THE OFFICIAL RECEIVER v. LI PING CHUNG

HCMP 511/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 511 OF 2003

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J U D G M E N T

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The Application

1. By an originating summons dated 6 February 2003, the Official Receiver applied under s.168H of the Companies Ordinance, Cap. 32 (“the Ordinance”) for a disqualification order against the Respondent, who was the former director of six companies (“the Companies”), Beauty View Catering Limited (“Beauty View”)[1], Miles Profit Company Limited (“Miles Profit”)[2], Honning Investment Limited (“Honning”)[3], Jademine Company Limited (“Jademine”)[4], Riverside Restaurant Limited (“Riverside”)[5], Seenhon Limited (“Seenhon”)[6].  There is no dispute that the Companies were insolvent at the time the Respondent was the director.  Hence, s.168H (1)(a) of the Ordinance, being one of the grounds which the court is required to be satisfied before a mandatory disqualification order is made, is satisfied.

2. Thus, the only remaining ground the Official Receiver is required to satisfy this court before a disqualification order is made is the ground set out in s.168H (1)(b), that is, the Respondent’s conduct as a director of the Companies, either taken alone or taken together with his conduct as a director of any or all of the Companies, makes him unfit to be concerned in the management of a company.  The Respondent had filed an acknowledgement of service stating his intention of not contesting the application. Apart from an affirmation of mitigations filed on 5 October 2004, the Respondent filed no other evidence.  The Respondent was also absent at the hearing on 25 November 2004 and filed no submissions.  Upon confirmation by Miss Lee acting on behalf of the Official Receiver that the Respondent had been served with the notice of the hearing in accordance with the directions made by Master Kwang at the call-over hearing on 12 October 2004 and upon Miss Lee’s further undertaking to file an affirmation of service, I was satisfied that the Respondent was duly notified of the hearing and proceeded with the application in the Respondent’s absence.

3. After the said hearing on 25 November 2004, it came to my attention upon the perusal of the affirmation of service filed by the Official Receiver that the Respondent was not served with the Notice of the Adjourned Hearing in accordance with the order of Master Kwang referred to in paragraph 2 above.  Instead of serving the Respondent at the address at Royal Jubilee, Sheung Shui as directed by Master Kwang, the Respondent, according to the Affirmation of Service, was served at the address of Shop 2, G/F, Fok Shing Commercial Building, 28 On Lok Mun Street, Fanling, which was no longer the Respondent’s last known address.

4. Hence I directed the Official Receiver to explain for the non-compliance.  By a letter dated 10 December 2004 to this court sent through my clerk, Miss Lee admitted the irregularity and explained for her non-compliance of the order of Master Kwang in this way, “ The reason is inadvertence on the part of the Official Receiver. As such, service of the Notice of Adjourned Hearing of Originating Summons is irregular”.

5. Due to the admitted irregularity of service, I directed Miss Lee to personally attend court on 13 December 2004, the date originally fixed for the handing down of the judgment.  Miss Lee was unable to attend court and she sent instead a Miss Tsui to attend the hearing.  The Respondent was also present at the hearing on 13 December 2004.  I explained to the Respondent the circumstances leading to the necessity of holding a hearing on the date originally fixed for the handing down of the judgment. The Respondent informed this court that he was indeed not served with the Notice of the Adjourned Hearing and was therefore not aware of the hearing on 25 November 2004.  However, he informed me that he did not wish this court to adjourn the application to another date for him to make submissions as apart from the affirmation filed on 5 October 2004, the Respondent said he had nothing else to say.

6. After having heard from the Respondent, I was satisfied that there was no need to adjourn the application to another date to enable the Respondent to make representations. Thus, with the consent of the parties, I deferred the handing down of the judgment to the next day on 14 December 2004.

7. As the Respondent has expressly informed the court that he does not oppose the application and only wishes to rely on the only affirmation he filed on 5 October 2004 to mitigate for a shorter period of disqualification, I only set out briefly the allegations of unfit conduct relied on by the Official Receiver for an order of disqualification.

The allegations of unfit conduct under s.168H (1)(b) relied on by the Official Receiver

8. In support of the application, the Official Receiver filed a report by Miss Fiona Lee dated 4 February 2004 together with 24 exhibits (“the Report”) and an affirmation of Lee Hip Pak Edmond, the Treasury Accountant, dated 3 August 2004 (“Mr. Lee’s Affirmation”).  According to the evidence contained in the Report and Mr. Lee’s Affirmation, the Official Receiver has made the following allegations of unfit conduct against the Respondent:

(1)	Breaches of ss. 121 and 274 of the Ordinance;
(2)	Entering into fraudulent preference transactions which transactions are liable to be set aside under s.266 of the Ordinance;
(3)	Making loan-repayments to the associate creditors which repayments are liable to be set aside under s.266B of the Ordinance;
(4)	Making withdrawals in the total sum of $1,818,871.49 from the two accounts of Beauty View after the presentation of the petition to wind up the company, which withdrawals are deemed to be void under s.182 of the Ordinance;
(5)	Breach of the director’s duty owed to Beauty View and Miles Profit; and
(6)	Trading at the risk of creditors by allowing the Companies to continue trading when the Respondent knew or ought to know the Companies were unlikely to avoid liquidation.

(1) Breaches of ss. 121 and 274 of the Ordinance

9. Ss. 121 and 274 are commonly described as accounting offences as they are by and large concerned with the duties imposed upon, inter alia, a director to keep proper accounts of a company.  S.121 requires a company to keep proper books of account for 7 financial years for the purpose of giving a true and fair view of the company while s. 274 requires a company to keep proper books of account for the period of 2 years immediately preceding the commencement of the winding up. 

10. According to the Report and Mr. Lee’s Affirmation, the Respondent was found to have been in breach of the obligations imposed upon him by s.121 in respect of Beauty View and Miles Profit and of those by ss. 121 and 274 in respect of Riverside and Seenhon. In respect of Beauty View, it was found that relevant accounts in the form of the current account of the company’s payee, the records of writing back of unsecured loans due to Beauty View’s related companies and the records of accounts payable to the company during the relevant period of 7 years could not be located.   In respect of Miles Profit, it was found that the general ledger of the company for the 2 years of the relevant 7 years’ period had gone missing and that a discrepancy from the available accounting records could not be reconciled.  As for Riverside, it is found that its general ledger for the 18 months’ period of the relevant 7 years’ period and the 2 years’ period immediately preceding the commencement of its winding up petition had gone missing.  As a result, information concerning some of the company’s transactions during this period, its management accounts, the amount of the debts written off by the company and its creditors could not be verified. As for Seenhon, it was also found that the general ledger for a period of 6 years was not available during the relevant 7 years’ period and that the company’s vouchers for a period of 4 years were also missing.  As a result, a number of transactions during the relevant periods of 7 and 2 years could not be verified. 

(2) Entering into fraudulent preference transactions which transactions are liable to be set aside under s.266 of the Ordinance

11. In the Report, the Official Receiver alleged that the Respondent, as the director of Miles Profit and Riverside, had caused payments by the said respective companies’ to a number of related parties within 6 months of presentation of the petitions to wind up the said companies, which payments were made with a view to give to the payees a preference over the other creditors.  In the Report, Miles Profit was found to have made payments of this nature in the total sum of about $957,000 while Riverside a total sum of about $2.6 million. The making of these payments by these two insolvent companies, according to the Official Receiver, is evidence of the Respondent’s neglect of the statutory prohibition imposed by s.266 as well as his lack of probity as a director of these companies.

(3) Making loan-repayments to the associate creditors which repayments are liable to be set aside under s.266B of the Ordinance

12. The conduct being complained of by the Official Receiver under this head, similar to the said conduct of lack of probity referred to above, is the alleged making of the loan repayments in the total sum of about $1.7 million by Beauty View to the parents of the Respondent within 2 years of the presentation of the petition to wind up Beauty View. At the time of the repayments, the Respondent was the director and had control of Beauty View, which was already insolvent.  Thus, the said repayments are liable to be set aside under s.266 B and for which the Respondent is alleged to be responsible.

(4) Making withdrawals in the total sum of $1,818,871.49 from the two accounts of Beauty View after the presentation of petition to wind up the company which withdrawals are deemed to be void under s.182 of the Ordinance.

13. After the petition to wind up Beauty View was presented, the Official Receiver, according to the Report, found that Beauty View had withdrawn from its two accounts a total sum of 1,818,871.49. The Official Receiver alleged that as the Respondent was the director of Beauty View at the material time of the withdrawals, he is responsible for the aforesaid transactions, which are liable to be set aside under s.182 of the Ordinance.

(5) Breach of the director’s duty owed to Beauty View and Miles Profit

14. According to Mr. Lee’s Affirmation and the Report, the Respondent is alleged to have been in breach of his duty as a director owed to Beauty View and Miles Profit.  Miles Profit was found to have repaid, whilst it was insolvent, a total amount of about $5.75 million to Riverside owed to it by Miles Profit.  In a letter written by the Respondent, he stated that it was a condition of the loan agreement between Miles Profit and Riverside that the repayments of the loan were to be “prioritized over all payments”. Miles Profit and Riverside were related companies through corporate shareholding.

15. As for Beauty View, from its audited financial statements, it was found that at the time when it was insolvent,  had made purchases from two companies in the respective sums of $2,173,655 and $3,660,477.  These purchases however were not supported by any accounting records.  Further, according to an answer provided by the Respondent on 28 November 2002 to one of the questionnaires served by the Official Receiver on the Respondent, the Respondent stated that the said purchase sums due to the companies were only respectively $39,000 and $531,404. This answer, submitted by the Official Receiver, is evidence of Beauty View having made substantial repayments to these companies when the former was already insolvent.

16. The Official Receiver submitted that the Respondent was in breach of his duty as a director in relation to these payments or alternatively, the making of the aforesaid payments by Miles Profit and Beauty View is evidence of a lack of probity on the part of the Respondent.

(6) Trading at the risk of creditors by allowing the Companies to continue trading when the Respondent knew or ought to know the Companies were unlikely to avoid liquidation

17. In Mr. Lee’s Affirmation, the Treasury Accountant found that the Companies were already insolvent for some years before their respective winding-up petitions.  Hence, the Official Receiver alleges that the Respondent had allowed the Companies to continue to trade, taking unwarranted risks with the creditors’ money when the Respondent knew or ought to know the Companies were unable to avoid liquidation.

The Respondent’s evidence

18. As it is stated above, the Respondent did not seek to dispute these allegations of his unfit conduct as a director of the Companies.  In his affirmation filed on 5 October 2004 in support of his plea for a shorter term of disqualification, he explained that the “failures” of the Companies should not be attributed to his mis-management of the Companies as his father was the decision maker of the Companies until his retirement in or about 1997 and that the Respondent himself was “only a nominated paid director” for his father.  The Respondent attributed the “failures” of the Companies to the economic downturn in Hong Kong.  Lastly, the Respondent stated that when the Companies were wound up, the outstanding debts were not substantial.

Findings

19. Having considered all the evidence adduced by the Official Receiver and the Respondent, I find all the allegations made against the Respondent proved on the balance of probabilities.  The Respondent’s explanations for the failures of the Companies, when taken to their highest, are no more than an attempt by the Respondent to mitigate against the period of disqualification, the imposition of which by the court he does not seek to challenge.  The Respondent’s father might well be the “patriarch” of the Companies as suggested by the Respondent.  This, even assuming it were true, does not entitle the Respondent to shirk his responsibility owed to the Companies as a director, which responsibility requires him to inform himself about the Companies’ affairs with his co-directors in supervising and controlling them. (See Re Westmid Packing [1998] 2 ALL ER 124 at 130 a-b).  The Respondent, in response to one of the Official Receiver’s questionnaires about his role and responsibility as a director of the Companies, stated that his role and responsibility are “general administration and financing”.  From these answers, I conclude that the Respondent was responsible for the Companies’ misdeeds as set out above.

20. Having found the allegations proved against the Respondent, I next consider if such conduct renders the Respondent unfit to be concerned in the management of a company.  In determining whether the Respondent’s conduct as a director of the Companies makes him unfit to be concerned in the management of a company, according to s. 168K, I shall have regard to matters set out in Part I and Part II of the Fifteenth Schedule of the Ordinance (“the Schedule”). Of the allegations which I find proved against the Respondent, his failure to comply with ss.121 and 274 of the Ordinance are the relevant matters set out respectively in clause 3(h) of Part 1 and clause 5(da) of Part II of the Schedule. The Respondent’s responsibility for Miles Profit and Riverside in entering fraudulent preference transactions prohibited by s.266 and causing Beauty View to make voidable disposition prohibited by s.182 are within the relevant matter in clause 3, Part 2 of the Schedule. Lastly, the breach of duty by the Respondent as a director of Miles Profit and Beauty View is a specified matter in clause 1, Part I of the Schedule.

21. Apart from the allegations of unfitness that fall within the relevant matters set out in the Schedule, which relevant matters of unfitness oblige me to impose a disqualification order, I take the view that other allegations of unfitness, though are not within the Schedule, should not be given less weight for the consideration of the Respondent’s unfitness to be concerned with the management of a company (Re Amaron Limited [1998] BCC264 at 268G).

22. After having carefully considered all the allegations (whether they are within or outside the Schedule), which I find proved against the Respondent, I am satisfied that the Respondent shall be disqualified under s.168H.

Period of disqualification

23. The period of disqualification is governed by s.168H (4) of the Ordinance, that is, the minimum period of 1 year and the maximum period of 15 years. Three brackets of disqualification have been identified for determining the period of disqualification.  The top bracket of disqualification for periods of over 10 years is for particularly serious cases.  The middle bracket of disqualification ranges from 6 to 10 years while the minimum bracket of disqualification for periods between 2 to 5 years is to be applied to relatively not very serious cases (See Sevenoaks Stationers (Retail) Limited [1990] BCC765 at 771H - 722A)

24. This case, in my view, should fall within the minimum bracket of disqualification.  I do not accept the Respondent’s explanation that the collapse of the Companies was due to the economic downturn in Hong Kong.  According to Mr. Lee’s Affirmation, most of the Companies were already insolvent long before the Hong Kong’s economy took a nosedive after 1997. While it is true that the amounts of debts owed to the creditors were relatively small when the Companies were wound up, I find the Respondent, who was responsible for the general administration and financing of the Companies, was culpable for the Companies’ insolvency, thus risking the interest of their creditors, especially the preferential creditors who were largely the employees of the Companies as a result of the improper manner he had conducted the affairs of the Companies.

25. Having had regard to the foregoing matters, I am of the view that the appropriate period of disqualification should be 4 years.

Order

26.  I order a disqualification of four years in the usual terms. Apart from the order I made on 13 December 2004 that there shall be no order to costs in relation to the costs occasioned by the irregular service I referred to above, I make an order nisi that the Respondent do pay the Official Receiver’s costs of this application, which costs order shall become absolute if no application is made to vary it within 14 days of the handing down of this judgment.

[1] Beauty View was incorporated on 10 March 1987.  The winding up petition was filed on 9 February 1999 and the company was ordered by the court to be wound up on 10 May 1999.

[2] Miles Profit was incorporated on 28 November 1989.The winding up petition was filed on 19 February 1995 and the company was ordered by the court to be wound up on 8 March 1995.

[3] Honning was incorporated in 1984. The winding up petition was filed on 23 February 1995 and the company was ordered by the court to be wound up on 22 March 1995.

[4] Jademine was incorporated on 27 August 1989.  The winding up petition was filed on 24 July 1995 and the company was ordered by the court to be wound up on 20 September 1995.

[5] Riverside was incorporated on 19 March 1976.  The winding up petition was filed on 24 September 1997 and the company was ordered by the court to be wound up on 27 November 1997.

[6] Seenhon was incorporated on 29 March 1988.  The winding up petition was filed on 24 October 1997 and the company was ordered by the court to be wound up on 10 December 1997.