M & T INTERNATIONAL LTD v. WINSPOWER LTD (in liquidation)

HCMP 621/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 621 OF 2006

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D E C I S I O N

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1.  This is an amended originating summons issued by M & T International Limited (“the applicant”) against Winspower Limited (“the Company”) under section 252 of the Companies Ordinance, Cap. 32.

2.  On 21 March 2006, the shareholders of the Company passed a special resolution to wind up the Company and to appoint Richard Healy and Stephen Peaker, solicitors of Messrs Oldham Li & Nie (“OLN”), as joint and several liquidators.  On the same day, a creditors meeting was held and a resolution was passed by a majority to appoint Mr Healy and Mr Peaker as liquidators.  It is alleged by the applicant that the liquidators should be removed for conflict of interest and independent insolvency practitioners should be appointed to replace them.  Hence this originating summons was issued on 28 March 2006.

3.  Directions were made on 11 April 2006 for evidence to be filed.  Further, the court directed the applicant to notify other creditors of this application, leaving it to other creditors if they wish to be heard in the application.  On 8 May 2006, the applicant’s solicitors sent a letter to each of the creditors in the statement of affairs provided by the Company, informing them that the applicant has applied to court to remove the existing liquidators for the reason that there would be a conflict of interest and a copy of the order on 11 April 2006 was enclosed to the letter.  I understand from Mr William Wong who appeared for the applicant that no response has been received from any creditor.  No creditor has appeared at the hearing today.

4.  The Company has filed 2 affidavits by Mr Healy to refute the allegation there is any conflict of interest and to oppose the application that the liquidators be removed.  Mr Firmin of OLN has appeared today but I gather from a letter of his firm to the applicant’s solicitors that OLN are not instructed to make representations in opposition to this application and that the liquidators are content to rely on the affidavit material already before the court.  OLN have attended the hearing today for the purpose of answering any question that may be raised by the court.

5.  Section 252 relates to the appointment and removal of a liquidator in a voluntary winding up.  By sub-section (2), “the court may, on cause shown, remove a liquidator and appoint another liquidator.”  The burden is on the applicant to show cause why the liquidators should be removed (Re Keypak Homecare Limited (1987) 3 BCC 558 at 563).

6.  It is well established that the exercise of the power under section 252 (2) is not limited to special circumstances, as the wording of this provision is very wide.  As Millett J (as he then was) had observed in Re Keypak, supra. at 564: “Circumstances vary widely, and it may be appropriate to remove a liquidator even though nothing can be said against him, either personally or in his conduct of the particular liquidation.”

7.  If a conflict of interest is shown, whether this be an actual conflict or it could be shown there are reasonable grounds for thinking that the objectivity and impartiality of the liquidators may be seen to be compromised, this would be a cause for removal of the liquidators.

8.  The matters the applicant says would give rise to the conflict of interest situation are as follows.

9.  Firstly, OLN had acted for the Company in 2004 and 2005 in 4 proceedings in the High Court.  In 3 of them the Company was sued.  In the other action, the Company and EMI Global Inc (“EMI”) were the plaintiffs.  I will later deal with the connection between the Company and EMI.  Judgments obtained by the various plaintiffs against the Company, one of them being the applicant, have not been satisfied, and these creditors are among the creditors in the statement of affairs.  The applicant says the mere fact of OLN having acted as solicitors for the Company extensively prior to the winding up would give rise to a clear case of conflict of interest.

10.  Secondly, and more seriously, the applicant noted in the statement of affairs and the unaudited management accounts up to 14 March 2006 that a number of matters would clearly call for investigation by the liquidators.  It was stated that according to the audited balance sheet as at 30 June 2004, there was an excess of assets over capital and liabilities of HK$43,041,635.10.  However, from 30 June 2004 to March 2006, there was a gross loss arising from the carrying on of business in the amount of HK$71,295,332.29.  The applicant is greatly concerned there was such a huge loss within a relatively short period and had by its representative raised questions on this at the creditors meeting on 21 March 2006 but had met with no explanation.  Further, a large part of this very substantial loss suffered by the Company was attributable to “marketing services expenses”.  The amounts incurred for this item were HK$37.5 million odd during July 2004 to June 2005 and HK$18.4 million odd from July 2005 to March 2006.  According to information provided by the liquidators, EMI has provided marketing services to the Company.

11.  It is not clear if all the marketing services expenses mentioned in the management accounts were paid or payable to EMI, but according to the statement of affairs, among the creditors of the Company, EMI has an outstanding claim of HK$23.3 million and its president Mr Richard Berger has a claim of HK$9.7 million.  The applicant has queried why such substantial licensing and marketing fee was due to EMI.

12.  Thirdly, it would appear from the way the creditors meeting was conducted on 21 March 2006 that although the sole director of the Company, So Kai Cheung Stanley, took the chair at the beginning, it was actually Mr Healy who had acted as chairman of the meeting throughout.

13.  Fourthly, 3 of the creditors, EMI, Mr Berger and George K W Ho & Co, with total claims of about HK$33 million odd, gave proxies to Ms Wong Nga Hung Tiffany to vote at the creditors meeting.  Ms Wong is a trainee solicitor of OLN.  She exercised the proxies by voting in favour of appointing Mr Healy and Mr Peaker, both solicitors of OLN, as liquidators.  Without these votes, the motion to appoint Mr Healy and Mr Peaker would not have been carried by a majority.  The votes cast by Ms Wong were in contravention of rule 138 of the Companies (Winding-up) Rules.  This provides that “no person acting either under a general or special proxy shall vote in favour of any resolution which would directly or indirectly place himself, his partner or employer in a position to receive any remuneration out of the assets of the company otherwise than as creditor rateably with the other creditors of the company”.  The proviso to this rule does not apply to the present situation.

14.  Fifthly, the relationship among Mr Berger, EMI and the Company would require investigation.  Mr Berger, as mentioned, is president of EMI which had allegedly provided marketing services to the Company at very substantial marketing services expenses.  Mr Berger was a director of the Company until he resigned on 16 April 2003.  He was also a shareholder of the Company as at that date.  Some time thereafter, all the shares of the Company were transferred to and held by Winspower Holdings Limited, a company incorporated in the British Virgin Islands.  Mr So, who is a certified public accountant and Kenchain Services Limited, which share the same address as Mr So, became directors in the place of Mr Berger.  In answer to a question raised by the applicant’s solicitors, OLN replied that they were informed by Mr So that Mr Berger was not a shadow director after his resignation, but OLN did not answer the question if Mr So is just a “nominee director”.

15.  I have considered the evidence put in by the liquidators, that they were voted into office by 6 creditors with aggregate claims of HK$35.7 million odd and that 5 of these creditors have continued to express support for the liquidators to remain in office.  The votes cast by the exercise of proxies held by Ms Wong do not appear to be valid, due to the contravention of rule 138.  As for the other 3 creditors, 2 of them are Mr So and S & W Consultants Limited.  The latter company shares the same address as Mr So.  I decline to attach weight to the votes cast by Mr So and this consultant company, as they would appear to have close connection with the Company.

16.  I am satisfied that the matters raised by the applicant would require investigation in this liquidation.  It would not be appropriate for the liquidators to continue in office, as the investigation should be undertaken by insolvency practitioners who are seen to be totally independent of the management of the Company and are seen to be completely impartial.  The applicant has proposed 2 insolvency practitioners who are certified public accountants, Mr Lau Siu Hung and Liang Yang Keng of Sammy Lau CPA Limited.  I am satisfied that they have no material professional relationship with the applicant or with the Company.

17.  I make the following orders:

(1)     Mr Healy and Mr Peaker are to be removed as liquidators of the Company and Mr Lau Siu Hung and Mr Liang Yang Keng, both of Sammy Lau CPA Limited, be appointed in their place as joint and several liquidators of the Company.

(2)     The applicant’s costs of this application are to be borne by the Company.