the Respondents who first proposed Carecraft resolution.[129]

82.  While I accept that the mitigating factors identified by counsel are relevant, they do not warrant the discount proposed by the parties for the following reasons:

(1)  Far from a mitigating factor, the substantial experience and seniority of the Respondents is an aggravating factor. There are 2 main reasons for this. First, very often, the experience and seniority of the proposed office-holder is an important, if not decisive, factor for the OR, the parties and the court in considering who should be appointed as liquidator. Second, experienced office-holders should know best the extent of trust the court placed on them and the very high standards required of them.

(2)  The degree of cooperation and “early admission” have to be seen against the fact that (a) the complaints are based on findings made by DHCJ To (and affirmed by the Court of Appeal) which are binding upon the Respondents; and (b) the Respondents initially opposed the application and only agreed to dispose of it 8 months after the OS had been issued.

(3)  The 5 years’ period during which the Respondents are said to have been “effectively disqualified” was the result of the Respondents’ own decisions in (a) choosing to appeal against the Judgment, rather than accepting the findings in the Judgment; and (b) making further representations to the OR in respect of the findings in the Judgment when they could have agreed to be disqualified at a much earlier stage. In any event, the Respondents continued to act as liquidators during the 5 years’ period, as can be seen from the list of cases submitted by the OR at the hearing which show that as of 24 January 2024[130], the Respondents remained liquidators of 12 companies in compulsory liquidation.

83.  More importantly, in my view, where as here the office-holders against whom a disqualification order is sought are found to have acted in breach of fiduciary duties, in considering the period of disqualification, the court should consider whether the company has suffered any loss as a result of the breach and, if so, whether the fiduciaries have taken any steps to address and remedy the loss suffered by the company. There are 3 main reasons for this:

(1)  The general rule of equity that no one who has duties of a fiduciary nature to perform can have a personal interest conflicting with the interest of whom he is bound to protect. A fiduciary’s liability to account does not depend on proof of mala fides. The rule applies to an agent, a director, a trustee or other person acting in a fiduciary capacity. The fiduciary must refund with interest all profits which he has made by means of his position unless he made them with the full knowledge and approval of the persons to whom he owes a fiduciary duty (Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 at 137G-138G, 144G-145A, 154B-C; Swain v Law Society [1981] 3 All ER 797 at 807e-808j).

(2)  In disqualification proceedings brought by the SFC against directors of listed companies, the fact that the director had taken step to address the loss suffered by the company as a result of the breach was a mitigating factor which the court would take into account (SFC v Li Hejun [2017] 4 HKLRD 785, §23).

(3)  It accords with the nature of the office-holders’ duty to account and the requirement that the office-holders have to justify their claim for remuneration against the estate o. This has been described as the Maxwell principles[131]. The principles have been stated by Le Pichon J (as she then was) in Re Peregrine Investments Holdings Ltd [1998] 2 HKLRD 670, at 679B-680A, in this way:

“(1) Administrators, liquidators, receivers, trustees in bankruptcy or other officers (“office-holders”) are fiduciaries charged with the duty of protecting, getting in, realizing and ultimately passing on to others assets and properties which belong not to themselves but to creditors or beneficiaries of one kind or another. They are appointed because of their professional skills and experience and they are expected to exercise proper commercial judgment in the carrying out of their duties. Their fundamental obligation is a duty to account, both for the way in which they exercise their powers and for the property which they deal with.

(2) The allowance of remuneration to officer‑holders represents an exception to the rule that a trustee must not profit from his trust which rule applies to all kinds of person who are in a fiduciary position. This exception inevitably involves a conflict between the interests of the fiduciary who is to receive such remuneration and the interests of those to whom the fiduciary duties are owed, who will bear whatever remuneration is allowed.

(3) It is for the office-holder who wishes to be remunerated at a particular level to justify his claim:

(a) Office-holders must give full particulars to justify the amount of any claim for remuneration. Where they seek to be remunerated upon the basis of time spent, they must do significantly more than list the total number of hours spent by them or other fee earning members of their staff and multiply this total by a sum claimed to be the charging rate of the individual whose time was spent. They must explain the nature of each main task undertaken, the considerations which led them to embark upon that task or to persevere in it. The time spent must be linked to this explanation so that it can be seen what time was devoted to each task.

(b) Office-holders must keep proper records of what they have done and why they have done it. Without contemporaneous records of this kind, they will be in difficulty in discharging their duty to account. Retrospective reconstructions are unlikely to be as reliable as contemporaneous records. Office-holders whose records are inadequate are liable to find that doubts are resolved against them because they are unable to fulfill their duty to account for what they have received and to justify their claim to retain part of it for themselves by way of remuneration.

(c) The test is whether a reasonably prudent man, faced with the same circumstances in relation to his own affairs, would lay out or hazard his own money in doing what the office-holders have done. It is not sufficient for office-holders to say that what they have done is within the scope of the duties or powers conferred upon them. They are expected to deploy commercial judgment, not to act regardless of expense. Transactions carried out at a high cost in relation to the benefit received will be subject to close scrutiny.” (underlined added)

84.  In the judgment of DHCJ Le Pichon, she noted in §64 and footnote 13 that during the 7 years when they were in office, the Respondents had been “handsomely remunerated” with fees in excess of HK$18 million. However, neither the Statement nor counsel’s submissions have addressed the issue.

85.  When this Court raised the question as to whether the Respondents have taken any step to address the loss suffered by Luen Tat, both as regards the remuneration charged and the costs incurred in pursuing the 6 misconduct which DHCJ To found against them, Mr Maurellet refers to ongoing legal proceedings between the Respondents and Father’s Camp in relation to some negligence claim but otherwise does not have any instructions on the issue. Nor has the OR considered the issue. Mr Maurellet submits that given the importance of the issue, the Respondents will file an affidavit to deal with the issue and invites the court to direct evidence to be filed by the Respondents and the OR.

86.  In David Yen’s affidavit filed on 8 February 2024, the Respondents provide the following information on the issue:

(1)  The Respondents had issued 17 invoices claiming HK$20.74 million as remuneration of which 15 invoices in the total amount of HK$18.87 million was paid;

(2)  The Respondents did not receive any payment for their remuneration after August 2014. Their time costs of approximately HK$3 million during the period from September 2014 to November 2017 were “written off”;

(3)  Of the 6 categories of misconduct, 2 of them fell within the period pre-August 2014;

(4)  The disbursements for legal services and advisory matters incurred by the Respondents amounted to HK$10.2 million, of which (a) HK$960,000 was incurred in the unsuccessful appeal against the stay order of Recorder Houghton SC dated 31 March 2021 (described in Section C5 above), and (b) HK$1.2 million was incurred in resisting the Petitioner’s application for stay of winding up and Removal Application;

(5)  Luen Tat commenced HCA 1397/2018 against the Respondents claiming damages in excess of HK$582 million[132] under 15 heads;

(6)  The Respondents took initiative to settle the dispute with Luen Tat and appointed a very eminent senior counsel as mediator but the parties were not able to come to a settlement; and

(7)  The Respondents would have been prepared to settle the dispute with Luen Tat had its claim been limited to recovery of remuneration and legal fees, but given the claim is in excess of HK$582 million, the Respondents have no option but to defend the claim.

87.  In her 2^nd Report filed on 22 February 2024, the OR states that she has no contemporaneous knowledge of the affairs which form the subject matter of these proceedings, and she agrees that the Maxwell principles are relevant.

88.  In short, the Respondents have neither paid nor offered to repay the remuneration and the costs paid out of the estate of Luen Tat even though part of the remuneration and costs were charged and incurred by them in relation to least 2 categories of misconduct.

89.  In my judgment, not only is a disqualification order against the Respondents amply justified, it is also necessary for the protection of the public. The practitioners and the public should be left in no doubt that the court takes breaches of duties by fiduciaries and office-holders very seriously and will impose a level of penalty commensurate with the gravity of the breaches. In the present case, a disqualification period of 7 years is appropriate given that:

(1)  The 6 categories of misconduct all involve breaches of fiduciary duties. The breaches are serious and go against the fundamental duties they owe to Luen Tat and the trust which the court has placed on them. The case falls within the high end of the middle bracket and warrants a disqualification period of 9 years.

(2)  The mitigating factors identified by the OR and the Respondents do not justify the substantial discount proposed by the parties for the reasons explained in §§82-88 above. I consider a reduction of the disqualification period of 2 years is appropriate.

90.  I make a disqualification order that the 1^st and 2^nd Respondents and each of them shall not, without leave of the court,

(1)  be a director of a company;

(2)  be a provisional liquidator or liquidator of a company;

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

(4)  in any way, whether directly or indirectly, be concerned or take part in the promotion, formation ort management of a company,

for a period of 7 years. The order shall take effect on 15 March 2024.

91.  As for costs, I make an order that the Respondents do pay the OR’s costs in the agreed sum of HK$2,100,000, to be paid within 28 days of this Judgment.[133]