ALLIED EVER HOLDINGS LTD v. LI SHU CHUNG AND OTHERS

HCCW 497/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 497 OF 2009

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DECISION

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INTRODUCTION

Introduction

1.  This is the hearing of the Petitioner’s application seeking (a) an order to stay the winding-up order against Luen Tat Watchband Manufacturer Limited (“the Company” or “Luen Tat”) made on 6 July 2010 (the “WU Order”); and (b) an order to discharge the appointment of the joint and several liquidators of the Company (the “Liquidators”).

The legal principles applicable to staying a winding-up order

2.  Section 209 gives the court jurisdiction to order a stay of winding-up proceedings at any time after a winding-up order was made whether permanently or for a limited duration and on such terms and conditions as it thinks fit.  The principles as to the granting of a stay of winding-up proceedings have been set out by Kwan J (as she then was) in Re Outboard Marine Corp Asia Ltd [1].  These principles are as follow:

(1) The power to grant a stay of winding-up proceedings is discretionary.  The burden is on the applicant to make out a sufficient case for a stay that carries conviction.

(2) Where there are sufficient assets to pay all the creditors and the expenses of the liquidation, the interests of the members, in addition to those of the creditors and the liquidator, would be considered.  Solvency is a paramount requirement: Re Nu-West Natural Products Corp Ltd [2].

(3) The court would also consider whether the stay is conducive or detrimental to commercial morality and to the interests of the public at large.

(4) The courts have consistently granted stays of winding-up orders in cases where they have found that the company is solvent, and that the creditors can be paid out of the assets available to the company: see eg Albert Edward Rodrigues v Associacao Portuguesa De Socorrous Mutuos[3]; Re Incorporated Owners of Kai Tak Mansion (Block Three)[4]; and Re Liang Yang Keng[5].

(5) In considering the issue of the solvency of the company, the court may be satisfied that the undertakings given by the applicants are sufficient for the purposes of showing solvency: Re Incorporated Owners of Kai Tak Mansion (Block Three).  The court would take into account any arrangement which has been entered into to ensure that all the company’s debts are paid and therefore the company is made, for all effective purposes solvent: Re Fullbright Co Ltd[6]. A stay may also be deferred until the company’s debts were actually paid off:  Re Five Star Wine Ltd[7].

(6) A liquidator’s commencement of investigations as to the affairs of the companies would pose no impediment to a stay of the winding-up order, in a case where such investigations could be continued by another body after the stay of the winding up: see Re Grande Holdings Ltd[8].

(7) As to the effect of a stay of the winding-up order, once a permanent stay is granted the liquidation is for all practical purposes at an end.  The liquidator may be discharged, control of the company reverts to the directors and the company may resume its business: Re Outboard Marine Corp Asia Ltd[9].

The legal principles applicable to removal of a liquidator for cause

3.  Under section 196, the court has wide discretion to remove a liquidator for cause shown.  The primary purpose of liquidation is for the general advantage of those interested in the assets of the company. The interest of those who are interested in the assets of the company is the single most important factor to consider in an application for removal of the liquidator. It is of such a paramount importance that a liquidator might be removed even if he was utterly without fault.  Thus a liquidator may be removed if the court is satisfied that his removal is for the general advantage of those interested in the assets of the company notwithstanding no personal misconduct or unfitness is established against him: Re Mainkey Development Ltd[10] and Re Keypak Homecare Ltd[11]. 

4.  The next important justification for removal of a liquidator is the liquidator’s conduct.  A liquidator is an officer of the court.  He is subject to duties which the law regards as fiduciary.  He is entrusted with the repudiation of the court for the impartial and proper dispatch of those duties.  In that regard, no less standard is to be expected of him than of a court or a judge: Re Legend International Resorts Ltd[12]. Flowing from that standard is the duty to act fairly and honourably: Macau First UniversalInternational Ltd v Ding Xiaohong (No 2)[13].  This is a very strict obligation.  Not only must he act fairly, he must be seen to be fair.  He must not only beindependent but must also be seen to be independent and completely impartial: see Tracker Software International Inc v Smith[14] and Re Winspower Ltd[15].  In Re Legend International Resorts Ltd[16], Fok JA (as he then was) said:

“ Where conduct of a liquidator has been such as to demonstrate that he has been biased against a particular creditor or at least to give rise to a perception, on reasonable grounds, that he was biased, or where his conduct has been such as to give rise to a real, and reasonable, loss of confidence in him by the creditor, the court may accede to an application to remove him: …. The court mustmake up its mind by looking at the overall picture, whether there isa manifested tendency of the liquidators to favour certain interestsat the expense of others. If there is that perception, and if in the eyes of a reasonable observer there is not the carrying on of the liquidation to the general advantage of the persons interested in the winding up, the court may act: ….”

5.  Thus, a liquidator may be removed if he has been shown to have been bias, or to give rise on reasonable grounds to a perception of bias, or to give rise to a real and reasonable loss of confidence in him by the petitioner, creditor or contributories.

6.  Other general grounds for removal include misconduct; dereliction of duty; unfitness, inability or failure to carry out his duty; or loss of confidence in his professional judgment to such a degree as will forfeit the confidence of the court.  These may be proved by evidence of some breach of duty or want of efficiency or appearance of partiality or conflict of duty on the part of the liquidator.  The test is whether the liquidator’s conduct is such as will forfeit the confidence of the court.  But it also seems to be enough to show that winding up can be conducted more cheaply or more effectively by some other person: McPherson’s Law of Company Liquidation[17].

7.  The category of misconduct is never closed.  One particular misconduct which the facts of this case calls for consideration is the liquidator’s disrespect or disregard to the court’s orders or findings. The insolvency regime operates through liquidators and trustees-in- bankruptcy who are officers of the court.  The duty of an officer of the court is to giveeffect to the court’s orders, acknowledge its findings and act accordingly.  Acts done by an officer of the court arising out of and in the course of performance of his duty have the protection of the court.  If the officer refuses to acknowledge the court’s orders, disrespects its findings, does any act which has that effect or has the effect of nullifying the court’s orders or findings, the insolvency regime could not operate.  There is no reason why the court should afford protection to that officer if he does not recognise the court’s command.  Such conduct apart from being disrespectful to the court, if not also contemptuous, is inconsistent with the fiduciary duty owed by an officer of the court.  It will forfeit the confidence of the court.  In an appropriate case, such conduct may be a valid ground for removal of the liquidator.

8.  As will be shown in the following subsection, on the facts of the present case, there are three important date-lines.  On 1 December 2011, Harris J in the companies court rejected the case of the opponent in HCCW 236/2011, who later made claims against the Company based on the same fact.  On 9 December 2015, the Court of First Instance delivered judgment in HCA 1171/2009 in which it made certain findings of fact which the Liquidators should have regard to in their conduct of the liquidation process.  On 19 January 2017, the Court of Appeal unreservedly upheld those findings.  TheLiquidators’ conduct after these date-lines would have to be viewed against these judgments.

9.  The burden of proof is on the party seeking to remove the liquidator.  The onus is very high and not easy to discharge.  This is because the court does not lightly remove its own officer and will amongst other considerations, pay due regard to the impact of a removal on his professional standing and reputation: Macau First Universal International Ltd v Ding Xiaohong (No 2)[18].

10.  Mr Barlow SC, leading counsel for the Liquidators, made the point that the onus of proof will not be easy to discharge where the liquidator has become well acquainted with the business and affairs of the company.  While that is a generally accepted proposition, it is not an immutable rule of universal application.  That a liquidator has become well acquainted with the business and affairs of the company is one important consideration, whether it is of such an importance as to make him irremovable or difficult to remove depends on all the circumstances.  In a big company, not to mention a public company, where the business and affairs are extensive and complicated and there are many conflicting interests between shareholders and creditors or amongst shareholders themselves, that consideration is certainly an important one.  But in a company with few or no creditors, or where the company is solely owned by one shareholder or where the shareholders stand on a united front, then who else knows the company, its affairs and business better and who else best represents its interest than its shareholder?  In that situation, the liquidator is a total stranger to the company.  His familiarity with the company’s affairs and business is not an impediment to his removal.

11.  As for the approach in assessing a liquidator’s conduct in an application seeking his removal, the court must bear in mind that liquidators are officers of the court.  They have a public duty to serve.   In discharging that duty, they may be placed in a position of conflict with parties who may have personal interests to pursue.  Thus, when assessing the conduct of a liquidator, the starting point must be a presumption of good faith in favour of the liquidator.  A complaint against the conduct of the liquidator must at least be viewed with some caution. 

12.  A liquidator is a total stranger to a company in liquidation.  When he takes over the company, particularly one in a members’ voluntary winding-up, he is entitled to consider or even to act on the information of the directors who were previously in its driving seat.  But that does not relieve him of his responsibility to make his own independent and professional judgment.  He has to exercise his own independent judgment and not to take instruction blindly from the former director.  Where there is evidence to suggest that the former director is not credible, a liquidator should be wary of his views and advice.  If the liquidator finds that he has misplaced his trust or confidence in the former director, he should be bold to depart from the views of that former director than to persist on the same course.

The liquidator’s duty to act in good faith

13.  Liquidators are officers of the court as well as agents of the company in liquidation. They owed the court and the company the duty to act in good faith.  When litigating over matters in which they have a personal interest as distinct from litigating on behalf of the company against a third party in relation to the company’s affairs, they have the duty to act in utmost good faith, including the duty to make full and frank disclosure to assist the court in its adjudication, even though such disclosure may be contrary to their personal interest.  It is not open to them to withhold material information which they have in order to present their case in the most favourable light.  This is because an officer of the court may not put his personal interest before his public duty.  Any attempt to withhold material information by a liquidator is an attempt by an officer of the court to mislead the court.  It will be viewed critically.  An attempt to mislead in a litigation in which his personal interest is involved as in the case of an application to remove him from office has to be viewed separately from the conduct which is alleged to justify his removal from office.  But an attempt to mislead the court reflects adversely on his lack of good faith in the discharge of his duty from which adverse inference may be drawn, not only in relation to the particular issue in question, but also in relation to his credibility generally and the entire conduct of the liquidation process put under his charge.  In an appropriate case, it may justify his removal on the grounds of bias or perception of bias or for loss of confidence in him.

The background

14.  The background to this longstanding matter was an attempt bythe eldest son Li Shu Chung (“Ken”) to oust his father the late Lee Sai Nam (the “Father”) and his siblings, Li Shu Hang (“Richard”) and Li Sin Man (“Seline”) from their Father’s Company.  In HCA 1711/2009 (the “Main Action”), Deputy High Court Judge Leung (“Deputy Judge Leung”) held that the Father was the absolute and beneficial owner of all the shares and profits of the Company and its related company, Hong Kong Pak Tat Trading Company (“Pak Tak”).  This fact was conclusively affirmed by the Court of Appeal in CACV 2/2016. A succinct summary of the background of the Main Action can be found in pages 2 to 19 of the judgment of the Court of Appeal (the “Court of Appeal Judgment”).  A more detailed version can be found in pages 2 to 11 of the judgment of the Court of First Instance (the “CFI Judgment”).  So far as is relevant for the disposal of this application, the factual background is as follows.

15.  In 1972, the Father established the Company as his flagship company in manufacturing watchband products.  As a result of subsequent restructuring, immigration planning and tax planning, 51% of the shares of the Company were held by Ken’s corporate vehicle, Joesh Overseas Ltd with the remaining 49% held by Richard’s corporate vehicle, Full Moon Investments Holdings Inc.  All the shares were held on trust for the Father instead of for Ken and Richard beneficially.

16.  In 1981, the Father set up a sole proprietorship company, Pak Tat Trading Company (“PTTC”), as the manufacturing arm of the business.  In 1992, through PTTC, the Father established Lianda Metal Watchband (Shenzhen) Co Ltd (“Shenzhen Lianda”) in Shenzhen as the mainland manufacturing base for his watchband business.  PTTC was the registered shareholder of Shenzhen Lianda.

17.  In 2002, all the shares in PTTC were transferred to Pak Tat.  Thus Pak Tat replaced PTTC as the holding company of Shenzhen Lianda.  The transfer of PTTC’s shareholding in Shenzhen Lianda was approved by the Mainland authority.  On record, the consideration for the transfer was $53 million, but no payment was actually made.  The payment was entered in the books of Pat Tat as the Father’s shareholder’s loan.  The Father was the authorised representative of Pak Tat.  He, Ken and Richard were its directors.  Initially, the Father was the 100% shareholder, but in September 2006, he transferred 50% of his shareholding to Ken as his nominee.

18.  In the same year, on the professional advice of David Cho (“David Cho”) of Moores Rowland, now Mazars CPA Limited (“Mazars”), the Company implemented a re-invoicing scheme to reduce its tax liability.  A new company Yuen Hing Enterprise Macao Commercial Offshore Ltd (“Yuen Hing”) was incorporated in Macao, with Seline as the person in charge.  Under this re-invoicing scheme, Luen Tat would place orders with Yuen Hing for the goods required in its business, and Yuen Hing would place back to back orders for the goods with Shenzhen Lianda.  Thus, Yuen Hing would invoice and receive payment from the Company for the goods, with profits accruing to Yuen Hing.  Yuen Hing was therefore said to be the treasury of the Luen Tat group.

19.  Since then, Ken gradually ousted the Father and his siblings from the business and usurped the Father’s control of the Luen Tat group.  In August 2009, the Father commenced the Main Action against Ken and his son seeking, essentially, a declaration against them that their shares in the Company and Pak Tat are held on trust for him.

20.  At the same time, the Father through his nominee, the Petitioner herein, petitioned to wind up the Company.  However, Ken caused a special resolution to be passed to wind up the Company pursuant to section 177(1)(a) of the former Companies Ordinance.  The WU Order was made with costs against Ken.  David Yen and Stephen Liu of Ernst & Young Transactions Limited were appointed as the joint and several Liquidators in 2010.  At the time, the Company was substantially solvent.

21.  While the Company was under liquidation, Ken and David Cho, accompanied by David Yen in his then capacity as provisional liquidator, made a report of tax evasion to the Inland Revenue Department against the Company by using the re-invoicing scheme.  The Company was order to pay further tax and a penalty of $3.4 million. 

22.  In 2011, to protect his interest in Shenzhen Lianda, the Father petitioned the winding up of Pak Tat under HCCW 236/2011 on the basis of his shareholder’s loan of$53 million, ie the purchase price of PTTC’s 100% interest in Shenzhen Lianda owned by the Father through PTTC. Ken resisted the petition alleging that he was the owner of 50% interest of both PTTC and Pak Tat.  On 1 December 2011, Harris J delivered judgment rejecting Ken’s case andissued a winding up order against Pat Tat.  The Liquidators were informed of this winding-up order by the liquidators of Pak Tat.  Harris J’s finding served as a warning about Ken’s credibility and that his story about his interests in the Company and Pak Tat should be considered with circumspection.  Despite that, the Liquidators’ further conduct of the liquidation proceeded on the basis of Ken’s assertions. 

23.  The Liquidators commenced four actions in 2012 against the Father, Richard, Seline, Ken and Yuen Hing to recover the penalty paid to the Inland Revenue Department and money paid to others under the re-invoicing scheme.  On 15 November 2013, just a few months before the trial of the Main Action, upon the application of the Father, two of those actions, namely HCA 1428/2012 and HCA 2137/2012, were stayed pursuant to the order of Master Ho, pending resolution of the Main Action.  The Liquidators appealed.  On 25 July 2014, Deputy High Court Judge Poon (“Deputy Judge Poon”) dismissed the appeal with costs to the Father’s camp holding, inter alia, that “the Liquidators’ Actions can serve little purpose if the Father turned out to be the 100% owner of [the Company] and its profits all along”.  That, indeed, was what turned out to be the case in the Main Action.  The findings in the Main Action were all upheld by the Court of Appeal.

The pre-application correspondence

24.  On 15 December 2015, soon after delivery of the CFI Judgment, the Petitioner’s solicitors, Messrs Joseph SC Chan & Co (“JC&Co”) wrote to the Liquidators’ solicitors, Messrs Henry Wai & Co (“HW&Co”) expressing the Petitioner’s intention to apply to stay the WU Order and/or to remove the appointment of the Liquidators.  The word “remove” was actually used.  They suggested the parties to make a joint consent application to stay the WU Order, otherwise the Petitioner will take out an application and “to hold the Liquidators personally liable for all the costs arising from their opposition and/or unreasonable/‌uncooperative conducts”.  In their further letter dated 4 January 2016, they pressed for a decision from the Liquidators and renewed their threat of seeking “costs against the Liquidators personally”, if they did not agree to make a consent application with no order as to costs.

25.  JC&Co and HW&Co continued further correspondence about some outstanding issues, including likely further penalty for tax evasion and payment of some of the proofs of debts, which ended in disagreement. On 5 March 2016, JC&Co renewed their threat to take out an application to “remove the appointment of the Liquidators” and to hold them “personally liable for all the costs arising from their opposition and/orunreasonable or uncooperative conducts”.  In their reply dated 8 March 2016, HW&Co rejected JC&Co’s suggestion to stay the WU Order by consent and denied “any allegation of misconduct” on the part of the Liquidators. 

26.  From these correspondences, there is no doubt that the Liquidators and their legal teams have no misunderstanding that in their application to stay the WU Order the Petitioner will be seeking their removal for cause and an order for costs against them personally.

27.  Then, on 26 May 2016, the Petitioner took out the present summons, expressly made pursuant to sections 196 and 209 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance, seeking an order that:

(1) the WU Order be stayed;

(2) the appointment of the Liquidators be discharged; and

(3) costs of the application be borne by the Liquidators personally.

The Petitioner’s grounds for staying of the WU Order

28.  In essence, the Petitioner’s ground for staying the WU Order is that by the CFI Judgment as later confirmed by the Court of Appeal, the Father was the 100% beneficial owner of all the shares in the Company.  There is no longer any question of interest of opposing contributories.  This together with the specific findings in the Main Action has removed the factual and legal basis of most of the actions pursued or contemplated by the Liquidators.  The Company’s debt, if any, are covered by the Company’s assets and, if necessary, by the undertakings offered by Richard and Seline.  The Company is effectively made solvent for all intent and purposes.

29.  The Liquidators’ professed stance as asserted by their counsel and as stated in their affidavits is “neutral” and that their position is to leave it to the parties to persuade the court whether or not a stay should be granted.  But in his affidavit filed in response to the Petitioner’s application, David Yen actually portrait a picture that the Company was massively insolvent by reason of a number of outstanding proofs of debt and their “recently” discovered “hidden” tax liability arising out of the re-invoicing scheme.  He also asserted that there are legal actions to be pursued to collect assets of the Company for the benefit of its creditors; and investigations to be carried out to uphold commercial morality and public interest in relation to the “recent hidden” tax liability.

30.  The Petitioner’s answer is that these proofs and tax issues are spurious and unjustified and were advanced by the Liquidators to justify the continuation of their appointment.  In any event, those liabilities, if they do arise, are adequately covered by the undertakings.

The Petitioner’s grounds for removal of the Liquidators

31.  The Petitioner seeks to remove the Liquidators by reason of their misconduct.  It alleges that the Liquidators had taken side and are bias in favour of Ken and his camp against the Father and his camp or that their conduct has at least given rise to a perception, on reasonable grounds that they are so biased.  Further, the Petitioner complains that as the 100% beneficial owner of the Company, it has completely lost confidence in the professional judgment of the Liquidators. Any of these allegations, if proved, is a sufficient ground for their removal. The Petitioner relies on the following matters as evidence in support of the above grounds:

(1) entertaining completely spurious proofs of debts in favour of Ken and his camp;

(2) making false allegation about “recent hidden” tax liability;

(3) forgoing investigations and claims against Ken and his camp;

(4) positively assisting Ken in the trial of the Main Action against the Father;

(5) insistence on continuing with the various legal actions commenced by the Liquidators against the Father and his camp; and

(6) exaggerating the alleged non-compliance of a production order against Seline.

32.  These allegations are denied by the Liquidators.  These six heads of complaints will be analyzed in the above order.  Then, in the light of my findings on these complaints, I shall determine the questions of staying the WU Order, the removal of the Liquidators and costs.

A preliminary point — The terms of the Petitioner’s summons

33.  Before the parties engaged in substantive argument, Mr Barlow SC raised a construction point relating to the second relief sought in the summons, ie. that the appointment of the Liquidators be discharged.  He said he was shocked to read the Petitioner’s skeleton argument given to him a week before the hearing seeking the removal of the Liquidators for cause.  He submitted that removal for cause was outside the express terms of the summons which only sought their discharge and the Liquidators had not filed evidence to meet this new case.  He quoted Red Victory Group Ltd v Lam Hok Chung Rainier and anor (Liquidators)[19]and Duffy v Super Centre Development Corporation Ltd[20]and submitted that removal of an officer of the court was a very serious matter and before any application for removal was heard, the Liquidators must be given the opportunity to provide evidence responding to every charge of misconduct and such charges need to allege something more serious than an erroneous commercial or other decision.  He also quoted In re Smith and Fawcett Ltd[21] in which it was held that if the application was based upon allegations that the liquidator had acted in bad faith, then the application need to require the attendance of the relevant witnesses for cross-examination.

34.  I have no disagreement with these principles.  But the question is what is the true construction of the Petitioner’s summons.  The usual rules of construction of document applies equally to construction of a summons.  Construction of a document is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of making the document: Investors Compensation Scheme Ltd v West Bromwich Building Society [22]. 

35.  Mr Barlow SC submitted that “discharge” is a neutral word, which may or may not carry any connotation of misconduct.  I agree.  According to the Shorter Oxford English Dictionary[23], “discharge” means “relieve, exonerate, release from relieve of residual liability”; but it could also mean “dismiss from office or employment”.  What that word means depends on the context or the factual matrix.

36.  The Petitioner’s summons has to be read against the factual background.  The summons was issued expressly pursuant to sections 196 and 209 of the Companies (Winding Up and Miscellaneous Proceedings) Ordinance and the inherent jurisdiction of the court.  Section 209 gives the court jurisdiction to stay a winding-up order permanently or for a limited duration.  It is trite that once a permanent stay is granted, the liquidation is for all practical purposes at an end.  The liquidator may be discharged, control of the company reverts to the directors and the company may resume its business: Re Outboard Marine Corp Asia Ltd [24]. Section 196 provides that a liquidator appointed may resign or be removed by court on cause shown.  There is no suggestion that the Liquidators were seeking to resign or that the Petitioner was seeking their resignation.  If the Petitionerwas not seeking removal, there was no need to make reference to section 196.  The Liquidators’ appointment would automatically terminate upon the court making an order for permanent stay.  It is obvious that the Petitioner is seeking the court’s jurisdiction to have the Liquidators removed for cause.

37.  The third relief sought by the Petitioner is strikingly hostile.  Liquidators are officers of the court discharging duties on behalf of the court.  The usual costs orders in an application for their discharge, even if successful and after contest, would not require them to personally bear costs.  In the light of the pre-action correspondence, the Liquidators could entertain no belief that the Petitioner was just seeking their honourable discharge.

38.  Indeed, the evidence filed in support of the application puts it beyond doubt that the Petitioner was seeking to have the Liquidators removed for cause.  In paragraph 24 of Seline’s 10^th affirmation, she said:

“ I verily believe that the Liquidators had kept searching for excuses to generate work for themselves with a view to burn up the funds/assets of [Luen Tat], and they did not act in the interest of [Luen Tat’s] sole shareholder and/or stakeholder, ie our Late Father’s estate. Further, the Liquidators have been very hostile and uncooperative, and they have been seizing opportunities to oppress members of our family.”

Then she continued all the way from paragraph 25 to paragraph 49 making allegations of misconduct and concluded by asking the court to make an order in terms.

39.  On the other hand, the Liquidators also had no misunderstanding that the Petitioner was seeking to remove them for cause.  In paragraph 1 of his affidavit, David Yen acknowledged that the relief sought was pursuant to section 196 and it was on that basis that he responded to the evidence filed by the Petitioner.  He also expressly acknowledged in paragraph 3 of his affidavit that among the grounds in support of the application for stay and their discharge was the Petitioner’s dissatisfaction of their conduct in the liquidation.  He must have known that this was an application for their removal for cause and not for their honourable discharge.  Then he went into great details in his 55-page affidavit to defend the allegations of misconduct made against them.

40.  Given the context in which the word “discharged” was used, particularly the reference to section 196; the very hostile costs order sought; and the factual matrix, any reasonable reader would understand it to mean “removed” for cause.  I find that the Liquidators and their legal teams clearly knew that the Petitioner were seeking a stay of the WU Order, their removed for cause and a cost order against them personally.  For the above reasons, I consider the Liquidators’ assertion that they were shocked to learn that the Petitioner wasmaking a belated attempt to incorporate a section 196 removal application into a section 209 stay and discharge application untrue.  I reject their argument that removal is outside the term of the Petitioner’s summons disingenuous.

41.  The Liquidators’ complaint that they ought to have been but were not given the opportunity to respond to the serious allegations made against them and to adduce evidence in their defence is disingenuous. They did not find it necessary to seek an adjournment to enable them to make further preparation.  Obviously, they knew this application is a removal application; they knew what charges were made against them; they had had the opportunity to answer those charges; and they had made use of that opportunity by coming forward fully armed to answer the charges by filing David Yen’s 55-page affidavit.  As the Liquidators did not ask for an adjournment, I shall proceed with the application on the basis that it was an application for stay and for their removal for misconduct and they were ready to contest the application. 

42.  The Petitioner’s use of the word “discharged” in the summonswas unfortunate.  But in any event, an application for stay under section 209 can be mounted on, inter alia, unreasonable conduct of the liquidators and the court has jurisdiction to order costs against the unsuccessful party.  Thus, if the court is satisfied by reason of the liquidators’ unreasonable conduct that the winding-up proceedings ought to be stayed, the court may grant a stay and order the liquidators to be discharged with costs against them personally, and in an appropriate case on indemnity basis.  In the present case, there is no misunderstanding that the application for stay was made on the basis of the Liquidators’ conduct.  Even if the application were mounted on section 209 alone, this court has jurisdiction to grant a stay and to discharge the Liquidators with costs against them personally.  On the factual circumstances of this case, there is no difference in form or in substance whether the application was made for the Liquidators’ discharge or for their removal.

ENTERTAINING SPURIOUS PROOFS OF DEBT

Ken’s proof of debt for 52.8 million

43.  In August 2016, eight months after the CFI Judgment was delivered dismissing his counterclaim for all profits of the Company, Ken lodged this proof of debt for $52,879,963.53.  The basis of his claim is that the sales by the Company to Apple Inc between April 2008 and June 2010 (the “profits of the Apple business”) belonged to him personally, but was booked to the Company’s account.  He produced extracts of the books and records of the Company as documents in support of his claim.  The extracts only corroborate the amount of his claim but do not provide evidence of the basis of his claim.  Other than his bare assertion that the sales belonged to him, there was a total absence of evidence in support.  On 17 May 2017, two months before this hearing, the Liquidators wrote to Ken requesting for documentary evidence in support.

44.  This claim was the subject matter of his counterclaim in the Main Action back in 2009.  The Father, Seline, Ken and David Cho, among others, gave evidence.  The Father’s case was that he was the 100% beneficial owner of all the shares and profits of the Company but he was ousted by Ken in August 2008.  Ken’s case was that at a meeting held on 31 October 2008, it was agreed that he should be entitled to 100% of the profits of the Company (the “2008 Agreement”).  The court accepted the Father’s and Seline’s evidence and rejected Ken’s.  That claim is res judicata.  Now Ken renewed his claim but called it profits from the Apple business.  According to his witness statement in the Main Action made in September 2013, he accepted that the profits from the Apple business belonged to the Company or the group.  While there is a subtle difference between being entitled to all the profits under the 2008 Agreement and being entitled to all the profits of the Apple business which formed part of the profits of the Company, the greater must include the lesser. 

45.  To salvage his spurious proof Ken sought to justify his claim on the grounds of unjust enrichment, mistake and quantum meruit.  None of these grounds can stand in the light of how he ran his case in the Main and in the light of the findings in the CFI Judgment. His claim is plainly incredible as being contrary to his case in the Main Action.  In the Main Action, his argument that his role of bringing in new business constituted good consideration for the agreement of 31 October 2008 was rejected.  Deputy Judge Leung judge said at paragraph 212 of the CFI Judgment:

“ 211. In court, Ken suggested, but not without hesitation, that he had the right to bring the Father to the court, if the latter changed his mind about the distribution of profits allegedly agreed upon. Yet what was it that would have prevented the Father from changing his mind? Throughout the trial, Ken kept labouring on the significance of his contribution towards the business of the group⁶⁰. Reference was made to specific instance such as the so-called ‘Apple’ business.

212. The Father did fairly acknowledge his son’s contribution to the family business.  So did he with respect to his other 2 children’s contribution.  Ken’s evidence, particularly that in court, was testament to his own perception of what he deserved, which was largely premised on his mentality that he was the major contributor by bringing in business to the group.  But one should not lose sight of the very fact that it was equally Ken’s duty towards the company, for which he received his remuneration and performance bonus.  Business, albeit introduced by Ken, was concluded with Luen Tat’s group, and the goodwill of this manufacturing business had presumably been in the forefront of its business counterpart’s consideration.  In other words, his contribution per se was not of such nature and did not arise in such circumstances that would have created some kind of equity estopping the Father from changing his mind about the profits distribution, even if agreed upon.  There was no clear, if at all, evidence suggesting otherwise.”

_______________________________

⁶⁰ Re-re-amended defence and counterclaim, §39B; Ken’s statement, §§10 – 19.

Clearly, there could have been no unjust enrichment as it was Ken’s duty as director to generate business for the Company.  Had he not wrongfully and greedily alleged a binding agreement entitling him to 100% of all the profits of the Company, he would have obtained the lion share in the Company’s profits by way of remuneration and performance bonus. 

46.   Ken’s argument that the Apple business was secured by him in his personal capacity or that he could claim quantum meruit is completely negated by his own evidence and the findings in the Main Action.  It is utterly contrary to basic principles of fiduciary duty owed by company directors.

47.   His argument of mistake is absurd when the finding in the Main Action was that it was Ken who used improper means to lure or coerce the Father to sign false minutes of shareholders’ meeting which purported to show a binding agreement was reached giving him 100% of the profits of the Company.  His act was the fraudulent design which induced the Father to sign the false minutes.

48.   The genesis of this proof of debt not only bears the hallmark of a recent concoction, but speaks volumes of Ken’s bad faith.  The Company was ordered to be wound up in July 2010.  Judgment in the Main Action was delivered in December 2015.  But Ken did not lodge this proof until August 2016 which was more than eight months after the CFI Judgment dismissing his counterclaim.  In this proof he alleged for the first time over six years after the WU Order was made that the profit from the Apple business belonged to him.  Obviously, it was after the court had rejected his alleged entitlement to all the profits of the Company that he turned around to pursue the inconsistent argument that the Apple business belonged to him personally.  The irresistible inference is that he took eight months to concoct a different case to resurrect the claim which he had lost in the Main Action.  This new claim is res judicata.  He is estopped from raising a new basis of claim which he could have reasonably raised in the Main Action.

49.   Any reasonable liquidator would have respected the CFI Judgment and rejected Ken’s claim as bogus.  But, instead of paying heed to the CFI Judgment, the Liquidators kept this, what I call an “empty”, proof alive for nine months.  David Yen said in his affidavit that Ken was appealing and it was not a forgone conclusion that the appeal would be dismissed.  He was optimistic that the appeal would be allowed.  This might arguably be an error of judgment, though I would not find it was.  Then, he went all out of his way to even provide arguments for Ken that he could be entitled to claim as a former employee and/or agent, when such arguments were not even pursued by Ken himself[25].  The Liquidators’ argument in overt assistance for Ken is clearly unsustainable in view of how Ken ran his case in the Main Action and in view of the court’s unequivocal reasoning in dismissing his counterclaim.  This shows the length to which the Liquidators were prepared to go in siding with Ken.  This is positive assistance which could not have been the result of an error of judgment.  It is clear evidence of bias.

50.   In January 2017, the Court of Appeal dismissed Ken’s appeal and upheld all the findings of the Court of First Instance.  By this time, any liquidator, however obstinate, should have respected the Court of Appeal Judgment and both courts’ criticism of Ken’s credibility.  Again, the Liquidators ignored the finding of both courts as being observations which have no bearing on the proof of debt.  Also, very remarkably, just two months before this hearing, they wrote to Ken asking for documentary proof in support.  Now, they argued that they had to investigate into this outstanding proof as a ground for resisting the application to stay.  Clearly that was a tactical move to keep Ken’s proof alive and to justify their continuation in office.  Such argument is disingenuous.

51.   The above facts show that even after Ken’s appeal was dismissed, the Liquidators did not resile from their position.  In the light of the Court of Appeal Judgment, they have no further reasons or excuse to keep Ken’s proof alive.  Were they acting properly and keeping a truly neutral stance, they should have sought leave to file a new affidavit setting out their revised position as a result of the Court of Appeal Judgment.  They should not have continued to rely on Ken’s proof to support their case that the Company was massively insolvent and to justify their continuation in office.  Instead, they did precisely the opposite.  Two months before this hearing, they wrote to Ken asking for documentary evidence and used that as a reason to justify their continuation in office to adjudicate on this blatantly spurious proof of debt.  Were they negligent and/or incompetent in not issuing this requisition earlier?  Was the requisition a mere show to justify their stay in office?  Obviously, their intention was to fortify Ken’s case and to create a reason for their continuation in office.  As officers of the court, the Liquidators’ duty was to give effect to the order of the court.  Their repeatedly ignoring the findings of both the Court of First Instance and the Court of Appeal, their advancing a new argument to justify Ken’s claim, which argument was not even raised by Ken himself, and their attempt to fortify Ken’s claimtantamount to annulling the findings of the court.  On any view, such conduct demonstrated that they were determinedly biased in favour of Ken against the Father and his camp.  They have forgotten that they are officers of the court and are now pursuing their own agenda and the interest of their new master.  Their conduct certainly gives rise to a real and reasonable loss of confidence in them by the contributories.

Ken’s proof of debt for $1.15 million

52.   Ken lodged a new proof of debt recently in the sum of $1,147,500 for his partial settlement under HCA 2137/2012 in which the Liquidators sought to recover the tax penalty of $3.4 million imposed on the Company as a result of the re-invoicing scheme.  The Liquidators rejected that proof.  Ken took out a summons appealing the Liquidators’ decision.  The appeal has not yet been determined by the court.  Ken was one of the directors of the Company when the re-invoicing scheme was implemented.  He must be liable to the Company for negligence or breach of duty.  As HCA 2137/2012 was commenced by the Liquidators, the Liquidators were bound to reject his proof of debt.  There is no complaint about the Liquidators’ rejection of this proof.  It is mentioned for the purpose of giving a whole picture of the Liquidators’ conduct.

Sun Moral’s proof of debt for $2.4 million

53.   Sun Moral Ltd (“Sun Moral”) is a company owned and controlled by Wong Shun Chiu (“Wong”).  On 13 August 2012, it filed a proof of debt for $3,273,725.56 in respect of alleged quality control services provided to the Company.  The supporting evidence consisted mainly of an invoice in the sum of $2,416,091.45 dated 31 October 2009 issued to the Company in respect of services rendered between April 2008 and October 2009 and another one in the sum of $108,000 for services rendered in November 2009.  It also included a claim for an outstanding balance of $516,091.45 which was unsupported by any invoice.  But there was no objective evidence of actual performance of the alleged services.

54.   This proof, at least insofar as the invoice for the sum of $2,416,091.45 is concerned, is blatantly bogus on two counts.  First, unlike Shenzhen Lianda, the Company did not carry out any manufacturing activities.  The services if they had been rendered were to Shenzhen Lianda and not the Company.  Second, Sun Moral was only incorporated in September 2009 and could not have rendered services since April 2008.

55.   What is more curious was the Liquidators’ suggestion that the proof be filed jointly by Wong and Sun Moral or by Wong via Sun Moral. This suggestion was contradicted by documents filed by Sun Moral itself.  There was not an iota of evidence in the documents submitted to suggest that Wong was the rightful claimant.  In fact, Wong was not even a shareholder of Sun Mora.  It does not appear to me that the Liquidators were trying to help out a genuine claimant in overcoming technicality in making a claim. 

56.   Then, despite all these defects, particularly the bogus nature of the claim at least insofar as the sum of $2,416,091.45 was concerned, shortly before this hearing, the Liquidators admitted this proof.  The following questions cry out for an answer.  What was the motive behind the Liquidators’ suggestion in the preceding paragraph?  In the face of this blatantly bogus claim made against a wrong party at a wrong time, any reasonably liquidator would have rejected it in no time.  Why would the Liquidators have admitted it?  Why did they sit on it for five years from 2012 through to 2017 and then admitted it shortly before this hearing seeking to remove them?  Did they do so for fear that they would have no authority to admit it after this hearing?  Besides these, the same questions which I raised in relation to Ken’s proof of debt may also be asked in respect of this proof of debt.  The Liquidators’ decision was perverse.

Wong’s proof of debt for $36 million

57.   In March 2016, Wong filed this proof for $36 million in respect of one quarter of the capital investment used to acquire land held by Shenzhen Lianda.  This claim was based on two Chinese notes dated 1994 and 1995. Between 1992 and 2002, the Father, not the Company or Pak Tat, through his sole proprietorship of PTTC was the sole shareholder of Shenzhen Lianda.  The CFI Judgment had put it beyond doubt that the Company had no interest in the shares of Pak Tat or Shenzhen Lianda.  Even if the claim could be substantiated, it could not possibly be translated into a monetary claim against the Company at all.  Any reasonable liquidator would have rejected this proof forthwith.  However, the Liquidators just sat on it.  I think, they were just keeping the proofalive to wait for the outcome of Ken’s appeal in the hope of justifying their continuation in office.

58.   In the Court of Appeal, Ken tried to rely on the same two Chinese notes to support his case that Wong was in fact a part shareholder of Shenzhen Lianda.  Ken’s spurious argument was unreservedly rejected by the Court of Appeal, which noted that the argument was completely contradictory to Ken’s own case run at trial and his witness statement that he and the Father each owned 50% of the interest in Shenzhen Lianda through Pak Tat. Ken’s assertions in that witness statement had been rehearsed before Harris J in HCCW 236/2011 and were rejected.  Yet, in the face of Harris J’s judgment, the CFI Judgment and the Court of Appeal Judgment, the Liquidators still kept this proof alive.    

59.   In May 2017, just two months before this hearing, they asked Wong for a copy of the judgment from the People’s Court in Shenzhen (“the Shenzhen Court”) in respect of Wong’s similar claim filed in Shenzhen.  David Yen said he learned about this judgment from the liquidators of Pak Tat.  Having obtained that judgment, the Liquidators ought to know that Wong had mounted a similar case on the same basis in Shenzhen in 2013, but his action was dismissed by the Shenzhen Court on 4 November 2016.  In rejecting Wong’s claim, the Shenzhen Court held that the cooperative agreement dated 7 June 2012 between Ken and Wong which was purportedly entered into to “ratify” the fact that Wong had part interest in the factory premises of Shenzhen Lianda was unreliable, especially as Ken was in litigation with his Father in Hong Kong.  This showed that Ken and Wong had been in cahoots with each other all along.  Now they had another confirmationfrom the Shenzhen Court that Wong was not credible. 

60.   But, until this hearing the Liquidators were still beating their drums on this proof of debt and relying on Wong’s explanation that he had sued the wrong party in Shenzhen as a reason for keeping this proof alive and were arguing before this court that despite allegations that Wong was an associate of Ken “it does not logically follow that his claims are unmeritorious”.  The purpose was to boost up the Company’s insolvency and to justify their continuation in office to adjudicate on this proof of debt.  While Mr Barlow SC submitted in his written skeleton argument that the Liquidators were inclined to reject this proof, it remained the Liquidators’ position as stated in David Yen’s 2^nd Affidavit that they are still considering this proof and are relying on it as evidence that the Company is substantially insolvent so as to resist the stay application.  David Yen’s affidavit stands as evidence of his perverse conduct from which the inference of bad faith and bias in favour of Ken’s camp may be drawn.  It shows that these officers of the court were prepared to ignore the findings of this court and the Court of Appeal so long as it suited their purpose to do so.  They went all out of his way trying to nullify the findings of these courts to assist Wong, a known associate of Ken.  That was done for the purpose of keeping this blatantly unmeritorious claim alive so as to justify their continuation in office.  They have obviously put their personal interest before those who are ultimately interested in the asset of the company placed in their control.  They are in breach of their fiduciary duty.  They are bias and have lost their independence.  Their conduct gives rise to a real and reasonable loss of confidence in them.  Their conduct has forfeited the confidence of the court.

Tang’s proof of debt for $2 million

61.   Tang Tsan Man (“Tang”) was the factory manager of Shenzhen Lianda.  He was Ken’s associate.  Together, they ousted Richard from Shenzhen Lianda.  In February 2013, he lodged a proof of debt for $2 million, being 5% of the annual profit the Company on the basis of an alleged profit sharing agreement starting from 2005. 

62.   Tang put forward no evidence in terms of payment records or tax returns.  He alleged that the agreement was approved in writing at the directors’ meeting of the Company.  That agreement never featured in the trial of the Main Action during which considerable time was spent on how the profits of the Company were to be distributed between the Father, Ken and the other family members.  Tang alleged default in payment since 2009, but he only lodged the proof in 2013.  The claim appeared suspicious. 

63.   The Liquidators sat on this proof for four years without verifying this assertion.  I understand that they had taken out parallel proceedings and obtained a production order against Seline requiring her to produce documents to enable the Liquidators to verify this claim.  Seline confirmed that she did not have such documents in her possession, custody or power.  The Liquidators are seeking to enforce that production order.  I find the position of the Liquidators inexplicable.  The burden is on the claimant to substantiate his claim and not for the Company to produce documents to help him to substantiate his claim.  Presumably, the Liquidators had access to the Company’s directors’ meeting minutes, which would have shown whether Tang’s alleged agreement existed.  If for four years, they did not admit this proof, the inference must be that the Liquidators were unable to satisfy themselves that the claim was genuine. 

64.   Mr Wong SC, leading counsel for the Petitioner, submitted that this claim is unmeritorious and should not have been relied on as making up the “insolvency” claim for the purpose of opposing the stay application.  As this particular proof was not relied on by the Liquidator at the hearing, I agree with Mr Wong SC’s submission.  This proof is spurious.  In any event, this is only a small claim which could be covered by the Petitioner’s undertaking.  This proof of debt differs in many respect from the other proofs.  Even though I feel doubtful about the Liquidators’ motive in keeping this proof alive for four years without an adjudication, I respect the presumption of good faith and draw no adverse inference against them in respect of their handling of this proof of debt. 

FALSE ALLEGATION OF “RECENT HIDDEN” TAX LIABILITY

65.   The Liquidators had been singing and dancing about the their “recent” discovery of the Company’s further “hidden” tax liability of $24 million to $72 million.  They argued that this “hidden” liability would render the Company massively insolvent and hence justify dismissal of the application to stay the WU Order and their continuation in office to investigate this “recent hidden” tax liability, to preserve commercial morality and protect public interest.  That was one of their reasons for refusing to consent to a stay of the WU Order on a no costs basis.  On the other hand, the Petitioner relied on the Liquidators’ conduct in raising this issue as evidence of their bias, bad faith and its loss of confidence in them. 

66.   At the hearing Mr Barlow SC accepted that, the Liquidators having reported the matter to the Inland Revenue Department recently, the issue if unresolved could be dealt with by the Company’s directors themselves upon a stay of the WU Order.  He accepted that the “recent hidden” tax liability issue cannot be a ground for resisting the application to stay.  Despite that concession and that he did not raise any argument based on the Liquidators’ affidavits relating to this issue, the Liquidators’ conduct in raising this issue as a ground to justify their continuation in office does not disappear like a puff of smoke in the air.  David Yen’s affidavit stands as evidence of the Liquidators’ conduct before this hearing from which inference of bad faith and bias may be drawn.

67.   The Liquidators’ and Ken’s argument is that under the re-invoicing scheme Shenzhen Lianda sold products to Yuen Hing at cost, which Yuen Hing resold to the Company at a profit.  Yuen Hing therefore captured the profits of the Luen Tat group, which should be treated as profits of the Company and subject to Hong Kong profits tax.  Though a settlement hadbeen reached with the Inland Revenue Department for payment of additional tax and penalty, Ken argued that there would be further liability in tax and penalty arising from the Liquidators’ “recent” further investigations and discoveries.  These discoveries are basically that Shenzhen Lianda had maintained two sets of management accounts, discrepancies between the expenses according to these two sets of accounts and the discrepancies between Shenzhen Lianda’s financial statements and Yuen Hing’s financial statements.  His arguments are basically those advanced by the Liquidators in David Yen’s affidavit.

68.   First, it lies ill in the Liquidators’ and Ken’s mouth to assert there was any new “recent” discovery.  Back in September 2010, Ken and David Cho, accompanied by David Yen in his then capacity as provisional liquidator, reported the re-invoicing scheme to the Inland Revenue Department.  David Cho explained in detail how the re-invoicing scheme worked and produced the two sets of accounts.  The existence of the two sets of accounts was evidenced in the Note of Interview prepared by the interviewing assessors dated 1 September 2010.  The two sets of accounts and the discrepancies created therefrom must have been considered by the Inland Revenue Department when assessing the further tax and penalty.  That resulted in a full and final settlement by the Company paying $9.7 million additional tax and $3.4 million penalty in May 2012.

69.   Then two and half years down in time, in October 2014, the Liquidators said that they discovered further tax evasion activities by reasonof the discrepancies between Yuen Hing’s audited accounts and the expenses recorded in Shenzhen Lianda’s accounts, including the audited financial statements and management accounts.  They alleged that relevant information might have been withheld from the Inland Revenue Department between 2010 and 2012. But, all this information had been disclosed to the Inland Revenue Department back in 2010 during Ken’s interview before the assessors in the presence of David Yen.  Ken and David Cho had fully exposed the re-invoicing scheme and the two sets of accounts before the assessors.  Specifically, David Cho had told the assessors about the two sets of accounts kept by Shenzhen Lianda; that its sales and purchases were understated to match the local customs declarations; and that additional expenses in Shenzhen Lianda’s internal management accounts were booked under Yuen Hing.  The Liquidators, in their then capacity as provisional liquidators, were also in possession of Yuen Hing’s audited account.  I have to come to the regrettable conclusion that these officers of the court were actively misleading this court by calling these documents as “recent” discoveries.  Furthermore, for them to assert that therefore “information might have been withheld from the Inland Revenue Department between 2010 and 2012” was rather artificial.  Then, in June 2017, which was about a month before this hearing, they wrote to the Inland Revenue Department inviting them to investigate and to lodge a fresh proof of debt.  Their conduct and the timing suggests that this is another tactical move in an attempt to boost up the Company’s insolvency so as to support their continuation in office.

70.   It is interesting to note that October 2014 was just three months after the Liquidators’ appeal to uplift the stay of two of their actions against the Father, Richard and Seline was dismissed by Deputy Judge Poon and while the trial of the Main Action was progressing in parallel.  It is also interesting to note that for the two and half years between October 2014 and June 2017, the Liquidator just sat on this what they alleged to be an important matter of commercial morality and great public interest which caused the Company to be massively insolvent as to justify their further investigation and continuation in office.  But they did nothing and discovered nothing.  The whole basis in support of their allegation of further “recent hidden” tax liability was that Shenzhen Lianda had kept two sets of accounts, which they knew for ages.  They were just concocting a case which never existed.  They were misleading this court and blowing the issue out of all proportion by raising issues of commercial morality and public interest, which I shall deal with further later.

71.   Second, it also lies ill in the Liquidators’ and Ken’s mouth to argue that there was any further “hidden” tax liability.  As explained by Elaine Pui who is a qualified tax-practitioner, ex-lecturer and ex-tax officer of the Inland Revenue Department, it is extremely unlikely that the Company would face further tax liability and penalties for the following reasons.  The two sets of accounts were before the Inland Revenue Department.  The discrepancies between Shenzhen Lianda’s two sets of accounts were not uncommon and were explicable by reference to custom practice and accounting practice in the People’s Republic of China.  It is not the practice of the Inland Revenue Department to re-open a further assessment against a company after having reached a full and final settlement.  The Inland Revenue Department is also barred from imposing further penalty or additional assessment under sections 60 and 80 of the Inland Revenue Ordinance.  This expert opinion was not challenged by the Liquidators.  The Liquidators also offered no evidence of intervention by the Inland Revenue Department since their last reporting of the “recent hidden” tax liability in June 2017.  This supported the expert evidence of Elaine Pui.

72.   To further justify their stay in office, David Yen smeared the Lee family by describing the Father as having “carried out a large scale tax evasion scheme using the Company and other companies owned and/or controlled by them (and/or different members of the Lee family)” by way ofthe re-invoicing scheme.  He then raised issues about “commercial morality and improprieties that demand their stay in office to continue with the investigation, which they had sat on for two years.  While investigating into the affairs of the company is one of the functions of the liquidator, investigating into tax evasion matters is just an ancillary function.  The Liquidators would have sufficiently discharged their duty by reporting their finding to the Inland Revenue and rendering such assistance as is required.  The further conduct of such investigation is a matter for the Inland Revenue Department.  As Mr Barlow SC rightly accepted that, the Liquidators having reported the matter to the Inland Revenue Department recently, the issue if unresolved could be dealt with by the Company’s directors themselves upon a stay of the WU Order.  The Liquidators’ argument that they should continue in office to investigate into the tax evasion matters of the Company is a non-sense which they themselves, presumably on proper legal advice, have abandoned at the hearing.  But their argument speaks volumes of their self-interest in the performance of their public duty.  Now that the Liquidators have made a further reporting, the matter should rest with the Inland Revenue Department. 

73.   The Liquidators and Ken were just re-dressing those same stale matters as if they were recent discoveries.  This ground of objection was not made bona fide.  The Liquidators, David Yen in particular, were deliberately misleading this court by not disclosing the fact that he was at the interview with the Inland Revenue Department and that he knew full well about the two sets of accounts six to seven years ago.  Then they concocted this “recent hidden” tax issue to justify their continuation in office.  Not only was their conduct improper, it is evidence on which the inference that these officers of the court were attempting to mislead the court in order to support their objection to a stay of the WU Order and to justify their continuation in office may be drawn.  This is also evidence of their bias against the Father and self-interest in their performance of their public duty which justifies their removal from office.

FORGOING INVESTIGATIONS AND CLAIMS AGAINST KEN’S CAMP

Ken’s misappropriation of $28 million

74.   As was found in the Main Action, Ken caused Seline to pay $28 million from Yuen Hing to his personal accounts on the excuse that it was part of the $53.6 million of the Company’s profits kept by Yuen Hing.[26]  The court found that the excuse was false as there was no such profit kept in Yuen Hing’s account; the Father had never admitted that there was such sum in Yuen Hing’s account; and that Mazars’ calculation on which Ken’s excuse was based was misconceived.  The court noted that “the claim was dropped to avoid complication as the same should now be matter for [the Liquidators]”.  The court also dismissed Ken’s counterclaim for the balance of $25.6 million from this sum of $53.6 million.  Ken appealed against the dismissal of his counterclaim but then abandoned it and was ordered to pay indemnity costs.  On the basis of these findings, there was simply no such sum of $53.6 million profit kept in the account of Yuen Hing.  Accordingly, Ken had misappropriated the sum of $28 million from Yuen Hing, which he caused Seline to pay to him.  However, the Liquidators took no action against Ken to recover this sum.

75.   Yet, instead of pursuing Ken for this clearly misappropriated sum, the Liquidators insisted on pursuing the Father and Yuen Hing for the balance of $25.6 million allegedly kept in Yuen Hing’s account, which the court had held did not exist[27].  The Liquidators’ action in the face of the court’s findings was absurd.  It demonstrates irrational preference in favour of Ken and against the Father.  It also gives rise to loss of confidence in the Liquidators by the Petitioner.

Ken’s misappropriation of $30 million

76.   The Company’s record showed that Ken had withdrawn $30 million from the Company to pay his son Joseph.  Upon being challenged by the Father, Ken replied after three months that the money was for “normaldirector’s account reserved for urgent expenses.”  The Liquidators refused to commence any action against Ken.  They were unable to provide the Father with any details of urgent expenses or evidence showing such expenses were incurred.  Even assuming it was within the director’s discretion to apply company’s funds for urgent expenses, the Liquidators’ failure to make investigation in what they alleged to be a massively insolvent company for the purpose of recovering its assets is inexplicable.  Their inaction in the total absence of supporting evidence that such an enormous sum had been incurred on unexplained urgencies gives rise to doubts as to their impartiality or professional competence; or at least a loss of confidence in the Liquidators by the Petitioner.

Ken’s wrongful deletion of Company’s data

77.   In their first report, the Liquidators stated that Ken had taken deliberate measures to destroy and conceal the data on the Company’s computers which were “essential to resolve [the Company’s] tax issues and to ascertain the extent of the asset dissipation and business diversion”.  Later, they changed their stance and said it could not be confirmed who deleted the data.  In an update to the Committee of Inspection dated 4 March 2011, the Liquidators reported[28]:

“ … two of the computers’ hard disks had been removed and mass deletion had been carried out on several other computers to permanently remove the information on these computers. …

… a few of the computers had newly installed operating systems shortly before the appointment of the provisional liquidators … [which] installation had the effect of wiping out information in those computers. …”

“ … It is probable that there was a deliberate attempt to destroy the Company’s [computer] records to facilitate the transfer of the Company’s business to other parties [and] the loss of the Company’s [computer] records has adversely affected its ability to pursue its other potential claims and as a result, suffered damages.”

78.   I start with the presumption of good faith and assume that at the time of the later report the Liquidators did not honestly know who was responsible for deletion of the data from the computers.  However, they must know that the computers contained important information about the Company’s affairs because they believed the computers contained evidence of transfer of the Company’s business to other parties.  There was also no doubt in their minds that the computers had been tampered with resulting in loss of important data causing damage to the Company.  Yet, they refused to refer the matter to the Commercial Crime Bureau until a very late stage.

79.   What is more baffling is their sitting on the computers for years without retrieving much information about the Company’s accounts from this very important source of information.  However, when these computers were passed to Richard pursuant to a court order, Richard was able to reconstruct 480,000 files within two weeks using a software that only cost $2,000.  Thereconstructed files revealed, inter alia, that Ken had misappropriated the said sum of $30 million from the Company and evidence supporting transfer of the Company’s business to companies owned and controlled by Ken, namely Hengfung Precision Limited (“Hengfung”) and Kenta Precision Limited (“Kenta”).  Who else but Ken could have been responsible for removing the hard disks and deleting the Company’s data from its computers and replacing its system with a new one?  If the Liquidators’ inaction was intentional, it must because they were protective of Ken and were therefore bias in favour of him.  If it was not, they were hopelessly negligent and incompetent.  Either way, it would justify their removal on grounds of bias or loss of confidence in their professional competence.

80.   Furthermore, the Liquidators rejected Seline’s request in January 2017 to forward the Company’s papers to the Commercial Crime Bureau to re-open the investigation against Ken.  That was after the delivery of the CFI Judgment and the Court of Appeal Judgment.  In the light of those judgments, the Liquidators should have woken up from the Ken’s spell, if they had been misled by him.  In the face of the retrieved data showing Ken’s misappropriation of the sum of $30 million and diversion of the Company’s staff and business, the Liquidators’ obstinate refusal to refer this matter to the Commercial Crime Bureau is illogical and inexplicable except for reason of bias.  Why should the Liquidators refrain from referring it to the police?  What was the objection to let the professionals make investigation into these prima facie criminal activities?  Why should they protect Ken from possible prosecution?  Their refusal is contrary to the “commercial morality and public interest” stance they took in insisting to remain in office to investigate in a stale and settled tax issue seven years ago which they dress up as “recent hidden” tax liability.  Their refusal is in stark contrast with the very oppressive manner they conducted the litigations against the Father and his camp.  Their behaviour left me in no doubt that they were protective of Ken and were heavily bias in favour of him against the Father.  They were not acting in the best interest of the Company but in Ken’s best interest.  They have forgotten they are officers of the court and have acknowledged Ken as their new master.  They have forfeited the confidence of this court.

Ken’s diversion of Company’s business and staff

81.   As was found by the court in the Main Action, shortly after he had ousted the Father from the Company in June 2009, Ken started to divert the business and staff of the Company to other companies controlled by him, namely Hengfung Precision Limited (“Hengfung”) and Kenta Precision Limited (“Kenta”)[29].  This is borne out by the documents retrieved from the Company’s computers.  As early as 2013, the Petitioner had written a detailed letter to the Liquidators pointing out, inter alia, such diversion.  The Petitioner expressed its concern about their competency and impartiality.  The Liquidators had been reminded of their duty to act impartially, had they overlooked it.  Yet, they took no action against Ken in respect of these damaging activities against the Company.  The only explanation they proffered was that the Company’s profit margin and profits had improved.  Such explanation is illogical and wholly unacceptable.  The Liquidators’ inaction is evidence of their bias and incompetence.  It also gives rise to a perception that they were biased and gives rise to a real and reasonable loss of confidence in them by the Petitioner.

No action against Mazars for professional negligence

82.   As analysed above, the Liquidators must know, in view of David Cho’s admission in David Yen’s presence during that interview that David Cho and/or Mazars were the architects of the re-invoicing scheme.  David Cho and/or Mazars owed contractual and common law duty of care to the Company. They could have absolutely no defence to an action by the Company for professional negligence.  They would have been the most ideal and cost effective targets for recovery as they were probably covered by insurance.  The Liquidators must know that the Company has a meritorious and indefensible claim against David Cho and/or Mazars for professional negligence. 

83.   While so rigorously pursuing against the Father, Richard, Seline and their companies for money allegedly siphoned off from the re-invoicing scheme and for penalty paid as a result and not even letting go the court’s order staying those actions pending the trial of the Main Action, the Liquidators refused to take legal action against David Cho and/or Mazars for professional negligence. In the face of Seline’s accusation of bias, theLiquidators just kept silent.  What I find ironical with David Yen’s high sounding ideal of protecting commercial morality is the Liquidators’ refusal to take actionagainst David Cho and/or Mazars who were the professional tax advisers responsible for advising the Father and the Company and for designing and implementing the re-invoicing scheme.  Their refusal to bring any action against David Cho and/or Mazars and their silence in the face of Seline’s accusation of biasspeaks volumes of their bad faith, self-interest, bias and persecution against the Father and his camp.

ASSISTING KEN IN THE TRIAL OF THE MAIN ACTION

84.   The Petitioner alleged that the Liquidators assisted Ken in his conduct of the trial of the Main Action against the Father and charged fees against the Company.  On the fact, the Liquidators sent a manager to attend court throughout the trial of the Main Action.  In the middle of the trial, the Liquidators even compiled and provided, on an urgent basis, detailed accounting documents in support of Ken’s case.  Deputy Judge Leung refused to allow Ken to adduce those documents.  What is significant is the deputy judge’s observation that those voluminous documents were not primary documents but secondary documents specifically compiled by the Liquidators for Ken’s use.  The Liquidators were not assisting the court or protecting or advancing the Company’s interest, but assisting Ken personally.  It was also suggested by Seline that the Liquidators’ refraining from taking action against David Cho and/or Mazars was the consideration to secure David Cho’s co-operation in giving evidence for Ken in the trial of Main Action. 

85.   There may be circumstances when a former director in his personal capacity is involved in litigation in matters relating to the company.  The liquidator may keep watch over the progress of that litigation for the purpose of protecting the interest of the company.  He may even assist if it is in the interest of the company to do so.  Other than that, the company’sresources should not be spent in fighting for the cause of its former director.  A shareholder’s interest should be distinguished from the company’s interest.  A liquidator should in no case be involved or seen to be involved in a shareholder’s dispute.  Even if he assists the party who has been wronged, it would give rise to a perception of bias or to a loss of confidence in him by other shareholders.

86.   The Main Actionwas a litigation between the Father and Ken.  The Company was not a party, though the shares in the Company and its profits were the subject matter of that litigation.  The Company had no direct or indirect interest in that litigation or its outcome. Whoever succeeded or lost in that litigation would be of no consequence to the Company.  The Liquidators should not have assisted any party in that litigation and had no right to charge the Company for providing assistance to Ken.  That incident evidenced the Liquidators’ bias in favour of Ken against the Father, even to the extent of using the Company’sresources to fight the private battle of Ken in a shareholder’s dispute which has nothing to do with the Company.  I hope the Liquidators would have the saving grace of voluntarily returning the fees charged to the Company without the Company having to resort to litigation.

INSISTENCE ON CONTINUING LEGAL ACTIONS AGAINST THE FATHER AND HIS CAMP

The setting

87.   Before embarking on this issue, I have to set out the scene the Liquidators found themselves.  I start with the proposition that they were strangers to the affairs of the Company.  As it was a members’ voluntary winding up and the Company was solvent, it was reasonable for them to place trust and confidence in Ken who was the director then in the driving seat of the Company.  That was 2009.

88.   A lot of events happened between then and 2016 when the Petitioner sought to stay the WU Order.  In 2009, the Father commenced the Main Action in addition to these winding-up proceedings.  In 2011, he also petitioned the winding-up of Pak Tat.  On 1 December 2011, Harris J rejected Ken’s allegation that he was the 50% owner of Pak Tat and PTTC and made the winding-up order against Pak Tat.  That was the first clear warning of Ken’s credibility, which is at the heart of his dispute with the Father in the Main Action as well as many of the proofs of debt in these winding-up proceedings.  Despite that, the Liquidators commenced a series of action against the Father and his camp, including HCA 1428/2012 and HCA 2137/2012 against the Father, Richard, Seline and Yuen Hing for account of money allegedly paid by the Company while under their control to Yuen Hing through the re-invoicing scheme. 

89.   I would take a very broad brush approach and assume that these recovery actions were taken by the Liquidators in good faith for the interest of those who were interested in the assets of the Company, ie the contributory whom they thought was Ken.  But things took a 180 degree turn in December 2015 with the delivery of the CFI Judgment in the Main Action.  By then the Liquidators ought to know that they had ridden on the wrong train.  But, as I shall demonstrate, they were pursuing those actions rigorously and acrimoniously against the Father while the trial of the Main Action was going on.  Then, despite the finding of the Court of First Instance that the Father was the 100% beneficial owner of the Company and whose interest it was their duty to protect, they still obstinately insisted to remain in office to pursue those actions against the Father.  And now, despite the Court of Appeal has confirmed all the findings of the Court of First Instance, they still refused to resile from that position.  They merely say that they are maintaining a neutral position and leave it to the parties to persuade the court.  In other words, if they are allowed to remain in office, they will continue prosecuting those actions against the Father and continue to use the Company’s, ie the Father’s, funds to fight the action against the Father for the Father’s benefit.  That is their position now before me.

HCA 1428/2012

90.   On 10 August 2012, the Liquidators commenced action in HCA 1428/2012 claiming against the Father, Richard, Seline and Yuen Hing for account of a sum of $53 million allegedly paid by the Company while under their control to Shenzhen Lianda through the re-invoicing scheme.  The Liquidators has utterly no basis to commence this action.  As early as December 2011, Harris J had rejected all of Ken’s arguments about his entitlement to Pak Tat and held that the sum of $53 million was the Father’s own money.  Though Harris J mentioned nothing about the re-invoicing scheme, it is obvious that the said sum of $53 million had nothing to do with that scheme as it was the Father’s money as early as 1992.  The Liquidators were hopelessly incompetent in commencing that action.  Yet, they went all the length incurring hefty costs in resisting the Father’s stay application before Master Ho and then appealing against the master’s decision seeking to uplift the stay.  Such action is, in my view, wholly unjustified in the circumstances of this case and from the point of view of a liquidator litigating on creditors’ limited funds.

91.   Then, come the CFI Judgment on 9 December 2015 in which Deputy High Court Judge Leung held that the Father was the 100% beneficial owner of the Company and its profits and that the said sum of $53 million was the Father’s money which had nothing to do with the re-invoicing scheme.  Thus, by 9 December 2015, the Liquidators had no basis to continue with that action.  Yet, in David Yen’s affidavit filed on 28 November 2016 for the purpose of this hearing, he wholly ignored the CFI Judgment and tried to impress (mislead) the court that they had a purpose and function to perform by remaining in office.  In paragraphs 30 and 31 of his affidavit, he repeated the Liquidators’ case, saying nothing about the CFI Judgment, but reiterated:

“ 30. … Accordingly, there are competing claims by [the Father], Ken Li and the Company against Pak Tat for the sum of around HK$53 million.

31. If the Winding-up Order is stayed and the Liquidators are discharged, then there is a risk, to say the least, that [the Father’s] camp will not cause the Company to pursue in claims against Pak Tat for the sum of around HK$53 million, in view of [the Father’s] competing claim for the sum of around HK$53 million against Pak Tat referred to in Paragraph 28 above and also having regard to the conduct of [the Father] in relation to the liquidation of Pak Tat and Lianda, which I shall deal with in more detail at Paragraphs 33 and 34 below.  As a result, such assets of the Company will not be available for payment to its creditors.”

92.   In the face of Harris J’s judgment in the winding up of Pak Tat rejecting Ken’s claim that he had 50% interest in Pak Tat, and in the face of the CFI Judgments that the Father was the 100% beneficial owner of the Company and Pak Tat, why do the Liquidators still tell this court in paragraph 30 that there are conflicting claims between Ken and the Father?  Undoubtedly, the Company and Pak Tat all belonged to the Father.  Why should the Liquidators still insist in paragraph 31 to remain in office to use the Company’s funds to litigate against the Father for the benefit of the Company, ie the Father?  Are they incompetent or are they pursuing their own agenda?

93.   Then, come the Court of Appeal Judgment on 19 January 2017 unreservedly upholding the CFI Judgment.  If the Liquidators had any respect for the Court of Appeal, they should have reviewed their situation, resiled from their insistence of pursuing those actions and sought leave to file a new affidavit setting out their new stance.  They did not.  They just marched on maintaining their argument that the Company was massively insolvent and that the legal actions were justified to recover funds for the benefit of the creditors whose claim are proven to be unmeritorious in the light of the finding of the Court of First Instance and the Court of Appeal.  Their purported neutral stance is, in my view, mere lip service.  If they are to remain in office, as they have not resiled from their position they will continue those actions against the Father.  I can only come to the conclusion that these Liquidators are pursuing their own agenda in generating work and profits for themselves.

HCA 2137/2012

94.   In this and two other actions, the Liquidators sought to recover the tax penalty paid as result of the re-invoicing scheme against the directors of the Company, including members of the Father’s camp and Ken.  From point of view of the Company, these actions were justified.  HCA 2137/2012 is mentioned as part of the background for the next sub-section.  Now that the Father is found to be the 100% beneficial owner of the Company, subject to the interest of the creditors, whether to proceed with these actions to recover the penalty is a matter for the Company or the Father or his estate.    

Attempting to uplift the stay of the above actions

95.   Towards the end of 2012, the Father’s Main Action had been commenced for over three years and was approaching the stage to be set down for trial.  Then the Liquidators commenced proceedings in HCA 1428/2012 and HCA 2137/2012.  They also commenced proceedingsin HCA 1952/2012 against the Father, Ken, Richard and his company Radar International (HK) Limited for misappropriating the assets of the Company.  On 15 November 2013, the Father obtained an order from Master Ho staying those proceedings pending the trial of the Main Action which was scheduled to commence on 11 March 2014.  That was only four months ahead.  Then the Liquidators appealed.  By the time the appeal was heard, the hearing of the Main Action had commenced.  The two sets of proceedings were proceeding in parallel.  The Liquidators were represented by top senior counsel in the appeal which lasted for three days.  Up to that stage, the legal fees incurred exceeded $7.6 million while the Liquidators’ own fees amounted to $18 million.  On 25 July 2014, in dismissing the Liquidators’ appeal, Deputy High Court Judge Poon said:

“ 66. … The Liquidators’ Actions can serve little real purpose if the Father turned out to be 100% owner of the [Company] and its profits along.

67. On the other hand, the Father’s concern about his money tobe spent for no reason is not unreal. … if the Father is successful in asserting his right as the 100% owner of the [Company] in the Main Action, it would mean that such costs will be paid out of his pocket in any event.”

96.   Deputy High Court Judge Poon’s observations were full of common sense and realism.  I cannot help asking what is the urgency in lifting the stay?  There is nothing to suggest that the Father will dissipate his assets and render any judgment against him nugatory.  Why can’t the Liquidators wait for just four months to see how the trial in the Main Action went?  Why can’t they wait till after delivery of judgment in the Main Action? Why should they incur such hefty costs on a non-cost effective procedure without even waiting for the outcome of the Main Action?  Why should the Liquidators conduct these proceedings in such an oppressive manner? 

97.   These actions were extremely cost-ineffective.  Up till then, the Liquidators had incurred $25.6 million.  More costs were to be incurred.  As liquidators, they must be very cost conscious in spending the funds of a company-in-liquidation.  It would have been prudent to have waited till delivery of judgment in the Main Action before commencing these two actions.  If the actions had been commenced, it would only stand to reason to wait for the judgment in the Main Action before deciding whether to commit further costs in the recovery action.  As Deputy High Court Judge Poon observed, the Liquidators’ action could serve no purpose if the Father turned out to be successful.  On the other hand, if Ken turned out to be successful, the Liquidator may even obtain summary judgment in his two actions without incurring much costs.  The course adopted by the Liquidators was unreasonable apart from being non-cost-effective.  From the very care-free manner in which the Liquidators incurred costs in these proceedings, it can be inferred that they were eager to create work for themselves regardless of the interest of the Company.  That, at least, gives rise to a perception that the Liquidators had put their personal interest before the Company’s and gives rise to a loss of confidence in them by the Petitioner.

98.   The Liquidators conducted these two litigations in a most oppressive manner.  At the time, the trial of the Main Action between the Father and Ken was progressing. At the same time, not only were they assisting Ken in the Main Action without justification and using the Company’s funds to do so, they even incurring a horrendous and disproportionate amount of costs to press on with these two actions against the Father, even to the extent of instructing top senior counsel on a three days’ appeal seeking to uplift the stay.  All these three sets of proceedings were proceeding in parallel.  I have already found ample evidence of their bias in favour of Ken against the Father.  This incident further fortifies that finding.  From their conduct, it can even be inferred that the Liquidators were acting in concert with Ken to put pressure on the Father.  Even though the Father won that appeal, effectively he was the one who was to pay every party’s costs, including the Liquidators’ own costs.

HCA 220/2015

99.   In January 2015, the Liquidators commenced this action against Yuen Hing claiming that a sum of $25.6 million sitting in the bank account of Yuen Hing came from and belonged to the Company. The basis of their claim was Mazars’ report prepared for Ken and an alleged admission by the Father in his affirmation.  In the Main Action, Deputy High Court Judge Leung found that the Father had never made any such admission as alleged by Ken and that Mazars’ calculation was fundamentally flawed because it was based on a misinterpretation of the Father’s ledgers.  Hence, the court dismissed Ken’s claim.

100.   With the delivery of the CFI Judgment in December 2015 in the Main Action, the Liquidators ought to know that this sum of $25.6 million did not exist.  However, in resisting the stay application, they argued that the money, if it was not Ken’s, belonged to the Company and they were duty-bound to pursue the claim for the benefit of creditors of the Company.  While acknowledging that the Father won the Main Action, they argued that the CFI Judgment was then subject to appeal and was by no means a foregone conclusion that the appeal will be dismissed.  In paragraph 25 of his affidavit, David Yen said that if the WU Order was stayed, the Father’s camp would not cause the Company to continue to pursue such actions against themselves and recover the sums for the benefit of the creditors of the Company.  These officers of the court had utterly no respect for the CFI Judgment.

101.   Now that Ken’s appeal has been dismissed, it is beyond argument that the Father was the 100% beneficial owner of the Company and its profits and Yuen Hing.  Though the Liquidators have not repeated the above argument at this hearing, that does not mean their conduct in commencing and then insisting to pursue this action contrary to the finding of the Court of First Instance is wiped off the board.  In any event, they have not resiled from their position and are still claiming that they should continue in office to pursue this and other actions.  Why should the Liquidators seek to remain in office against the will of the Father solely for the purposeof recovering money from the Father to return to the Father or his estateor for the benefit of the creditors with spurious claims which the Liquidators sat on for years without making an adjudication?  Their rationale is just a load of non-sense.

Conclusion

102.   The Liquidators’ conduct has to be viewed against the setting as set out in paragraphs 88 and 89.  I would assume that these actions were commenced with good faith.  However, the rigour with which they conducted the actions was out of all proportion.  There was no urgency to press on with these actions.  Their decision to engage top senior counsel on a three days’ appeal seeking to uplift the stay was manifestly unreasonable.  The costs they incurred were disproportionate.  Their decision to further to pursue these actions after delivery of the CFI Judgment and the Court of Appeal Judgment was absurd.  Their repeatedly ignoring the findings of the court and inventing reasons to further Ken’s cause which Ken had not even advanced in order to justify their continuation in office to pursue those actions is perverse.  They were trying to annul the findings of the court.  Their conduct suggests to me that they were not acting in the interest of the Company.  They have forgotten they were officers of the court whose duty was to give effect to the orders and findings of the court.  They have taken Ken as their new master and are actively pursuing Ken’s interest and creating work and profits for themselves.  Their conduct is evidence of bad faith, bias in favour of Ken against the Father and an intention to benefit themselves to the prejudice of the persons who are interested in the assets of the Company.  Not only has the Petitioner lost confidence in them, so has this court.

EXAGGERATING THE ALLEGED NON-COMPLIANCE OF THE PRODUCTION ORDER AGAINST SELINE

103.   The Liquidators relied on the alleged breach by Seline of the production order made by Deputy High Court Judge Manzoni SC as a ground for resisting the stay application.  They argued that the production order would never be enforced if the WU Order is stayed.  According to the Liquidators, the Father’s camp was uncooperative and failed to produce documents to enable them to investigate the affairs of the Company.  The order was issued pursuant to section 221 of the Companies (Winding-up and Miscellaneous Proceedings) Ordinance to enable them to adjudicate on the claims Sun Moral and/or ‌Wong and Tang.  Then, when the Liquidators were about to apply for a peremptory order to compel Seline to comply with the production order, the Petitioner took out the present application to stay the WU Order.

104.   David Yen devoted 12 pages in his affidavit dealing with Seline’s breach of the production order.  Two facts speak for themselves.  First, the production order was of a very limited scope, being related to two proofs of debts by Sun Moral and/or Wong and Tang.  Seline gave some credible reasons for the delay and had repeatedly sworn on oath that she did not have the documents sought.  She could not produce what she did not possess.  Second, the Liquidators had just informed the Petitioner that they had admitted the proof of debt by Sun Moral and/or Wong.  Seline must have supplied sufficient material to enable that adjudication to be made.  The only outstanding information required related to Tang’s proof.  To withhold the information would be contrary to the Petitioner’s interest.  Thus, if she had information about Tang’s proof, there was no reason why she would not have produced it.  Now that the Father has been proved to be the 100% beneficial owner of the Company, if the WU Order is stayed and the control of the Company returned to the Father, Tang’s claim could be pursued through the usual litigation and proper discovery procedure. Why should the Liquidators remain in office for the purpose of pursuing the production order?  For reasons as I have already explained, Tang’s claim is dubious.  Furthermore, Tang’s claim is well protected by the undertakings.  I agree with Mr Wong SC’s comment that the Liquidators argument is sheer exaggeration in an attempt to justify their remaining in office. 

APPLICATION TO STAY THE WINDING UP ORDER

Introduction

105.   Now that the Court of Appeal has confirmed that the Father was the 100% beneficial owner of the shares of the Company, there is no longer any question of interests of opposing contributories.  This finding together with the specific findings in the CFI Judgment has removed the factual and legal basis of all the actions pursued or contemplated by the Liquidators.  Whether to pursue those actions is a matter entirely for the Company, subject to there being no prejudice to the creditors.  As Deputy High Court Judge Poon said in confirming the stay of the Liquidators’ two actions, there is little point for them to continue in office to prosecute those actions against entities whose interest align with the estate’s, when the Father’s estate is fully entitled to decide not to pursue the same.  Thus, whether to stay the WU Order turns on the question of solvency of the Company and the interest of the creditors.  It is only where there are sufficient assets including an adequate undertaking to pay all the creditors and the expenses of the liquidation that a stay would be considered. 

Solvency of the Company

106.   The ground advanced by the Liquidators in their affidavit filed in opposition to the stay application is that the Company is massively insolvent by reason of a number of proofs of debts and a recently discovered potential tax liability.  In his affidavit, David Yen pictured the best and worst case scenarios in which the Company would be insolvent for a very significant amount of $62.4 million or $259.6 million.  He was assuming that the Company would be definitely liable to the “hidden” tax liability and penalty of between $24 million and $72 million.  But he admitted he did not even know the real factual position. 

107.   As for the proofs of debt, I have reviewed all them in the earlier sections and considered them unmeritorious.  At the hearing, Mr Barlow SC only referred me to the follow three proofs of debt: 

(1) Wong’s proof of debt of $36 million;

(2) Ken’s proof of debt of $1.15 million; and

(3) Ken’s proof of debt of $52.8 million.

108.   I assume the Liquidators current position is that they must have considered the other proofs of debts, save that of Sun Moral and/or Wong which they had recently admitted, as unsubstantiated and ought to be rejected.  In the end, according to the Liquidators, the Company has some $66 million assets and some $33.8 million has to be distributed to creditors whose proofs of debt have already been admitted.  In addition, the liquidation costs were estimated to be at least $29.8 million. On this basis, the Company has a surplus asset of $2.4 million. 

109.   As for Wong’s proof of debt of $36 million, Mr Barlow SC now indicated that the Liquidators were inclined to reject it.  For reasons as stated in paragraphs 57 – 60, in my opinion is this proof is spurious and ought reasonably to have been rejected.  As for Ken’s proof of debt of $1.15 million, the Liquidators had rightly rejected it, though Ken’s appeal has yet to be heard.  As for Ken’s proof of debt of $52.8 million, the Liquidators considered that it is “not necessarily unmeritorious”.  However, for reasons as stated in paragraphs 43 – 51, in my opinion it is spurious and ought reasonably to have been rejected.

110.   As for the so called “recent hidden” tax liability, it was all conjured up by the Liquidators in an attempt to mislead the court so as to justify their continuation in office.  Furthermore, now that the Liquidator had recently reported the matter to the Inland Revenue Department, it is a matter to be resolved in future between the Company and the Inland Revenue Department, if the WU Order is stayed and if necessary.  On the state of evidence now before me, I should say the risk of such liability is very low.  Such liability, if it does materialise, may also be covered by the Petitioner’s undertakings.  It is not for the Liquidators to investigate the alleged tax evasion on behalf of the Inland Revenue Department and at the expense of the Company, its contributories or its creditors. 

111.   On the question of solvency, the court is entitled to form a provisional view based on the documentary evidence whether a proof of debt is substantiated.  The court is in a much stronger position than the liquidator in determining this question.  An application to stay should not be deferred merely by reason of the liquidator failing or neglecting to make an adjudication on a proof of debt.  In fact, except for Ken’s latest proof which the Liquidators have rejected, the Liquidators have been sitting on the other two proofs for years. Having discounted these three proofs of debt, I find that the Company is marginally solvent.  However, to err on the safe side, I would require an appropriate undertaking as a condition precedent for the grant of an order to stay the WU Order.

The undertakings

112.   Mr Barlow SC on behalf of the Liquidators raised some concern about the adequacy of the undertakings offered by Seline and Richard.  I am satisfied that the undertakings are sufficient.  Richard has a two-thirds interest in the company holding the Father’s family residence which is estimated to worth at least $210 million.  Seline owns through hercompany a shop valued at $90 million.  The other concerns are very trivial.  Basically, the Liquidators argued that with their discharge, there would be nobody to adjudicate upon the extant proofs of debts and Ken’s appeal against their rejection of his proof of debt will be stayed without any final adjudication.  In my view all the extant proofs have been shown to be unmeritorious, including Ken’s which had been rejected by the Liquidators against the decision of which Ken is now appealing.  Upon the discharge of the Liquidators, the alleged creditors are free to take action against the Company.  In my view, their chances of success are almost non-existent.  Even if they do succeed, the Company’s liability is more than adequately covered by the undertakings.  The Liquidators’ affidavits showed that the Company had been depleted almost entirely of its assets since liquidation.  In fact, as Mr Wong SC submitted, the potential creditors have never been as secure as they will be with the undertakings offered.

Conclusion — application to stay the WU Order

113.   The parties’ counsel have fine-tuned the terms of the undertakings in court.  I am satisfied that they are adequate and sufficient.  Accordingly, I grant the application to stay the WU Order.

APPLICATION TO REMOVE THE LIQUIDATORS

114.   The Petitioner relies on six categories of the Liquidators’ misconduct as evidence of their taking side in favour of Ken and his camp against the Father and his camp and that their conduct has at least given rise, on reasonable grounds, to a perception of bias.  Any of these misconduct is a sufficient ground which would justify for their removal, particularly as the Petitioner is now confirmed to be the 100% beneficial owner of the Company.  In the preceding sections, I have analyzed the misconduct complained of and made findings of bias, perception of bias or the Petitioner’s loss of confidence in them.  I shall not repeat my findings but shall adopt them and highlight the issue of bias, perception of bias and the Petitioner’s loss of confidence in them.

Entertaining spurious proofs of debt

115.   I have considered five proofs of debts in paragraphs 43 to 64.  The Liquidators rejected Ken’s proof for $1.15 million.  They were bound to reject that proof, as it was they who commenced the action in HCA 2137/2012 to recover tax penalty against all the directors of the Company, including Ken.  The Liquidators seemingly did not take a strong position in respect of Tang’s proof for $2 million.

116.   The Liquidators relied heavily on Ken’s proof of debt for $52.8 million in support of their case that the Company was massively insolvent so as to justify their remaining in office.  I repeat my findings in paragraphs 43 – 51. They deliberately turned a blind eye to the findings of the Court of First Instance and the Court of Appeal.  They advanced frivolous arguments in support of the claim which were not even raised by Ken.  Their maintaining this proof alive instead of rejecting it in the light of the above is an attempt to annul the court’s finding.  It is strong evidence of bias in favour of Ken and their improper motive of pursuing their personal interest by justifying their remaining in office.

117.   Shortly before this hearing, the Liquidators admitted Sun Moral’s and/or Wong’s proof of $3.27 million, when a claim of at least $2.4 million of which was manifestly bogus as being allegedly accrued before the incorporation of Sun Moral.  To overcome that hurdle for Sun Moral, the Liquidators suggested the proof to be filed by Sun Moral and Wong jointly.  That move was curious as there was no evidence to support Wong’s claim.  Besides, the Liquidators ought to have known from the judgment of the Shenzhen court that Wong was in cahoots with Ken.  I repeat my findings in paragraphs 53 – 56.  The Liquidators’ conduct was suspicious and gives rise to a perception of bias in favour of Ken’s camp to the detriment of the Company and rise to the Petitioner’s loss of confidence in their professional ability.

118.   Until this hearing, the Liquidators still relied heavily and seriously on Wong’s proof for $36 million in support of their case that the Company was massively insolvent.  Though they indicated, through counsel, their inclination to reject this proof, their handling of this proof does not cease to be evidence of their bias, willful ignorance of the findings of the courts and their incompetence for failing to take into account the finding of the Shenzhen court in relation to Wong’s claim and his incredibility. I repeat my findings in paragraphs 57 – 66 and my finding of the Liquidators’ bias in favour of Ken, their bad faith and their self-interest.  The Petitioner has good reason to lose confidence in their professional competence and impartiality.

False allegation of “recently” discovered “hidden” tax liability

119.   I repeat my findings in paragraphs 65 – 73.  In making the allegation of “recent hidden” tax liability, the Liquidators were re-opening an old chest and dressing up a concluded matter as a new discovery.  The allegation was an attempt to mislead the court into believing that the Company was massively insolvent so as to justify their continuation in office to carry out tax investigation in the public interest and to maintain commercial morality.  But the real purpose behind was to justify their remaining in office and to generate work for themselves.  I contrast their expressed laudable intention of upholding commercial morality and investigating tax evasion with their refusal to take action against David Cho and/or Mazars who were the accountants responsible for such commercial immorality.  The stance they took is clear evidence of self-interest and bias in favour of Ken’s camp against the Father and his camp.  The Petitioner has good reason to lose confidence in the Liquidators’ impartiality and so has this court.  I emphasize my condemnation of the Liquidators’ conduct in paragraph 73 above.

Forgoing investigation against Ken and his camp

120.   The Liquidators refused or neglected to take action against Kenfor misappropriating $28 million of the $53.6 million of the Company’s profit kept by Yuen Hing which he caused Seline to pay into his account; and for $30 million which Ken transferred from the Company to his son’s account.  Ken’s liability is fully supported by the court’s findings.  Their refusal is in stark contrast to their suing the Father for the balance of $25.6 million from the aforesaid sum of $53.6 million, which the court held had not been kept by the Father but was Ken’s creation by his misinterpretation of the ledgers. 

121.   The Liquidators did not take action against Ken for deleting the Company’s data or for diverting the Company’s business and staff to companies controlled by him.  They also took no action against David Cho and/or Mazars for negligent advice resulting in the Company having to pay tax penalty.  David Cho’s and/or Mazars’ liability is indisputable. 

122.   I repeat my findings in paragraphs 77 – 83.  The Liquidators’forgoing investigation against Ken and his camp and by way of contrast their action taken against the Father and his camp is inexplicable except on the basis of incompetence, bias and self-interest.

Positively assisting Ken in the trial of the Main Action

123.   I repeat my findings in paragraphs 84 – 86.  The Liquidators rendering assistance to Ken in the trial of the Main Action and charging theCompany for their services was wholly unjustified.  This is strong evidence of bias and impropriety of conduct.  It also gives rise to the Petitioner’s loss of confidence in them.

Insistence on continuing with the Liquidators’ actions against the Father and his camp

124.   I repeat my findings in paragraphs 87 – 102, particularly my criticisms of the Liquidators’ conduct in paragraphs 100 – 102. There was no urgency to press on with the two actions. The Liquidators did not even spare a stay of those actions for a few months granted by Master Ho and engaged top senior counsel on a three days’ appeal.  All those efforts and costs were spent in a failed attempt to uplift a stay.  They should have had the good sense of Deputy High Court Judge Poon of asking themselves, what if the Father is found to be the 100% beneficial owner of the Company, which indeed turned out to be the case.  The very oppressive manner in which the Liquidators pursued their actions against the Father and his camp when contrasted with their rendering assistance to Ken at the Company’s costs, refusing or neglecting to take action against Ken and his camp, especially against David Cho and/or Marzars, speaks volumes of their bias in favour of Ken against the Father and of their pursuing their own interest in creating work for themselves and in attempting to continue in their office.  I am able to step outside the arena to take a detached view and ask myself, “what is going on?”  Not only were they biased against the Father, they were acting in bad faith and pursuing their own interest in breach of their official duty.  Their conduct was an abuse of the power entrusted to them and amounted to persecution of the Father.

Enforcing the production order against Seline

125.   Starting with the presumption of good faith, I could not see anything wrong with the Liquidators’ attempt to enforce the production order.  But taking a deeper view of the matter, I do not consider it an action which I would endorse.  The Liquidators’ avowed purpose was to obtain information to enable them to adjudicate on Sun Moral’s/Wong’s and Tang’s proofs of debt.  They have already, in my view, wrongly admitted Sun Moral’s/‌Wong’s proof, what was left was Tang’s proof of $2 million.  If they were satisfied with the evidence submitted by Tang, their duty was to admit it. If not, they should reject it.  Instead, they went the length of incurring costs to require the Company, Yuen Hing and Seline to produce documents to prove Tang’s case. The Father had objected to the proof.  Seline had sworn on oath that she did not have the documents in her possession, custody and power.  If she had, it would have been contrary to the Petitioner’s interest not to produce them.  Yet, the Liquidators incurred hefty costs in obtaining the production order and are now intending to incur further costs to enforce it.  I presume they meant taking contempt proceedings against Seline, if she would not produce documents to their satisfaction.  Even if they have an excuse to incur those costs, was it justified?  Why should the Company, its creditors and contributories incur those costs for the benefit of an alleged creditor who was unable to prove his claim?  Alternatively, would it not be cheaper to admit the proof than to indulge in such discovery proceedings?  Their course of action was not cost-effective.  Putting their proposed enforcement action in the entire context of the liquidation process, this is just another example of bias, persecution against the Father’s camp and creating work for themselves.

Conclusion — application to remove the Liquidators

126.   Though claiming, through their counsel and in their affidavits, that they were adopting a “neutral” stance and were trying to assist the court, the Liquidators were, at least until this hearing, still adopting an adversarial and sometimes even hostile position.  In effect, they were arguing that the Company was massively insolvent and that the circumstances require that they remain in office to pursue legal actions to recover assets for the Company and to investigate the Company’s tax evasion activities and to uphold commercial morality and public interest.  They never resiled from that position, not even after delivery of the Court of Appeal Judgment.  In the above subsections, I am more than satisfied that the Petitioner has proved the six categories of misconduct complained of.  Hereunder is a wrap up of my findings.

127.   Not only do I find the Petitioner’s complaints of bias and loss of confidence justified and are amply supported by the evidence, I find that in contesting the Petitioner’s application, the Liquidators have been actively attempting to mislead this court.  The most blatant example is their attempt to conjure a case of “recent hidden” tax liability against the Company so as to boost their case that the Company is massively insolvent.  As they were actively attempting to mislead the court, such conduct could not have been the result of an error judgment.  I repeat my strong indignation and condemnation of their conduct. 

128.   The Liquidators were heavily biased in favour of Ken and his camp.  In advancing Ken’s and Wong’s claims under the proofs of debt, they repeatedly turned a completely blind eye to the findings of the Court of First Instance.  They even invented cases for Ken and Wong, which they never advanced.  They adopted an adversarial position on behalf of the claimants in advancing their interests and claims against the Company instead of adopting a neutral position as liquidators should.  In the face of the Court of Appeal Judgment, they still sat on those proofs which they had sat for years and still argued that they have a function to discharge in adjudicating them. That was a deliberate and wanton disregard of the findings of the Court of First Instance and the Court of Appeal, which suggests that their conduct could not have arisen out of an error of judgment or incompetence.  Indeed, these officers of the court were finding ways to avoid the effect of the court’s findings.  Their refusal to investigate Ken’s appropriation of funds from the Company and their refusal to take legal action against David Cho and/or Mazars is further evidence of their bias.

129.   The most blatant example of the Liquidators’ bias against the Father is the series of legal actions they commenced against the Father and his camp and the very high-handed and oppressive manner with which they persecuted those actions.  They did not even spare the Father of the stay granted by Master Ho and instructed top senior counsel on a three days’ appeal in a failed attempt to uplift the stay. Such action was wholly unnecessary and unwarranted.  The action taken and the costs incurred were out of all proportion with necessity.   It was done to give pressure on the Father who was fighting the Main Action against Ken whom the Liquidators was rendering support at the Company’s costs.  Viewed together with the bias in favour of Ken’s camp, that was a persecution of the Father.  Their bias manifested itself as an abuse by them of the power entrusted to them as officers of the court.  Their conduct put shame on the court.

130.   That was not all.   Even after the delivery of the CFI Judgment and the Court of Appeal Judgment, the Liquidators were still arguing that they have a duty to remain in office to pursue those actions for the benefit of the creditors.  Those judgments told them unequivocally that the Father was the 100% beneficial owner of the Company and that those alleged creditors did not have any genuine claim against the Company.  They were just trying to create work for themselves.  They should know what they were seeking is to use the Father’s money to fight the Father for the benefit of alleged creditors who have no genuine claims.  Their conduct is made all the more serious by their attempt to mislead the court about the Company’s solvency by conjuring a case of “recent hidden” tax liability.

131.   At some stage during these seven years, their personality has mutated.  They have forgotten their position as liquidators and officers of the court performing a public function and have switched to serve their new master in persecuting the Father and in actively pursuing their new master’s and their personal interest.  They did not respect their position as officers of the court and did not respect the court’s findings.  They tried to avoid or nullify the court’s findings in order to advance Ken’s interest.  They did not act in the interest of those entitled to the asset of the Company.  They abused the power the court bestowed on them.  They tried to create work and profits for themselves.  In particular, their conduct in relation to the “recent hidden” tax liability issue was ugly.  The way they conducted this liquidation was shameful.  They have completely forfeited the confidence of the court.  I am mindful that these are harsh comments may have a serious impact on their professional practice.  But the way they conducted the liquidation asked for these harsh comments.  The only course now open to this court is to remove them from their appointmentwith an advice to the Official Receiver to review their suitability as liquidators.

CONCLUSION

132.   For the above reasons, I grant the Petitioner’s application to stay the Winding-up Order permanently and to remove the Liquidators.  To reflect the court’s feeling of indignation and condemnation of their conduct, the Liquidators should pay the Petitioner’s costs of the application on indemnity basis.  Though Ken’s position is somewhat different from that of the Liquidators, his conduct, which was what gave rise to the Liquidators’ conduct, and the way he contested the application also justify indemnity costs against him.  Accordingly, I make a costs order that the 1^st Respondent and the Liquidators shall pay the Petitioner’s costs of the application on indemnity basis with certificate for four counsel. 

133.   I apologise to the parties for the time taken in my deliberation.  I thank the legal teams of the parties for their contribution.  I am particularly grateful to Mr Wong SC’s legal team for their well-prepared hearing bundles, summaries and appendices.