RE MKI CORPORATION LTD

IN THE SUPREME COURT OF HONG KONG

COMPANIES (WINDING-UP) NO. 562 OF 1994

HIGH COURT

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D E C I S I O N

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1. This is an application in respect of costs following the dismissal of a winding up petition by consent. The brief history of the matter is that the petition was first presented by the Securities and Futures Commission on 13th December last year. The petition was brought under the provisions of Section 45 of the Securities and Futures Commission Ordinance to wind up the Company on the ground that it was just and equitable since it appeared that it was in the public interest so to do. The original petition was doubtless defective but there was a radical amendment on the 24th January this year. Following that in February there was an application to strike the petition out on the basis that it was incompetent having regard to the fact that the Company was an oversea company. After that the Petition was mentioned in Court on a number of occasions for the purpose of giving directions. At an early stage, and certainly during a hearing at the end of March, the Court was informed that a rescue operation was being sought by the company and that the outcome was hoped to be successful but that if no rescue could be achieved it was unlikely that the Petition would be contested. The matter has continued for longer than would have been optimal, but that has been necessitated by a number of steps necessary to bring about the rescue. That has now occurred and as a result the Commission is satisfied as to the present and foreseeable future running of the company and there has been a consent order to dismiss the Petition. The costs of the petition were reserved to be argued later and following that argument I said I would give my decision in writing which I now do.

2. The provisions of Section 45 of the Securities and Futures Commission Ordinance to which I have referred mirror the provisions of Section 124 of the Insolvency Act 1986 and indeed earlier provisions. The difference there being that the Secretary of State has the power to present a petition in the United Kingdom. That difference apart the effect of the provisions is the same. The effect of those provisions has been considered in a number of cases to which my attention has been drawn including in particular Re Highfield Commodities Ltd. [1984] BCLC 623, Re Walter L. Jacob Ltd. [1989] 5 BCC 244 and Re Xyllyx plc (No.2) [1992] 378. Rather than cite passages from those cases I consider it would be more convenient to enumerate the principles which I find I should apply in these proceedings. These are based on the principles which emerge from those cases which I have adapted to the situation of this case.

Winding up an active company is a serious step and the person seeking to do so must establish sufficiently weighty reasons for so doing.

The Secretary of State (in this case I equate the Commission with the Secretary of State) has himself nothing to gain from a winding up order. In this regard he is acting in what might be regarded as a process of law enforcement.

To present a petition therefore the Secretary of State ( the Commission) is acting at public expense and in what he sees as the public interest.

The question of costs should be approached on the basis "Was the petition properly presented by the Secretary of State (the Commission)?"

The fact that the petition might in the end not be successful is not determinative of the question of costs particularly, as here, in circumstances where the petition is dismissed by consent the circumstances relating to the Company having wholly changed.

3. Mr Graham on behalf of the Commission seeks costs. He says quite simply that there was ample reason to bring the petition. The grounds in the Petition are more than enough to have warranted the presentation. The evidence supports the petition and there is in effect nothing to contradict it. Had the rescue operation, which has resulted in a manifest change in the identity of the management of the Company, not been successful winding up would have been inevitable.

4. Miss Rattigan on behalf of the Company resists any order as to costs and says that the fair order would be no order as to costs. She says that the allegations in the petition have never been admitted or found proven. Furthermore the grounds of misconduct and mismanagement had clearly ceased by the time the petition was presented and therefore there was no justification in presenting the petition. That then leaves the allegation that the Company was insolvent, that she says has always been hotly contested and when the evidence is looked at, it can be seen that there is no clear conclusion to be drawn that the company was insolvent.

5. It is therefore, it seems, necessary to go into the allegations in the Petition and the evidence filed to support them to see whether there was justification in presenting the petition.

6. At the risk of oversimplification I can say that apart from potential insolvency the allegations made in the petition fall into 3 main categories.

Those running the company sought to induce the public to believe that Mr Arthur Lai, who had a substantial judgment debt of some $84,000,000 over his head, had left the management of the company. In reality however he continued to still hold the strings of management.

7. The share price of the company was "ramped" up from 32 ￠ on the 16th May to 65 ￠ on 3rd June 1994, falling back to 61 ￠ on the 6th June the day when trading in the Company's shares was suspended. This spectacular rise in price was due to a number of announcements of joint venture projects some with well known and substantial companies. All those announcements have proved to be bogus. Either there never were any joint ventures or if there were they did not take the form represented to the public and in one instance the subject matter of the joint venture was no more than a glint in somebody's eye and certainly not a reality. One is left with the impression that if this is the only Court proceedings following that episode, the parties responsible can justifiably feel truly relieved.

8. Finally there were a series of deals relating to land in the People's Republic of China. The net effect of the evidence which has been filed is that either there was deliberate dissipation of the Company's money to persons connected with the management and others or else the management of the Company was so culpably inept that large sums of money were lost.

The Management of the Company

9. Turning to the evidence this amply supports the allegations made in the Petition. It is provided mainly from an affidavit of Mr Hague, a Chartered Accountant, who had been appointed an authorised person under section 29A of the Securities and Futures Commission Ordinance. The judgment for $84 million was awarded against Mr Lai on 31st December 1992. He ceased to be a director on the 7th January 1993. But on that same day he entered a contract with the company to be its advisor. Mr. Lai also retained control of MKI Management Services Ltd. That latter company employed all the employees of the Company and effectively managed both companies. Moreover Mr. David Tang who had been a director of the Company since 1991 replaced Mr. Lai as Chairman of both the Company and the linked company Chesterfield Ltd. As late as 15th May 1994 the Mr. Tang as Chairman wrote an apparently unsolicited letter to Mr. Lai and referred inter alia to "paper" board meetings about "deals" in respect of which he signed papers about which he knew absolutely nothing. He said in the letter that hitherto he had signed all such minutes but suggested that thereafter they be left to executive directors.

10. The clear acknowledgement that the letter contains, that it was Mr. Lai who continued to run the Company despite the purported distancing, is only confirmed by many other documents signed by Mr. Lai giving directions as to the running of the Company. I need only mention one, as late as April 1994 in which Mr. Lai gave written instructions as to who might deal with the Stock Exchange and the public on behalf of the Company.

11. The continued secretive management by Mr. Lai is at least a starting point for justification to present the Winding up petition. The blind approach to signing paper Board Minutes expressed by the Chairman in the letter to which I have referred signifies a grave lack of attention by a director and Chairman to the affairs of a public company. That a director of a public company should sign minutes of "paper" board meetings approving or implementing deals of which he knew nothing is indicative of an indifference to the good of the company that is culpable to say the least. That such a person should abdicate his responsibility at the instigation of a shadow director who has taken steps to give the public appearance of having left the management of the company makes observance of fiduciary duties seem almost a distant dream. Regrettably the suggestion in the letter that a non-executive director might incur no liability if he wilfully ignores the activities of the company and the decisions of the board, shows that the duties of directors are clearly not understood.

The Ramping of the shares

12. This aspect of the Company's affairs seems to be linked with the appearance on the scene of a person listed under the name His Excellency Khundar Khalid Ahmed Hossain. Mr Hague's affidavit gives 4 examples of instances where public announcements were made by the Company. These as I have said on the only evidence before the Court present the picture of blatant bogus announcements. To give but one example the Company announced a 50/50 joint venture with a company by the name of Columbia Cellular Corporation. According to that company there never was any such joint-venture. There is nothing but a single scrap of paper, which could have been produced on any word processor, that would indicate otherwise. There is certainly no joint venture agreement that has been produced.

13. In another announcement the Company referred to the obtaining of marketing rights in respect of a super computer. Even if the alleged location of such a computer were not enough to put the reader on his guard, the fact remains that there was no such computer in existence. By the end of the period it seems that the Company was putting out statements about supposed partnerships to pursue power generation projects in China with Rolls-Royce Plc. There is apparently nothing to support that notion either.

14. The conclusion on this aspect of the case must be that the share price was doubled in the space of a few trading days by deliberately false statements by the Company. Again, such conduct can confirm that something is seriously wrong with the Company such that winding up proceedings may not be far away.

The Land Deals

15. In the first of the series of land deals the Company parted with substantial sums of money in the form of shares to persons related to Mr Richard Lo who was a director of the Company. The Company effectively lost its investment since it was written down from $76 million to $1,000. There were no steps taken to enforce the company's rights against the parties with whom it was dealing and the company had no prospect of being able to finance the necessary development it had undertaken as part of the deal. It would have had to do so in order to be able to retain the investment.

16. In the other deals the company paid sums of $10 million on each occasion. On the first of these 2 deals the purchase of land was to be effected by the purchase of a company from a Leung Kwok Hung. The deposit money was parted with before any feasibility study was undertaken. A Mr. Wong who was subsequently a director of the Company acted as guarantor. Mr. Wong has since disappeared. The date for completion of the agreement has passed; the deposit of $10 million and 130 million shares in Chesterfield Ltd. which were also pledged have not been recovered and instead MKI Management Services Ltd. extended the time for completion by 9 months although nothing was known as to the financial security of the deal as far as the Company was concerned.

17. The second deal was entered when ignoring legal advice the Company paid the deposit and has failed either to complete the purchase, retrieve its deposit or make use of any development opportunity. There is some suspicion that the same parties may have been involved.

18. All these deals have the appearance of being devices by which money or shares were extracted from the Company and the Company in effect lost its rights since there was never any prospect of it being able to finance the development projects that were integral parts of the deals. In respect of at least 2 of the deals and very probably also in respect of the 3rd there is a great deal of suspicion to say the least that those who received the Company's money were or were connected with one of the dircectors.

Lack of contrary evidence

19. Against this, as Mr. Graham pointed out, there was no evidence. The only evidence that was filed on behalf of the company was at a very early stage and no doubt was directed to the early version of the petition. On that occasion Ms. Picazo was able to say with some justification that the petition was too vague to be able to answer. That situation has long since passed. The Court cannot presume that there is a good answer to the allegations and evidence with which it has been presented.

Summary

20. The fact that the evidence as presented by the Commission shows that a key director at least has allowed himself and his position as Chairman to be used and manipulated by a shadow director is serious in itself. That the Chairman should at the same time confess to being ignorant of what was taking place in the Company is a matter that clearly calls for inquiry to say the least. The fact that a company should put out a false statement about a deal or joint venture is also in itself a matter for inquiry, censure and probably more. That 4 such false statements should be issued by the company within the space of a month when there were clearly no grounds for them is a matter that requires urgent rectification of the most severe kind. That this should be accompanied by a doubling in the share price can only give rise to the inference that the investing public, and here I include the institutional investors as well as the private investors, was being deliberately defrauded. That all this should be happening at a time when directors of the Company and their friends and relations were benefiting from deposits made in respect of land deals which can only be euphemistically be said to have turned sour is on the face of it unacceptable.

21. The imagination of this court is stretched to conceive of a more appropriate occasion when it is in the interests of the public to bring an end to the activities of the company. On the facts as presented the Commission were justified in taking the view that the investing public were simply being "ripped off".

22. Of course, as in any situation, what might on its face look plain, may be explained. Sinister appearances particularly of combinations of facts may have innocent explanations. Here none have been proffered and so the Court has to decide whether the facts as presented by the Commission justified their action. To this question there can be only one answer. The Commission were bound to present the petition. They were acting in the interests of all investors large and small. Had action not been taken not only would there be direct loss to others but the damage likely to be caused to the public good by the existence of such a company warranted the exercise of the extreme power of winding up. It was, as I say, open to the Company to bring forward evidence to show that the Commission acted in haste or ignorance of the real facts. That the Company has singularly failed to do. Not only is there no evidence to such effect but there is nothing to suggest that there might be evidence to that effect.

23. It was suggested by Counsel for the Company that other steps could have been taken such as using the powers the Commission under the Ordinance to seek injunctions or exclusion orders. In my view given the history of the matter and the clandestine activities which I have related, that would be taking a risk as to the effectiveness of such steps that the commission was justified in taking the view was too great for the occasion.

Cessation of objectionable activities

24. Miss Rattigan argued that there was no call upon the Commission to bring the winding up proceedings because by the time of the presentation of the petition in December 1994 the acts and conduct complained of had ceased and the relevant persons were no longer directors or in control of the company. To that it seems there are 2 answers. In the first place as I have indicated trading in the shares of the Company was suspended in June 1994. That clearly did not change matters overnight. For example the Chairman, who had confessed to blindly carrying out Mr. Lai's instructions, still remained a director. It will be noted that he remained a director of the Company until 24th September 1994. There was no reason on what I have seen that there could be any assurance that even by December 1994 the Company had been rid of the management of which the Commission complained. In the second place, and perhaps linked to the first reason, as Nicholls L.J. said in Re Walter Jacob & Co. Ltd (1989) 5 BCC 244 @ 257G the fact that the Company that has misconducted itself might take steps to make it appear that it has changed its course of conduct just as the net is closing around it would not seem to make very much difference. The wishes of those who control such a Company clearly do not weigh heavily in the public interest. Given the previous history of subterfuge in identity of the key figures behind the Company and hiding behind "front men " in the management, it must clearly take more than a mere statement of change of identity of personality of the directors to convince those who are charged with protecting the public interest that there has been a real and permanent change.

Conclusion

25. In my view the facts alleged in the petition and supported in the affidavit evidence filed on behalf of the Commission are more than enough to show that it was clearly the Commission's task on what it knew to take the most severe and drastic steps in the public interest. The Company had been used to dupe the public. The shares had been artificially boosted with false information and at the same time money was at best frittered away in imprudent deals and more likely siphoned out of the Company with unscrupulous deals and all the time the Company was giving the impression it was being run by its directors but in truth and in fact they were acting as fronts for a person who had good reason to distance himself and be seen to distance himself from the Company.

26. I therefore have no hesitation in awarding the Commission its costs.