THE OFFICIAL RECEIVER v. WONG KWAN PUI AND OTHERS

HCMP 1464/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1464 OF 2001

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J U D G M E N T

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1. This is an application by the Official Receiver for a disqualification order against Mr Wong Kwan Pui, the 1st respondent in these proceedings, under section 168H of the Companies Ordinance, Cap. 32.

2. The Originating Summons was issued on 16 March 2001. The 1st respondent has filed an Acknowledgement of Service on 5 July 2001 stating that he intends to contest the application on the ground that his conduct as a director of Emperor Hotel Management Co. Ltd ("EHM Ltd") was not as alleged by the Official Receiver, that he disputes the allegation such conduct makes him unfit to be concerned in the management of a company, and that he intends to adduce mitigating factors with a view to justifying a short period of disqualification.

3. On 8 June 2001, at a hearing before a Master in which the 1st respondent appeared, directions were given for the filing of evidence in opposition by the 1st respondent and leave was given to the 1st respondent to inspect the ledgers and books of account in custody of the Official Receiver. An inspection of books and records was duly made by the 1st respondent on 24 June 2001. However, he did not file evidence in opposition pursuant to the directions of the Master.

4. On 21 September 2001, at another hearing before a Master in which the 1st respondent had also appeared, an order was made adjourning the Official Receiver's application for a disqualification order to a judge in Court and an extension of time was granted to the 1st respondent to file evidence in opposition by 10 October 2001. The 1st respondent did not file evidence within the extended time.

5. On 30 August 2002, the Official Receiver served on the 1st respondent a notice of the adjourned hearing of the Originating Summons. The notice has been duly served on the 1st respondent and the application has come before me today. The 1st respondent has not appeared at this hearing.

6. Where the Official Receiver is the applicant in proceedings of this kind, his written report shall be treated as verified by affidavit by him and shall be prima facie evidence of any matter contained in it, see r. 4(2) of the Companies (Disqualification of Directors Proceedings) Rules. The standard of proof in these proceedings, which are civil proceedings, is proof on the balance of probabilities. Any misconduct of the respondent as a director may be relevant even if it does not fall within a specific section of the Companies Ordinance (Re Bath Glass Ltd (1988) 4 BCC 130).

7. The background matters may be stated as follows.

8. EHM Ltd was incorporated in Hong Kong on 28 August 1981. The 1st respondent, who is a qualified accountant, was appointed as a director of EHM Ltd on 1 April 1997. His position was the director of finance. EHM Ltd held 60% of the shares in Emperor Hotel Reservations Co. Ltd ("EHR Ltd"). The 1st respondent was appointed the company secretary of EHR Ltd in June 1991. The principal activity of EHM Ltd was the provision of hotel management services.

9. On 19 March 1997, a petition to wind up EHM Ltd was presented. A winding-up order was made on 7 May 1997.

10. I am satisfied on the evidence that EHM Ltd is insolvent within the meaning of section 168H(2)(a). Up to the date of the first report of the Official Receiver dated 16 March 2001, the total proof of debt filed with the Official Receiver in the liquidation amounted to HK$7,500.00 and US$7,500.00, and the assets realised by the Official Receiver amounted to HK$15,555.69. The assets were thus insufficient to pay the debts and other liabilities and the expenses of the liquidation. The Official Receiver has satisfied the first requirement in section 168H(1)(a) in that the 1st respondent has been a director of a company which has become insolvent while he was a director.

11. I turn to consider the second requirement in section 168H(1)(b), and that is whether the 1st respondent's conduct as director of EHM Ltd makes him unfit to be concerned in the management of a company.

12. The conduct complained of, as stated in Official Receiver's first report, may be grouped under the following heads:

(1) accounting records offences;

(2) failure to submit a statement of affairs; and

(3) unauthorised dealing with the interest of EHM Ltd in EHR Ltd.

Accounting records offences

13. No accounting records of EHM Ltd were recovered by the Official Receiver during the period from the date of the winding-up to June 2000. The 1st respondent only delivered to the Official Receiver the accounting records in June 2000.

14. The accounts delivered have been examined by a Treasury Accountant in the employ of the Official Receiver's office, and the findings are set out in her affirmation filed on 16 March 2001. Under section 121, EHM Ltd is required to keep proper books of account as are necessary to give a true and fair view of the state of affairs of EHM Ltd and to explain its transactions for 7 years, i.e. from 8 May 1990 to 7 May 1997. Under section 274, EHM Ltd is required to keep proper books of accounts as are necessary to exhibit and explain the transactions and the financial position of the trading or business of the company throughout the period of 2 years immediately preceding the commencement of the winding-up, i.e. from 20 March 1995 to 19 March 1997.

15. There was missing information in the ledgers and bank statements provided and discrepancies in the accounting records. The Treasury Accountant has found that the general legers did not balance; the balance in the general ledger as at 30 June 1993 and 30 June 1992 could not be reconciled with the audited accounts for the year ended 30 June 1993 and the comparative figures for the preceding year; the transactions in the directors' current account and the shareholders' loan account were not described so that the Treasury Accountant was unable to determine the breakdown of the amount due to individual directors or shareholders; a detailed breakdown of the amount due to individual creditors was not available for a number of liability accounts; and no vouchers or supporting documents were available to support and explain the transactions recorded in the general ledger.

16. I accept the findings of the Treasury Accountant. I am satisfied that EHM Ltd is in breach of the provisions of sections 121 and 274.

17. Further, the latest audited financial statements of EHM Ltd were only made up to the year ended 30 June 1993. The 1st respondent did not cause to be made out and laid before the company at its annual general meeting the profit and loss account and balance sheet for the years of 1994, 1995 and 1996, as required under section 122.

18. There is no evidence before me that the 1st respondent as a director, had taken any or any reasonable steps to ensure compliance by the company of the obligations imposed by sections 121, 274 and 122. I bear in mind that the 1st respondent is a qualified accountant and the position he occupied was the director of finance.

19. In Re Majestic Recording Studios Ltd (1988) 4 BCC 519 at 522, Mervyn Davies J cited these two references when he rejected a submission that a particular director had no concern in or control over any financial affairs. The first was the statement of Byrne J in Drincqbier v Wood [1899] 1 Ch. 393 at 406:

"It should be understood that a director, consenting to be a director, has assumed a position involving duties which cannot be shirked by leaving everything to others."

20. The second reference was the statement of Vinelott J in Re Stanford Services Ltd & Others (1987) 3 BCC 326 at 336:

"The public is entitled to be protected, not only against the activities of those guilty of the more obvious breaches of commercial morality, but also against someone who has shown in his conduct of more than one company...a failure to appreciate or observe the duties attendant on the privilege of conducting business with the protection of limited liability."

21. These references seem to me to sum up the position aptly. As stated by the English Court of Appeal in Secretary of State for Trade and Industry v Griffiths [1998] BCC 836 at 843D:

"It is of the greatest importance that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are inescapable personal responsibilities."

These observations apply with even greater force to an active director who must accept responsibility for the failure to maintain and produce adequate books of account (Re T & D Services Ltd [1990] BCC 592).

22. I am satisfied that the complaints under the heading of accounting records offences are made out.

Failure to submit statement of affairs

23. No statement of affairs of EHM Ltd was submitted by the 1st respondent from June 1997 to February 1998.

24. In February 1998, the Official Receiver laid information against, inter alia, the 1st respondent for breach of section 190 of Cap. 32. A statement of affairs was submitted by the 1st respondent in May 1998 but the statement of affairs was incomplete and not acceptable for filing with the Court.

25. On 16 June 1998, the 1st respondent was convicted by a Magistrate of an offence under section 190 and was fined. It was only after his conviction that an amended statement of affairs which was acceptable was filed with the Court on 22 December 1998. I am satisfied that the complaint has been made out in that the 1st respondent had failed to comply with section 190.

Unauthorised dealing with the interest of EHM Ltd in EHR Ltd

26. A special resolution of EHR Ltd was passed on 30 April 1999 at an Extraordinary General Meeting of shareholders to wind up that company voluntarily. This was after the winding-up order was made against EHM Ltd and the Official Receiver was appointed the liquidator of EHM Ltd. The 1st respondent had full knowledge of the winding-up of EHM Ltd and the Official Receiver's appointment.

27. Nevertheless, the 1st respondent purported to act under the authorisation given in an undated board minutes of EHM Ltd to represent EHM Ltd in relation to the winding-up of EHR Ltd and to sign any documents in connection with it on behalf of EHM Ltd.

28. The notice of the Extraordinary General Meeting on 30 April 1999 was not served on the Official Receiver. It was given to the 1st respondent for service on EHM Ltd. However, the notice was addressed to the old address of EHM Ltd and not to the Official Receiver as the liquidator. The 1st respondent gave instructions to an accountant to deal with the voluntary liquidation of EHR Ltd. He signed the notice of the Extraordinary General Meeting and the special resolution on behalf of the EHM Ltd with the chop of EHM Ltd, which was not surrendered to the Official Receiver.

29. These matters have been gone into in some detail in the examination of the 1st respondent before a Master on 22 February 2001. Given the 1st respondent's background and training as a qualified accountant, I am satisfied that the 1st respondent knew he had no authority to deal with the interest of EHM Ltd in EHR Ltd after the winding-up order was made and that he had acted with a lack of commercial probity. The acts done by the 1st respondent to bring about the winding-up of EHR Ltd were premeditated, although there is no specific allegation of dishonesty made against him.

30. I should also mention that there was an amount of HK$496,000.00 due from EHR Ltd to EHM Ltd.

31. I am satisfied that the complaint under this heading has been established.

Period of disqualification

32. It was submitted by Mr Tam on behalf of the Official Receiver that the above complaints against the 1st respondent would place him at the upper end of the minimum bracket in the tariff laid down in Re Sevenoaks Stationers (Retail) Ltd [1990] BCC 765. The minimum bracket is up to 5 years and is to be applied where the misconduct is not very serious. I agree with this submission.

33. I take into account that although the misconduct is reprehensible there is no personal gain proved against the 1st respondent. In all the circumstances, it seems to me that an appropriate period of disqualification would be 4 years.

34. I make the following orders:

(1) Pursuant to section 168H of the Companies Ordinance, the 1st respondent shall not without leave of the Court

(a) be a director of a company;

(b) be a liquidator of the company;

(c) be a receiver or manager of a company's property; or

(d) in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company for a period of 4 years, beginning from the date of this order.

(2) The 1st respondent is to pay the Official Receiver's costs of this application, to be taxed if not agreed.

35. For the sake of clarity, I should mention that under r. 10 of the Companies (Report on Conduct of Directors) Regulations, the disqualification order is to take effect from the beginning of the 21st day after the day on which this order is made. The effect of this is that the order is temporarily suspended for a period of 21 days although the term of the disqualification order would from begin today (Re Cannonquest Ltd [1997] BCC 644 at 648 to 649). The purpose of the temporary suspension is to give the 1st respondent a reasonable period to put his affairs in order so as to comply with the disqualification order.