THE OFFICIAL RECEIVER v. CHAN HAY MUK AND OTHERS

HCMP 4754/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4754 OF 2002

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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 under s. 168I(2) of the Companies Ordinance, Cap. 32 for an extension of time of six months or such period as the court thinks fit, to commence proceedings for disqualification orders against the four respondents, who are the former directors of South View Holdings Ltd ("the Company").

2. Only the 1st respondent Mr Chan Hay Muk has appeared at the hearing today, however I am satisfied from the affirmation of service that the other three respondents have been duly served, and I have decided to proceed with the application in their absence.

3. By virtue of s. 168I(2)(a), an application for a disqualification order must not be made after the end of the four-year period beginning with the day on which the winding-up is deemed to have been commenced. Here, the petition for the winding-up was presented on 21 November 1998 and the winding-up order was made on 23 December 1998 in HCCW No. 832 of 1998, so the time within which to apply for the disqualification orders would have expired on 20 November 2002. On 19 November 2002, the Official Receiver took out the present application.

4. In summary, the reason for the application is that investigation into the affairs of the Company, its subsidiaries and related companies is not yet completed, and it is only on completion of the investigation that the Official Receiver would be able to form a view whether it would be in the public interest to apply for a disqualification order against all or any of the respondents.

5. As for the reason why investigation has not been completed in the four-year period, the Official Receiver's contention is that this is due to the non-cooperation of the respondents in that:

(1) no accounting records of the Company have been recovered by the liquidators, despite letters and reminders sent to the respondents;

(2) no statement of affairs of the Company has been submitted;

(3) the respondents failed to reply to the letters from the Official Receiver requesting delivery of the accounting records, the submission of the statement of affairs and provision of the information sought;

(4) the liquidators have been unable to contact the directors and the officers of the subsidiaries to recover the amount due from the directors, the subsidiaries and related companies and to realize the Company's investments in the subsidiaries;

(5) the Official Receiver's letters to the subsidiaries and related companies addressed to the registered office of these entities were returned undelivered.

6. On 27 October 2002, the Official Receiver made an ex parte application for a public examination of the four respondents. An order for public examination was granted on 3 October 2002. The public examination will take place on 23 January 2003. It is hoped that more information would come to light as a result of the public examination.

7. On 24 October 2002, a warrant of arrest was issued against the four respondents in HCCW No. 832 of 1998, on the application of the Official Receiver, for avoiding examination in respect of the affairs of the Company or otherwise avoiding, delaying or embarrassing the proceedings in the winding-up. The warrant of arrest was executed against the 1st respondent, Chan Hay Muk and the 3rd respondent, Choi Tsz Keung on 6 and 8 November respectively.

8. It is apparent from the affidavit filed on behalf of the Official Receiver that much information is required in the four areas investigated by the Official Receiver, namely the amount due from the directors, the amount due from subsidiaries and related companies, the loss suffered by the Company for the period of 1 April 1997 to 3 July 1998, and the investment of the Company in subsidiaries.

9. The Official Receiver has to show good reason for an extension of time under s. 168I(2). I have considered the relevant factors to be taken into account in the exercise of the discretion whether to grant an extension of time under this section in The Official Receiver v Mak Wing Hung, HCMP No. 2808 of 2002, 27 September 2002. I shall not repeat paragraphs 10 to 17 of my judgment here.

10. Using the same approach, I look at the gravity of the charges that may be made against the respondents. Leaving aside accounting records offences, the Official Receiver is investigating substantial advances made to the four respondents by the Company. Between 1 April 1997 and 3 July 1998, according to the unaudited management account, it would appear that the respondents have received a total of $47.2 million from the Company. It is not known at the moment if any repayment has been made. Further, substantial sums of over HK$110 million were advanced by the Company as interest free loans repayable on demand to seven subsidiaries and related companies. The respondents were directors and shareholders of one or other of these companies. There is no available information on the source of funds for the loans, the reasons for the loans and what the respondents knew or should have known of the financial position of the Company and the borrowers. During the same period, i.e. between 1 April 1997 and 3 July 1998, the Company sustained a reduction in retained earnings of HK$376.6 million. Nothing is known of the circumstances in which the Company had engaged in such loss making activities.

11. It seems to me that when the investigation is completed, and if the Official Receiver is in a position to apply for disqualification orders against the respondents, the allegations against them may well involve misappropriation of substantial funds and breaches of fiduciary duty. Such allegations, if established, are very serious indeed.

12. As for the delay, I am of the view that at least a significant part of the delay is attributable to the failure of the respondents to cooperate with the liquidators and the Official Receiver and their failure to keep proper accounts and records.

13. I bear in mind the public interest involved in proceedings for disqualification, in that the Official Receiver is not seeking to enforce a private right but is seeking to protect members of the public from the actions of persons alleged to be unfit to act as company directors.

14. In my judgment, the balance clearly comes down in favour of the Official Receiver in granting an extension of time. I make an order that the time for commencement of proceedings under s. 168H against the four respondents be extended for a period of six months from the date of this order. I order that the costs of these proceedings be in the disqualification proceedings to be brought.