THE OFFICIAL RECEIVER v. MOHAN K VASWANI

HCMP 2030/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2030 OF 2005

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J U D G M E N T

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1.  This is an originating summons issued by the Official Receiver under section 168H of the Companies Ordinance, Cap. 32 for a disqualification order against Mohan K Vaswani (“the respondent”), regarding his conduct as a director of Asean Interests Limited (“the Company”).  By consent, leave was given to the Official Receiver to issue proceeding against the respondent out of time.

2.  The Official Receiver and the respondent have asked the court to dispose of the proceedings by the Carecraft procedure.  This course commends itself to me.

3.  The core material facts are set out in the statement for the purpose of the Carecraft settlement.  It is also agreed that the statement may be used by the Official Receiver in the application filed by the shareholders of the Company to stay the winding-up proceedings of the Company under section 209.

4.  It is submitted by the Official Receiver that by reference to the undisputed facts, the conduct of the respondent as director has been such as to make him unfit to be concerned in the management of a company.  This is accepted by the respondent, for the purpose of resolving these proceedings.

5.  Also set out in the statement are matters that the respondent wishes the court to take into consideration by way of mitigation.  It is agreed that no further facts may be adduced at the hearing by way of mitigation.  The Official Receiver does not object to the court taking such matters into account, whilst not accepting the truth of these matters, and reserves the right to make submission on these matters.

6.  There is no agreement on the length of the disqualification period, but both sides agree that it should fall within the minimum bracket of 1 to 5 years.  The Official Receiver submits that 4 years would be appropriate and Miss Linda Chan for the respondent submits that the appropriate period should be 1 year.

7.  I annex a copy of the body of the statement to this judgment as a schedule, without the appendices.

8.  There are 3 allegations of unfitness against the respondent.

9.  The first is that the respondent caused or permitted unfair preference payments by the Company to Asean Holdings A.G. (“AG”), in which he had a beneficial interest, in preference to other creditors of the Company.  The respondent was responsible for the unfair preference transactions liable to be set aside under section 266B.  There was breach of fiduciary duties on his part, in particular those owed to the creditors of the Company.  The total amount involved was US$1,518,122.00.  The net sum of US$508,607.00 was paid within the 2-year period before the presentation of the winding-up petition against the Company, and the net sum of US$1,009,515.00 was paid within the 6-month period before the presentation of the petition.

10.  The second allegation is that the respondent was responsible for causing or permitting the Company in entering into transactions with or payments to AG, which are liable to be set aside under section 182.  The total amount involved was US$359,744.00.  The net sum of US$197,232.00 was paid between the presentation of the petition and the date of the winding-up order, and the net sum of US$162,512.00 was paid in the month following the winding-up order.

11.  The third allegation is that the respondent was responsible for the Company’s failure to maintain timely and proper accounting records, since he had failed to inform Ang Kok Leung, a director and the financial controller of the Company, and Ho Suk Mi, a director and the company secretary of the Company, of the instructions given by him in respect of the payments and transactions in the first and second allegations, and he had failed to ensure that the payments made by the Company being the subject of the first and second allegations were recorded in the accounting records in a timely and proper way.  In the light of this, the respondent has contravened sections 121 and 274: in failing to take reasonable steps to keep and preserve proper books of account as are necessary to give a true and fair view of the affairs of the Company and explain its transactions for 7 years; and in failing to comply with the obligation to keep proper books of account as necessary to exhibit and explain transactions and the financial position of trading or business of the Company throughout the 2 years immediately preceding the commencement of winding up.

12.  I find that the above allegations, which are admitted by the respondent, are such as to render him unfit to be concerned in the management of a company.  A disqualification order should be made.

13.  I turn to the matters in mitigation.

14.  In relation to the unfair preference payments and the void payments under section 182, the respondent’s wife, Madam Vaswani, has returned to the liquidators the total sum in question being US$1,877,865.00 by 2 payments made on 9 August 2005 and 9 September 2005.  So any possible prejudice to the creditors of the Company has now been fully remedied.

15.  I accept that the respondent had given instructions to effect preference payments and void payments in ignorance of the legal implications.  I also accept that the respondent had no intention to conceal anything.  There was no dishonesty involved.

16.  I am asked to take into account that the arrangement of effecting inter-company payments which fell foul of section 182 and the provisions in respect of unfair preference payments had been put in place at a time when the Company was solvent and was part of the commercial functioning of the Company, and that the failure to terminate this arrangement once the winding-up petition was presented was due to the oversight of the respondent.

17.  The Official Receiver submits that no evidence had been adduced and no particulars given as to the assertion by the respondent that the arrangement for inter-company payments was in place at a time when the Company was solvent.  That is neither here nor there.  Nor do I see any necessary conflict with another part of the statement which stated that when the unfair preference payments were made to AG, the Company was insolvent within section 51 of the Bankruptcy Ordinance, Cap. 6.  I also see no conflict with the arrangement being a standing policy and the fact that instructions for payments of various amounts were given by the respondent from time to time.  As pointed out by Miss Chan, there were payments and receipts on both sides made over a period of time, the unfair preference payments were the net sums involved in these transactions.

18.  So I will take into account there was inadvertent failure to terminate a standing policy and it was not a deliberate attempt to dispose of assets at the expense of creditors.

19.  As for the accounting records offences, the respondent’s default was the delay in causing entries relating to the preference payments to be recorded.  There is no allegation of inaccuracies or dishonesty involved.  It was a case of the record of repayments not being made promptly.

20.  Taking the above matters into account, and giving credit for the respondent’s co-operation with the Official Receiver in his investigation, an appropriate period of disqualification to reflect the gravity of the 3 allegations against the respondent is 2 years.

21.  As agreed, the respondent is to pay the costs of the Official Receiver in this application, to be taxed if not agreed.

22.  I make an order in terms of the draft submitted by the Official Receiver.  The period of disqualification to be inserted in the draft, as I have mentioned, is 2 years.

Schedule

STATEMENT OF FACTS NOT IN DISPUTE FOR THE PURPOSES

OF A “CARECRAFT” SETTLEMENT AS BETWEEN

THE OFFICIAL RECEIVER AND THE RESPONDENT

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INTRODUCTION

1.  Before the signing of this Statement, the Official Receiver has issued an Originating Summons under S.168H of the Companies Ordinance (the “Ordinance”) to apply for a disqualification order against the Respondent (the “OS”) in relation to his conduct as a director of Asean Interests Limited (the “Company”).  In support of the application, the Official Receiver has filed his 1st Report.

2.  Subject to the approval of the Court, the Official Receiver and the Respondent are willing to dispose of these proceedings against the Respondent by way of the shortened form of procedure sanctioned in Re Carecraft Constructions Company Limited [1994] 1 WLR 172, as clarified by the English Court of Appeal in Secretary of State for Trade and Industry v Rogers [1996] 4 ALL ER 854.

3.  The purpose of this Statement is to identify, in relation to the allegations of unfitness relied on by the Official Receiver, the core material facts which, for the purposes of a “Carecraft” disposal of these proceedings are not disputed by the Respondent.  None of the facts set out below are disputed by the Respondent, and it is acknowledged by the Respondent that there is evidence verifying each of the same.

4.  The Respondent agrees that this Statement may be produced and used by the Official Receiver in the hearing of the Summons dated 28 September 2004 filed by the Shareholders (as hereinafter defined) to apply for an order that the winding up of the Company be stayed pursuant to S.209 of the Ordinance.

5.  The Official Receiver submits that, by reference to the undisputed facts herein, the conduct of the Respondent as a director of the Company has been such as to make him unfit to be concerned in the management of a company and that, accordingly, the Court is bound (pursuant to S.168H of the Ordinance) to make a disqualification order against the Respondent. 

6.  Solely for the purpose of resolving these proceedings as set out above, the Respondent accepts that, by reference to the facts which are not in dispute, the Court can be satisfied as to his unfitness to be concerned in the management of a company and a disqualification order shall be made against the Respondent pursuant to S.168H of the Ordinance.

7.  The Official Receiver and the Respondent cannot reach agreement on the length of disqualification period but both parties agree that the disqualification period shall fall within the minimum bracket of 1 year to 5 years.  The appropriate period of disqualification shall be at the discretion of the Court after considering this Statement and hearing the submissions of the parties.

8.  The Respondent also agrees that if, pursuant to this Statement, there is “Carecraft” disposal of these proceedings, then there shall additionally be an order that he shall pay the Official Receiver’s cost of these proceedings to be taxed if not agreed.

9.  The Official Receiver and the Respondent agree that, if for any reason, the Court is unwilling to approve a “Carecraft” disposal of these proceedings, then no further reference may be made by any party to this Statement (or to the admissions or to the concessions contained herein) during the course of these proceedings and they will remain confidential thereafter.  The Official Receiver and the Respondent also agree that, in such event, they will jointly apply to the Court for a direction that a different Judge or Master should hear the contested trial.

10.  Paragraphs 54 to 60 below set out certain matters which the Respondent wishes the Court to take into account by way of mitigation.  The Official Receiver and the Respondent have agreed that no further facts (other than those set out in paragraphs 54 to 60) may be adduced at the “Carecraft” hearing by way of mitigation.  For the purposes of the Respondent’s submissions in mitigation, the Official Receiver, whilst not accepting the truth of these matters, does not object to the Court taking them into account for the purpose of disposing of this matter summarily but the Official Receiver reserves the right to make submissions on the mitigations put forward by the Respondent.

11.  In the event of a disqualification order being made by reference to this Statement, the Official Receiver and the Respondent agree that they will jointly apply for a direction that this Statement be annexed to the Court’s judgment.

STRUCTURE OF THIS STATEMENT

12.  The structure of this Statement is as follows :-

(1)	Paragraphs 13 to 35 set out the background information in relation to the Company and admitted by the Respondent.
(2)	Paragraphs 36 to 53 relate to the allegations of unfitness that are made by the Official Receiver and admitted by the Respondent.
(3)	Paragraphs 54 to 60 contain certain matters of mitigation relied upon by the Respondent.

AGREED FACTS RELATING TO THE CONDUCT OF THE RESPONDENT

General Background

13.  The Company was incorporated in Hong Kong on 14 January 1977.  The Company is an investment holding company consisting of various international companies with investments in diversified fields of business, including manufacturing of textiles, food products, paper and trading in sundry items (the “Group”).  A corporate chart of the Group is at Appendix 1.

14.  According to the last annual return of the Company made up to 14 January 2001, the authorized share capital of the Company was HK$40,000,000 divided into 40,000,000 shares of HK$1 each, all of which have been issued and the shareholding was as follows :-

15.  AG was incorporated and registered onto the Liechtenstein Public Register on 12 January 1977.  The beneficial owners of AG (“AG Beneficial Shareholders”) were :-

(1)	The Respondent
(2)	Vishamkar T. Adnani
(3)	Sajen G. Aswani (“Sajen”)
(4)	Harkishin G. Aswani
(5)	Narinder Kumar G. Aswani
(6)	Jacky Chatteram Mulani (“Mulani”)

The Respondent and the other 5 AG Beneficial Shareholders are relatives or closely related.

16.  Pursuant to a decision of the Princely Court of Justice of the Principality of Liechtenstein on 18 February 1998, AG was dissolved and it was expunged from the Liechtenstein Commercial Registrer on 8 April 1998.  On 26 March 2002, Dr. Guido Meier in his capacity as the last director of AG moved a motion with the Liechtenstein Country Court to reinstate AG for the purposes of distributing (1) the shares AG held in the Company and (2) the loan of US$106,952,020 which AG had granted to the Company.  Dr. Meier’s motion to the Liechtenstein Country Court was approved on 4 April 2002, whereupon AG became a reinstated company and Dr. Meier was appointed as the liquidator of AG.

17.  On 26 August 2002, Dr. Meier, as the liquidator of AG passed a corporate resolution according to which, AG’s loan of US$106,952,020 to the Company was assigned to (1) Madam Kawita Mohan Vaswani (“Madam Vaswani”), the Respondent’s wife, in the amount of US$106,952,015, (2) the Respondent, in the amount of US$2.50 and (3) Mulani, in the amount of US$2.50.  Dr. Meier further resolved that the 40,000,000 ordinary shares in the Company were assigned as follows (1) 39,999,998 shares to Madam Vaswani, (2) 1 share to the Respondent and (3) 1 share to Mulani.

18.  By a Summons filed on 3 April 2004 pursuant to S.182 of the Ordinance, Madam Vaswani, the Respondent and Mulani (the “Shareholders”) applied inter alia for a court order to validate the transfer of shares set out in the preceding paragraph.  A court order was made on 23 April 2004 in terms of such Summons.

19.  Madam Vaswani holds her beneficial interest in the aforesaid 39,999,998 shares in the Company and all the debts owing to her by the Company on trust for the following persons (the “Beneficial Shareholders”) in the following proportion :-

(1)	The Respondent	45.6%
(2)	Vishamkar T. Adnani	32.5%
(3)	Sajen	7%
(4)	Harkishin G. Aswani	7%
(5)	Narinder Kumar G. Aswani	7%

20.  The Company’s directors as at the date of the winding-up of the Company were :-

22.  A petition to wind up the Company was presented by CDC Group plc (formerly Commonwealth Development Corporation) to court on 27 December 2000 in HCCW 1233/2000 and the winding-up order was made on 21 May 2001 and by such order, the Official Receiver was appointed as the provisional liquidator of the Company.

23.  By an order dated 9 June 2001, Mr. John J. Toohey and Mr. Anthony D. Mitchell were appointed as joint and several special managers of the Company (the “Special Managers”). Sajen (nephew of the Respondent) acting on behalf of himself and the Shareholders (together referred to as the “Family”) informed the Special Managers that the Family was contemplating a restructuring of the Company’s obligations, to be implemented, inter alia, via a stay of the liquidation pursuant to S.209 of the Ordinance.  This alternative of restructuring was raised at the first creditors meeting held on 7 August 2001.  The creditors present and voting agreed to adjourn the meeting on the basis that the Family would prepare a restructuring proposal.  The Family produced a restructuring proposal (the “Proposal”) in September 2001.

24.  The first creditors’ meeting was adjourned for a few times to allow time for the creditors to evaluate the Proposal and subsequent revisions thereof.  The meeting was held on 31 January 2002 at which resolution was passed for appointment of the Special Managers as liquidators of the Company.

25.  On 21 February 2002, Stephenson, Hardwood & Lo on behalf of Tolaram Investments Limited (“Tolaram”), a subsidiary and a creditor of the Company, filed a notice of Motion seeking order to set aside inter alia the said resolution for appointment of the liquidators of the Company.  The Motion was adjourned to a date to be fixed but no date was fixed by Tolaram as the applicant.  The Official Receiver’s application for court’s ratification of the appointment of liquidators of the Company was withheld pending the outcome of the Motion.

26.  On 15 August 2002, the Official Receiver applied to court for dismissal of the Motion, for reconvening the creditors’ meeting and for appointment of liquidators.  At the hearing on 4 November 2002 of such application, Tolaram did not object and the Special Managers were appointed as the joint and several liquidators of the Company (the “Liquidators”) and it was directed by the Court that a Committee of Inspection be appointed.

27.  At the creditors’ meeting  held on 10 December 2002, the creditors resolved that the Liquidators should continue to negotiate with the Family to implement a restructuring.

28.  By a Summons dated 28 September 2004, the Shareholders applied for an order that the winding up of the Company be stayed pursuant to S.209 of the Ordinance (the “Application”).  The hearing of the Application has been adjourned for a few times and an order on the Application has not yet been made by the Court.

29.  The Liquidators have investigated into the affairs of the Company and have on 12 October 2004 submitted to the Official Receiver a Report on Conduct of Directors pursuant to S.168I(3) of the Ordinance to report inter alia that the Company has made unfair preference payments and void dispositions with reference to S.266B and S.182 of the Ordinance respectively, in the aggregate sum of about US$1.9 million.

30.  A Statement of Affairs of the Company dated 16 July 2001 sworn by Ho was submitted to the Liquidators (copy is at Appendix 2), summary of which is as follows :-

	US$
Gross assets (estimated realizable values)	24,109,319
Gross liabilities to creditors	151,694,696
Estimated total deficiency as regards creditors	127,585,377
Paid-up capital	6,984,390

31.  Amendments to the Statement of Affairs were sent to the Liquidators on 31 July 2003 (copy is at Appendix 3).  The Amended Statement of Affairs provided only book values of the assets and liabilities.  According to the Amended Statement of Affairs, the gross assets were US$167,575,858, gross liabilities to creditors were US$125,633,865 and paid up capital was US$6,984,390.

32.  The total amount of proofs of debt submitted in HCCW 1233/2000 as at 20 September 2005, excluding claims withdrawn or rejected was HK$882,025,807.75.  Copy of a detailed list of proofs of debt prepared by the Liquidators is at Appendix 5.  According to the Liquidators, the total amount of assets realized as at 20 September 2005, including repayment of the void dispositions and unfair preference payments by Madam Vaswani, was HK$17,225,511.73.

33.  The Company went into liquidation at a time when its assets were insufficient for the payment of its debts and other liabilities and the expenses of the winding up.  The Company has become insolvent within the meaning of S.168H(2)(a) of the Ordinance.

34.  Due notice under S.168P of the Ordinance of the Official Receiver’s intention to apply for a disqualification order against the Respondent pursuant to S.168H of the Ordinance has been served on the Respondent. 

35.  S.168I(2) of the Ordinance provides that an application for a disqualification order under S.168H of the Ordinance shall not be made after the end of the period of 4 years beginning from the commencement of the winding-up of the company, which was 27 December 2000 in this instance.  Hence, the period had expired on 26 December 2004.  By  a consent Order dated 14 September 2005 made by Madam Justice Kwan in HCMP 1951/2005, leave was granted to the Official Receiver to issue disqualification proceedings against the Respondent  seeking a disqualification order under S.168H of the Ordinance out of time.

Unfair preference

37. According to the Company’s audited accounts for the year ended 31 December 1999, US$3,503,129 was due from Lotus Indah as at 31 December 1999.

38. According to the Company’s audited accounts for the year ended 31 December 1999, US$105,637,129 was due from the Company to AG as at 31 December 1999. 

39. The Respondent first came to have knowledge of the winding-up petition against the Company when it was served on the Company by the petitioner’s solicitors on 28 December 2000.

40. In 2000 and 2001, instructions were given by the Respondent for a total sum of US$1,877,865 to be paid by Lotus Indah to various third party creditors of AG.  The instructions were given at various times, mostly shortly before the time when the payments were made by Lotus Indah.  Particulars of such payments are as follows :-

(1)	A net sum of US$508,607 was paid between 1 January 2000 and 26 June 2000 (within the 2-year period before the presentation of the winding-up petition against the Company).
(2)	A net sum of US$1,009,515 was paid between 27 June 2000 to 26 December 2000 (within the 6-month period before the presentation of the winding-up petition against the Company).
(3)	A net sum of US$197,232 was paid between 27 December 2000 to 20 May 2001 (being the date of presentation of the winding-up petition to the date prior to the winding-up order against the Company).
(4)	A net sum of US$162,512 was paid between 21 May 2001 and 27 June 2001 (after winding-up order had been made against the Company).

Statements of account of the said payments is attached hereto as Appendix 4.

41. In respect of the said payments totaling US$1,877,865 by Lotus Indah to various third party creditors of AG, the Respondent as director of the Company intended the following to take place :-

(1)

The payments be regarded as partial repayments of Lotus Indah’s debt due to the Company as and when the payments by Lotus Indah to the third party creditors of AG were made and the accounting records of Company should be adjusted / reconciled accordingly to record / reflect the partial repayments by Lotus Indah to the Company upon the Company’s receipt of Lotus Indah’s audited accounts for the financial periods concerned.

(2)

The payments be correspondingly regarded as partial repayments of the Company’s debt due to AG as and when the payments by Lotus Indah to the third party creditors of AG were made and the accounting records of the Company should be adjusted / reconciled accordingly to record / reflect the partial repayments by the Company to AG upon the Company’s receipt of Lotus Indah’s audited accounts for the financial periods concerned.

42. The aforesaid partial repayments by Lotus Indah and partial repayments by the Company were not recorded in the Company’s accounting records as by the time  Lotus Indah’s audited accounts for the years ended 31 December 2000 and 31 December 2001 were  received on 7 June 2001 and  11 July 2002 respectively, the Company had already been wound up and / or the books and records of the Company have been delivered to the Liquidators.

43. The aforesaid partial repayments by Lotus Indah and partial repayments by the Company were subsequently shown in the following documents provided by the Company’s directors to the Liquidators:-

(1)	Amended Statement of Affairs of the Company submitted to the Liquidators on 31 July 2003 (copy at Appendix 3)
	-	The total amount due from the Company to AG and Madam Vaswani as at 21 May 2001 was reduced from US$106,952,020 (being the original amount stated in the Statement of Affairs) to US$105,074,155, thereby reflecting the partial repayments by the Company in the total sum of US$1,877,865.
	-	The amount due from Louts Indah to the Company was reduced from US$3,096,964 (being the original amount stated in the Statement of Affairs) to US$1,219,099, thereby reflecting the partial repayments by Louts Indah in the total sum of US$1,877,865.
(2)	The Amended Statements of Affairs and the ledgers submitted with Madam Vaswani’s amended proof of debt to the Liquidators on 27 June 2003 showed that the total amount due from the Company to AG and Madam Vaswani as at 21 May 2001 was reduced to US$105,974,156 and thereby reflecting the partial repayments of US$1,877,865 by the Company to AG.

45.  The repayments by the Company to AG in the total sum of US$508,607 between 1 January 2000 and 26 June 2000 and in the total sum of US$1,009,515 between 27 June 2000 and 26 December 2000 were unfair preferences within S.266B of the Ordinance :-

(1)	The Respondent being a director of the Company is an associate within the meaning of S.51B of the Bankruptcy Ordinance.
(2)	The Respondent is one of the AG Beneficial Shareholders and is closely related to other AG Beneficial Shareholders. The Respondent had benefit and interest in the repayments by the Company to AG.
(3)	The winding-up of the Company commenced on 27 December 2000 upon presentation of the petition. The payment of US$508,607 between 1 January 2000 and 26 June 2000 was within 2 years before the commencement of winding-up. The payment of US$1,009,515 between 27 June 2000 and 26 December 2000 was within 6 months before the commencement of winding-up.
(4)	AG was a creditor of the Company and the payments of US$508,607 between 1 January 2000 and 26 June 2000 and of US$1,009,515 between 27 June 2000 and 26 December 2000 have the effect of putting it in a better position than it would have been if the payment had not been made and it had to rank for dividend in the winding-up of the Company.
(5)	The Respondent caused and / or permitted the Company to make the payments to AG indicates a desire of the Company (acting by the Respondent) to prefer AG.
(6)	At the time when the payments to AG totalling US$508,607 were made in the period between 1 January 2000 to 26 June 2000 and totaling US$1,009,515 were made in the period between 27 June 2000 and 26 December 2000, the Company was insolvent within the meaning of S.51 of the Bankruptcy Ordinance.
(7)	The said payments of US$508,607 and US$1,009,515 were unfair preferences within S.266B of the Ordinance.

46.  In relation to the unfair preference payments of US$508,607 and US$1,009,515 mentioned in paragraph 45(7) above and the void dispositions of US$197,232 and US$162,512 mentioned in paragraph 49 below, Madam Vaswani has returned to the Liquidators a total sum of US$1,877,865 (US$500,000 on 9 August 2005 and US$1,377,865 on 9 September 2005). 

47.  Allegation 1 : The Respondent as a director of the Company caused and / or permitted the said unfair preference payments by the Company to AG in which he had beneficial interest in preference to other creditors of the Company.  The Respondent was responsible for the said unfair preference transactions liable to be set aside under S.266B of the Ordinance.  There was a breach of the fiduciary duties on the part of the Respondent, in particular those owed to the Company's creditors.

Transactions liable to be set aside under S.182 of the Ordinance

48.  The winding-up of the Company commenced upon the presentation of the petition on 27 December 2000 and accordingly payments by the Company after 27 December 2000 shall be void.  The petition was served on the Company on 28 December 2000 and the Respondent had knowledge of the petition on the same day.

49.  Despite the commencement of the winding-up and the Company's and the Respondent's knowledge of the same, payments of US$197,232 and US$162,512 (totaling US$359,744) as set out in paragraphs 40(3) and (4) above were still made by the Company to AG on or after 28 December 2000 (date of the Respondent’s knowledge of the petition) and on or after 21 May 2001 (date of winding-up order).  Such payments in the total sum of US$359,744 are void dispositions by virtue of S.182 of the Ordinance.

50.  Allegation 2 : In view of the matters set out in paragraphs 39 to 44, 48 and 49 above, the Respondent is responsible for causing and / or permitting the Company in entering into the said payments to / transactions with AG which are liable to be set aside under S.182 of the Ordinance.

Failure to maintain proper accounting records

52.  As stated in paragraphs 40 to 44 above, the partial repayments in the total sum of US$1,877,865 of the debt due from Lotus Indah to the Company and of the debt due from the Company to AG made between 1 January 2000 and 27 June 2001 were not timely and properly recorded in the Company's accounting records with proper supporting vouchers, documents and explanations.  Without a timely and properly kept accounting records, the Company's directors could not know the Company's financial position with accuracy.

53.  Allegation 3 :

(1)

The Respondent is responsible for the Company's failure to maintain timely and proper accounting records since he failed to inform Ang, the director and the financial controller of the Company, and Ho, the director and the one responsible for recording the debit and credit entries of settlements to and by the Company and failed to ensure that the said repayments were timely and properly recorded in the Company's accounting records.

(2)

The Respondent has failed to take reasonable steps to keep and preserve proper books of account as are necessary to give a true and fair view of the state of affairs of the Company and to explain its transactions, pursuant to S.121 of the Ordinance and failed to comply with the obligations imposed by S.274 of the Ordinance to keep proper books of account as are necessary to exhibit and explain the transactions and financial position of the trade or business of the Company throughout the period of 2 years immediately preceding the commencement of the winding-up.

MITIGATION

In relation to Allegations 1 and 2

54.  The Respondent and the Family have duly repaid the entire amount of US$1,877,865 to the Company on 8 August 2005 and 9 September 2005. With this repayment, the financial effect of the preferential payments described in paragraphs 40 and 41 above has been fully rectified. Any possible prejudice to the creditors has likewise been fully remedied.

55.  It is emphasised that the arrangement for inter-company payments  was put in place at the time when the Company was solvent. It was part of the commercial and financial functioning of the Company and was not inappropriate. The failure to terminate such an arrangement once the winding-up petition had been presented was simply an oversight on the part of the Respondent. It was not a deliberate attempt to dispose of assets of the Company at the expense or to the detriment of the interest of the creditors of the Company. Moral blame should not be placed on the fact that this commercial arrangement was not terminated post-winding up.

56.  The Respondent did not act wilfully against the law. He gave instructions for the preferential payment to be made in complete ignorance of the legal implications of such payments.  At the time those instructions were given the Respondent was not aware that these payments would be considered as preferential payments under the law or that they are liable to be set aside. 

57.  This is supported by the fact that the Respondent took the initiative to amend the Statement of Affairs previously submitted to the Liquidators  immediately after he  discovered the omissions to incorporate the effect of such payments.   Corresponding amendments were also made promptly and voluntarily to reflect the correct position in the Amended Statements of Affairs and the ledgers submitted with Madam Vaswani's Amended Proof of Debt to the Liquidators.  The Respondent had been candid and honest regarding these payments and had no intention to nor did he take any  step to conceal the fact that these payments had been made.  This also supports the fact that the Respondent was not aware of the impropriety of these payments and allowed the pre-winding up arrangement to continue innocently.

58.  It should also be noted that the amount of the preferential payment is not substantial when compared to the total amount currently owed by the Company to the Shareholders which stands in the sum of US$76,563,023.

In relation to Allegation 3

59.  The Respondent's only default in relation to keeping proper books and records of the Company was the delay in causing entries relating to the preferential payments to be recorded. There is no allegation of inaccuracies or dishonesty involved. The amount involved in these payments was not significant when compared with the total cash flow or total assets of the Company. Accordingly, although the Respondent accepts that the payments in question have not been recorded promptly, the books of account of the Company nonetheless reflect, in general, a true and fair view of the state of affairs of the Company.

Overall

60.  The Respondent has provided full cooperation with the Official Receiver in his investigation into his conduct as director of the Company and consented to the use of the Carecraft procedure which has led to considerable savings on time and costs.  He has provided prompt, complete and detailed response to the Official Receiver throughout the investigation and has readily consented to disqualification proceedings being brought out of time.

Dated 28 September 2005.