THE OFFICIAL RECEIVER v. CHEUNG WAI LEUNG

HCMP 3470/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 3470 OF 2001

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J U D G M E N T

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Introduction

1. This is the Official Receiver's application taken out pursuant to s. 168H(1), Companies Ordinance (Cap. 32). That section provides:-

"The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied-

(a) that he is or has been a director of a company which has at any time become insolvent whether while he was a director or subsequently; and

(b) that his conduct as a director of that company, either taken alone or taken together with his conduct as a director of any other company or companies, makes him unfit to be concerned in the management of a company".

The gist of the Official Receiver's case in this application is based on s. 168H(1)(b), namely, the respondent's conduct as a director. The "disqualification order" referred to in s. 168H(1) is defined by s. 168D(1) as:-

"[A] court ... under section 168H shall ... make against a person a disqualification order, that is to say an order that he shall not, without leave of the court-

(a) be a director of a company;

(b) be a liquidator of a 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 specified period beginning with the date of the order".

2. The background facts are largely undisputed. A Hoida Industrial Company Limited (now in liquidation) ("Hoida Industrial") was incorporated in March 1982. The respondent was appointed as a director in April 1982. He also held 90% of the shares of Hoida Industrial.

3. In February 1991, an employee of Hoida Industrial, one Ms Chan, was injured in the course of employment. She lodged claims against Hoida Industrial both under the Employees' Compensation Ordinance (Cap. 282) as well as the common law. In relation to the claim under Cap. 282, judgment in the sum of $490,668 was entered against Hoida Industrial in Ms Chan's favour on 17 October 1996.

4. In May 1997, a Hoida International (HK) Limited ("Hoida Int'l") was incorporated. Similarly, the respondent has been appointed as a director of Hoida Int'l. He also held 90% of its shares as at May 1998 and thereafter held 99.9% of the shares.

5. On 27 June 1997, Ms Chan petitioned for the winding-up of Hoida Industrial for Hoida Industrial's failure to pay the judgment debt. A winding-up order was made therein on 13 August 1997.

The Official Receiver's Case

6. In the report to court dated 22 June 2001, the Official Receiver contended that a disqualification order should be made because of the following conduct of the respondent:-

(1) he has failed to take reasonable steps to keep and preserve proper books of account as are necessary to give a true and fair view of the state of Hoida Industrial's affairs and to explain its transactions: s. 121, Cap. 32;

(2) he has failed to keep proper books of account as are necessary to exhibit and explain the transactions and financial position of the trade or business of Hoida Industrial for the period of 2 years immediately preceding the commencement of the winding-up: s. 274, Cap. 32;

(3) he has failed to take reasonable steps to cause to be made out and laid before Hoida Industrial at its annual general meeting a profit and loss account and balance sheet for the year 1997: s. 122, Cap. 32;

(4) he has caused cheques to be issued by Hoida Industrial without due regard to the likelihood of their being honoured on presentation;

(5) he misapplied the properties of Hoida Industrial by transferring the assets and business of Hoida Industrial to Hoida Int'l;

(6) $436,658.52 was withdrawn after the date of winding-up, namely, 27 June 1997 from an account of Hoida Industrial which the respondent was the only authorised signatory;

(7) the following sums are due from a Hero Power International Limited ("Hero Power") to Hoida Industrial: $11,655,257 (as at 31 March 1995) and $11,487,956 (as at 31 March 1996). The respondent was a shareholder and director of Hero Power and responsible for extending the loan to Hero Power without security;

(8) he failed to submit to the Official Receiver a proper statement of affairs. The one submitted on 12 January 1998 for Hoida Industrial is incomplete: s. 190, Cap. 32.

7. In the Official Receiver's skeleton submissions, the Official Receiver submits that the duties of a company director include the following:-

(a) he should be equipped with the general knowledge, skill and experience which may reasonably be expected of a person carrying out the same function as that of a company director;

(b) he is under a fiduciary duty to avoid a conflict of interest between his own interest and his duties towards the company, to act bona fide and not to act for improper or collateral purpose.

The Respondent's Case

8. The respondent opposes this application. In his affirmation dated 19 February 2002, he responded to the Official Receiver's complaints as follows:-

(a) in relation to the books and records, some of them was lost during the removal of Hoida Industrial's office. Further, a large volume of documents stored inside a container were soaked and damaged by rain water in around 1998;

(b) that books and accounts were properly kept by Hoida Industrial is evidenced by Hoida Industrial's auditors being able to prepare auditor reports up to 31 March 1996;

(c) in relation to the dishonoured cheques, they were given to the suppliers of Hoida Industrial quite some time before the winding-up petition. It has been Hoida Industrial's practice to provide post-dated cheques to suppliers who requested some form of security for payment of their goods sold to Hoida Industrial by way of credit sale;

(d) in relation to the cessation of business, this was caused by Hoida Industrial being "short of working capital" (para. 12 thereof) and the respondent has "to cease providing fresh working funds as it was to be wound up". Further, after the presentation of the winding-up petition, Hoida Industrial "was incapable of taking on or executing orders for its customers" (para. 15 thereof). The respondent "agreed with [Hoida Industrial's] overseas buyers that [he] would be setting up another company to take their orders ... " (para. 26 thereof);

(e) in about June 1997, the respondent was "very upset and tired with the litigation which [Hoida Industrial] had with [Ms Chan] ... The ongoing litigation made it difficult for me to concentrate on doing business with overseas customers. At the same time the business of [Hoida Industrial] had been bad ... and [it] suffered losses" (para. 19 thereof);

(f) in relation to $11,655,257 due from Hero Power, this resulted from Hoida Industrial creating a legal charge over one of its properties as security for Hoida Industrial's borrowings which were partly made available for Hero Power's use (para. 24 thereof). The sum has been repaid to Hoida Industrial (para. 25 thereof);

(g) in around May or June 1997, the respondent contacted the overseas customers of Hoida Industrial and informed them the financial situation of Hoida Industrial. He also agreed with the customers that he would set up another company to take up their orders if they still prefer to do business with him (para. 26 thereof);

(h) in around June 1997, the respondent instructed the staff to send letters to customers informing them of the new company, namely, Hoida Int'l. By mistake, the staff wrongly stated that Hoida Industrial changed its name to Hoida Int'l (para. 30 thereof);

(i) the retention of the name "Hoida" was due to the respondent's sentimental attachment to the name (para. 33 thereof);

(j) there was no diversion of funds belonging to Hoida Industrial. Goods in fact shipped by Hoida Int'l were mistakenly invoiced on documents with Hoida Industrial's letterhead. The revised documents were to correct that mistake (para. 35 to 44 thereof).

9. The respondent also said in his 2nd affirmation dated 17 October 2002:-

(1) Ms Chan's claim in HCPI No. 494 of 1997 is without merits and has no chance of success. He believes Ms Chan did not sustain the alleged injury in the course of her employment (para. 3 thereof);

(2) the sale proceeds from the sale of Hero Power's real property were used to repay the loan owed to Hoida Industrial (para. 5 thereof).

10. The respondent further suggests during the hearing that if the books and accounts of Hoida Industrial were not in order, this could have been a result of oversight of the staff to whom he had entrusted the work. He also says that the Official Receiver never asked him to rectify the statement of affairs.

Credibility of Witnesses

11. The respondent attended the hearing in person and submitted himself for cross-examination by the Official Receiver. There is no need to go into the details under this heading suffice it to say I do not find the respondent to be a truthful or reliable witness. His denial of the Official Receiver's case is nothing more than an attempt to explain away his misdeeds and is therefore rejected (save as to his explanation that some of the documents have been damaged by water leakage).

12. The reports of the Official Receiver shall be prima facie evidence of any matter contained in it: r. 4(2), Companies (Disqualification of Directors) Rules (Cap. 32). Because the denial contained in the respondent's affirmation evidence has been rejected, there is no evidence which contradicts or refutes those reports.

Findings of Fact

13. The answer given by the respondent towards the end of his cross-examination about the litigation commenced by Ms Chan is telling of the true reason why the business of Hoida Industrial was brought to an end. In gist, this part of his testimony is as follows. He claims that he is very strong-willed. Ms Chan commenced litigation against him and, after many years, he lost the litigation. He feels upset about it and considers that Ms Chan was trying to cheat his money.

14. In light of this answer, I infer from the totality of the evidence (which has been accepted) that Hoida Industrial's business was brought to an end by the respondent (who has been the person effectively controlling it) because he wanted to defeat the judgment given in Ms Chan's favour. That kind of conduct, namely, aiding and abetting an individual to disobey a court order, or doing an act to obstruct or frustrate it, is an act of civil contempt: Borrie & Lowe: The Law of Contempt (1996) 3rd Ed., p. 573. This applies to an order for the payment of money, although whether the contemner can be imprisoned for such an act remains to be determined: Borrie & Lowe, pp. 582-583 and 647-651.

15. I have already stated that I do not find the respondent to be truthful or reliable. More specifically, in relation to the alleged "shortage of working capital" of Hoida Industrial, its "incapability to take on or execute orders for its customers" and the respondent informing the customers of the above, I infer that they were part of the respondent's design to close down Hoida Industrial. The same can be said of creating a legal charge over one of the properties and diverting its funds to elsewhere. The use of the word "Hoida" by Hoida Int'l (also controlled by the respondent) must have been also for the purpose of carrying out that design.

16. Further, in relation to the respondent's claim that he delegated parts of his duties as a director to others (for example, keeping proper books and accounts of Hoida Industrial), I do not find that to be a valid reason even if it were true. It is trite law that a company director cannot simply leave to others the duties imposed on him by law on his assumption of his position: Re Majestic Recording Studios Ltd (1988) 4 BCC 519, 522-523; Re Westmid Packing Services Ltd, Secretary of State for Trade and Industry v. Griffiths [1998] 2 All ER 124, 130.

17. On the other hand, in relation to the respondent's alleged failure to keep and preserve proper books of account, although I have rejected his evidence, it is possible that some of documents might have been lost in the water leakage incident he mentioned.

Conclusion

18. The standard of proof in this application (being civil in nature) is proof on the balance of probabilities but the cogency of evidence required must commensurate with the seriousness of the charge against the respondent: Phipson on Evidence (2000) 15th Ed., para. 4-36 citing Re H (minors) [1996] AC 563.

19. Any misconduct of the respondent as a director may be relevant to this application even if it does not fall within a specific provision of the Companies Ordinance (Cap. 32): Re Bath Glass Ltd (1988) 4 BCC 130, 133.

20. Having considered the above matters, I am satisfied that the Official Receiver has established his case against the respondent.

Period of Disqualification

21. Since I find that the case against the respondent has been established and that his conduct falls within s. 168H(1)(b), it is mandatory to make a disqualification order against him. The period of disqualification, on the other hand, is within my discretion (which must be exercised judicially).

22. The objective of such an order is to protect the public against the future conduct of companies by persons whose past records as directors of insolvent companies have shown them to be a danger to creditors and others: Re Lo-Line Electric Motors Ltd [1988] Ch 477. The order should also serve as a deterrent to the director concerned: Re Westmid Packing Services, p. 132a.

23. S. 168H(4) prescribes the period of disqualification as follows:-

"Under this section the minimum period of disqualification is 1 year, and the maximum period is 15 years".

24. Guidelines and broad tariffs were laid down in England by the court of appeal in Re Sevenoaks Stationers (Retail) Ltd [1990] BCC 771-772. The court of appeal endorsed the division of the 15-year period into 3 brackets (proposed by the official receiver in England):-

(a) the top bracket of disqualification for over 10 years should be reserved for particularly serious cases. These may include cases where a director who has already had one period of disqualification imposed on him falls to be disqualified yet again;

(b) the minimum bracket of 2 to 5 year's disqualification should be applied where, though disqualification is mandatory, the case is relatively not very serious;

(c) the middle bracket of disqualification from 6 to 10 years should apply where the case though serious do not merit the top bracket.

The guideline has been adopted in Hong Kong in cases including Re Wealth Property Agency Co Ltd, HCMP 5157 of 2001 and Re Observers Travel Enterprise Co Ltd, HCMP 3049 of 2000. Disqualification orders ranging from 6 years to 3 years have been imposed in the last-mentioned cases.

25. In this application, the respondent has been the person in control of Hoida Industrial. He is currently in charge of Hoida Int'l. He disclosed that he is about 50 years old at the time of the hearing of this application. He is married and has 3 children aged 3, 5 and 10. His wife is a housewife and hence the respondent must be the family's sole breadwinner. He said he had been in charge of Hoida Industrial since its incorporation in 1982. Before then, Hoida Industrial was operated as a firm. He has been a businessman for about 30 years, after having worked as a mould-worker from about 11 years old (when he completed primary education).

26. The seriousness of his conduct lies in its contemptuous nature. It must have been carefully pre-planned and thoroughly executed. The net effect is Ms Chan has been deprived of the fruits of her judgment since the time of accident up to now.

27. Taking everything into account, I consider that a disqualification period of 7 years is warranted. The disqualification is to take effect from 22 November 2003 in order to give the respondent a period of time to put his affairs in order.

Costs Order Nisi

28. I make a costs order nisi pursuant to RHC Ord. 42 r. 5B(6) that the costs of this application be paid by the respondent to the Official Receiver to be taxed if not agreed.