THE OFFICIAL RECEIVER v. YAN KWOK KEE GAY AND OTHERS

HCMP 1237/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1237 OF 2003

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D E C I S I O N

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1. This is an application issued by the Official Receiver under section 168I(2) of the Companies Ordinance, Cap. 32 for an extension of time and for leave to the Official Receiver to commence proceedings against the four respondents under section 168H for disqualification orders. The application was taken out by originating summons on 20 March 2003, three days before the time within which an application for a disqualification order was due to expire on 23 March 2003. The extension sought is nine months from the date of the order to be made.

2. The respondents are brothers and sisters and former directors of Yan Chim Kee Co. Ltd ("YCK"). The 1st respondent has filed an Acknowledgment of Service stating that he does not intend to oppose this application, the other three respondents have opposed the application and each has filed an affidavit in opposition.

The Approach of the Court in this Application

3. It would be convenient first to summarize the principles governing the general approach and the relevant matters to be taken into account in an application of this kind.

4. The court has an unfettered discretion whether to grant leave, a balance is to be struck between the public interest in that the Official Receiver is not pursuing a private right but is seeking to protect the public from the actions of those unfit to act as directors and the legitimate interest of the director concerned and the possible prejudice he may suffer if leave be granted. The Official Receiver has to show good reason for an extension of time. In most situations, the court will take into account the four factors mentioned below:

(1) length of the delay;

(2) reason for the delay;

(3) strength of the case against the director; and

(4) the degree of prejudice caused to the director by the delay.

None of the four factors are to be taken as constituting a free-standing test which much be satisfied before any extension of time is to be granted. The four factors are not exhaustive and all relevant circumstances are to be taken into account.

5. The principles summarized above are taken from Re Probe Data Systems Ltd (No. 3) [1992] BCC 110 at 118G; Re Copecrest Ltd [1993] BCC 844 at 852B; Secretary of State for Trade and Industry v Davies [1997] BCC 235 at 244G-H, 245C-D; Official Receiver v Mak Wing Hung, HCMP No. 2808 of 2002, paras. 10-12.

6. I turn to each of the above factors.

Length and Reason for the Delay

7. The Official Receiver has summarized the key events in a schedule attached to the skeleton submission and I do not propose to repeat them.

8. The reasons why the Official Receiver was not in a position to decide if proceedings for disqualification orders should be brought within the four-year period from the commencement of the winding up of YCK on 23 March 1999 would appear to be as follows.

9. Firstly, there was delay by the liquidators in submitting their report to the Official Receiver on the conduct of the directors (i.e. Form D1) under section 168I(3). The report was submitted only on 24 December 2002, despite repeated requests and reminders from the Official Receiver.

10. The reasons for the delay by the liquidators were due to the voluminous documents involved (over 200 cartons of documents were required to be reviewed); the difficulty in liasing with the former directors of YCK who claimed to be stationed mainly in the Mainland; and the fact that the Statement of Affairs prepared by the 2nd respondent did not agree with the latest accounting records of YCK, so it was necessary to clarify the discrepancies with the former directors and to ascertain if proper books and records were maintained by them.

11. These matters are not really disputed by the respondents.

12. I bear in mind that the delay by the liquidators in reporting misconduct of the directors to the Official Receiver will not in itself be sufficient explanation for the delay, as the Official Receiver has powers under section 168I(4) to require the liquidators to provide information (Re Polly-Peck International plc [1993] BCC 890 at 900H and 902A-B). The liquidators' delay is not to be looked at in isolation, as any delay attributable to the respondents should also be taken into account (Re Copecrest, supra. at 852D-E and 853B). I remind myself that the explanation for the delay is a matter to be considered with all other relevant circumstances and it is not to be treated as a free-standing test which must be satisfied before other considerations are to be taken into account.

13. The second reason for the delay is the contributory delay caused by some of the respondents. The Statement of Affairs was submitted with five months extension granted to the 1st and 2nd respondents. There was lack of response from the 2nd respondent to clarify queries raised by the liquidators relating to the Statement of Affairs and lack of response from the respondents and from YCK Investments Limited ("YCKI") and YCK (China) Co. Ltd ("YCKCCL") to clarify the accounting records of YCK and the debts due to YCK. I note in the 2nd respondent's affidavit he asserted that the delay in submitting the Statement of Affairs was due to the fact that books and records were removed from the premises of YCK when a writ of possession was executed and that he had tried his best to complete the Statement of Affairs with the limited resources available to him. Be that as it may, there had been delay occasioned by the respondents in providing information.

14. The third reason for the delay is due to the voluminous accounting records, more time was required by the liquidators and will be required by the Treasury Accountant of the Official Receiver's Office to complete the investigation.

Strength of Case against the Former Directors

15. This is not a reference to the strength or credibility of the evidence which the Official Receiver seeks leave to file but to the gravity of charges being made against a director (Secretary of State for Trade and Industry v Davies, supra. at 242B; Mak Wing Hung para. 12).

16. The deficiency of assets as disclosed in the Statement of Affairs is substantial, in the region of HK$168 million odd.

17. The main allegations of misconduct reported by the liquidators may be summarized as follows:

(1) disposal of assets by YCK to YCKI and YCKCCL during the year ended 31 March 1995 with no records of substantial cash payments by YCKI and YCKCCL;

(2) settlement of YCKI's expenses by YCK with no records of substantial cash payments by YCKI over periods ended 31 March 1996 to 31 March 1999;

(3) long outstanding debts due from YCKI and YCKCCL since the period ended 31 March 1995;

(4) two reductions made on 31 March 1999 on debts due from YCKCCL; and

(5) breaches of sections 121, 122, 274 and 190 of Cap. 32.

18. It is not necessary to go into the details of these allegations at this stage.

19. The Official Receiver's case against the respondents is that they were directors of YCK during the relevant period and in respect of the periods during which their appointments as directors were void, the respondents were de facto directors. The respondents had an interest or control in YCKI and YCKCCL during the periods under investigation.

20. The 2nd respondent has claimed that he was not held out to be a director under the public records in the Companies Registry after he resigned as director on 7 December 1992. According to the Official Receiver's affidavit, the 2nd respondent was a director on record in the subsequent period from 11 January 1993 to 4 November 1995, he was again appointed as a director on 7 October 1997 and there was no record of his resignation.

21. The 2nd and 4th respondents have asserted in their affidavits that they did not have an active role in the affairs of YCK. This is a matter to be resolved eventually in the disqualification proceedings, if it is decided by the Official Receiver that such proceedings should be brought.

22. The 2nd, 3rd and 4th respondents have also contended in their affidavits that of the deficiency in assets in the Statement of Affairs of HK$168 million, the unsecured portion of the liabilities amounted to approximately HK$93 million of which HK$79 million (representing 84.5% of the unsecured liabilities) were due to members of the Yan family. As the main victims of the failure of YCK are family members and the 1st, 2nd and 3rd respondents have already been made bankrupt, the respondents claim that there is no or little public interest involved for the Official Receiver to bring proceedings for disqualification orders against them.

23. I do not accept this. One of the purposes of a disqualification order is to protect members of the public from the actions of persons found to be unfit to act as company directors, the fact that only they or their family members have suffered as a result of their misconduct is not relevant.

Prejudice to the Respondents

24. Other than the general and inherent prejudice in the pendency of the disqualification proceedings that may be brought against them, it has not been shown that the respondents have suffered any specific prejudice. Inherent prejudice alone is unlikely to be sufficient for the court to refuse to exercise its discretion in favour of the Official Receiver (Re Manlon Trading Ltd [1995] 4 All ER 14 at 25b).

Orders

25. Having considered each of the above factors, and looking at the application in the round, I am satisfied that the court's discretion should be exercised in favour of the Official Receiver in granting the extension of time sought. I make an order in terms of paragraphs 1 to 3 of the originating summons.