THE OFFICIAL RECEIVER v. LAM KWOK SHING AND ANOTHER

HCMP 2240/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2240 OF 2007

______________________

______________________

______________________

______________________

J U D G M E N T

______________________

Introduction

1. Section 168 of the Companies Ordinance make it mandatory to make a disqualification order against a director if the court is satisfied that the company in which he is or has been a director has become insolvent and, further, that his conduct as a director of that company or of any other company makes him unfit to be concerned in the management of a company.

2. The present application by the Official Receiver is brought under 168H against the two respondents, the two Messrs Lam, concerning with their conduct whilst acting as directors of three companies, Strong Eagle Limited ("Strong Eagle"), Capital Faith Limited ("Capital"), and Sanfield International Limited ("Sanfield").

3. The Official Receiver served the originating summons together with all the evidence, the affidavits and the first Report of the Official Receiver in support of the application on the two Respondents.  The 1st Respondent has returned an acknowledgment of service indicating that he does not intend to contest the application but states that he wishes to adduce mitigating factors to justify for a shorter period of disqualification.

4. The 2nd Respondent has not returned any documents.  The 1st Respondent attended in person at the hearing today.  The 2nd Respondent was absent.  I am satisfied that the 2nd Respondent has been duly served with the application, and proceeded to hear the application in the absence of the 2nd Respondent.

The background

5. Strong Eagle was incorporated in Hong Kong on 11 July 1996.  Before it was wound up by a court on 16 June 2004 on the petition in HCCW635 of 2004, it operated a Chinese restaurant under the name of Viking Restaurant.  Bruno Arboit and Simon Blade were appointed as joint and several liquidators by an order dated 28 June 2006.

6. The two respondents - I was informed that they were brothers - were directors of Strong Eagle shortly after its incorporation until the purported resignation on 1 March 2002.  Further, the 2nd Respondent was reappointed on 25 April 2003 until 1 August 2003.  In the first Report of the Official Receiver, the Official Receiver states that the two respondents continued to act as directors despite their purported resignations on the ground that they remained as two of the authorised signatories of Strong Eagle's bank account.  Further, the 1st Respondent was the director of a BVI company, called Niceway Consultants Limited, a majority shareholder holding 1,750,000 shares out of a total of 5,250,000 shares in Strong Eagle.

7. Similarly, the 2nd Respondent was the director of another BVI shareholder company holding the same amount of shares called Fortune Look Holdings Limited.  According to the first Report, the total amount of proofs of debt was $1,763,260.17 and the amount of assets realised was $4.31.  Its assets were clearly insufficient to meet its debts.

Capital

8. Capital was incorporated in Hong Kong on 17 February 1989 and, similar to Strong Eagle, also operated a Chinese restaurant under the name of Viking Restaurant, Kwai Chung.  It was wound up on 9 January 2002 on a petition in HCCW1019 of 2001.  The same liquidators were appointed on 19 June 2002.  The respondents have been directors of Capital since 1 September 1989.  The total amount of proofs of debt filed was $1,055,088.89 and the amount of assets realised was $32,787.49.  Again, the Official Receiver states that the company was insolvent.

Sanfield

9. Sanfield was incorporated in Hong Kong on 25 September 1998 and, again, operated a Chinese restaurant called Viking Seafood Restaurant, Whampoa Garden.  It was wound up on 28 May 2003 on a petition in HCCW 403 of 2003.  By an order dated 7 May 2004, the same joint and several liquidators were appointed.  The two respondents were appointed as directors on 11 January 1999 until their purported resignations on 14 March 2002.

10. However, the Official Receiver states in the first Report that the respondents continued to act as de facto directors despite their resignations under similar circumstances as in Strong Eagle.  The proven amount of debt was $659,960.64 and the assets realised was $248,836.80.  Hence, the Official Receiver submits that the company was insolvent.

The Official Receiver's Grounds of the Application

11. The Official Receiver says that the respondents are unfit to be a company director on three grounds as follows:

(1)	The respondents have failed to comply with sections 121 and 274 of the Companies Ordinance, to keep proper books of account of the three companies as are necessary to exhibit and explain the transactions and financial position of the trade or business of the three companies throughout the period of two years immediately preceding the commencement of its winding-up;
(2)	The respondents have failed to submit any statement of affairs of Strong Eagle and Stanfield, hence, a breach of section 190 of the Companies Ordinance;
(3)	Whilst insolvent, Capital and Sanfield have paid to the respondents' two related companies controlled by the two respondents under the description of consultancy fees.  $1,884,000.00 and $1,177,500.00 were paid by Capital and a sum of $216,000.00 was paid by Sanfield.

Evidence

12. The Official Receiver has submitted a total of two reports and filed the affidavit of the Treasury accountant in support of the application.  The reports of the Official Receiver shall be prima facie evidence of any matter contained in them.  See Rule 4(2) of the Companies (Disqualification of Directors) Proceedings Rules.

13. Both respondents have filed no evidence.  On the issue of whether the respondents were directors, the Official Receiver, in her skeleton submissions, had relied on the English authority of Secretary of State for Trade and Industry v Tjolle [1998] 1 BCLC 333 at page 343, and stated that there was no one test for deciding whether a person was a de facto director.

14. On the evidence, I find that both respondents have been directors of the three companies within the definition of section 168H, subparagraph 1, sub-subparagraph (a) which is wide enough to encompass a de facto director by acting as if he were a director.  I am further satisfied that the two respondents were directors while the three companies were insolvent.

15. After having made this determination, I shall assess whether the evidence factually substantiates the grounds alleged by the Official Receiver.  In this application, a civil standard of proof shall be applied which is proof on the balance of probabilities.  I shall consider if the grounds that have been established warrant a conclusion that the two respondents are unfit to be company directors or someone involved in the management of a company.  Should I so find, I shall determine the appropriate period of disqualification.

16. As I have stated above, both respondents have filed no evidence to dispute the allegations.  As a matter of fact, the 1st Respondent, who appeared in person today, had stated in his acknowledgment of service filed with the court that he does not dispute the allegation.

17. After having considered the reports and all the evidence filed, I am satisfied that the grounds as alleged by the Official Receiver are made out.  In coming to this conclusion, I have considered the submissions made by Mr Lam, the 1st Respondent, in court today.  His explanation for the non-compliance with the provisions of the Ordinance or the commission of the offences, was due to his poor management.  I find that such explanation hardly goes to refute or militate against the allegations.

18. Apart from the third ground of allegation, the first and second grounds of allegation clearly point to the need and importance for company directors to comply with the obligations imposed upon them by law as directors.  As stated in one of the cases submitted by the Official Receiver, Secretary of State for Trade and Industry v Arif & Others[1996] BCC 586 at pages 593-594 the need for the directors to comply with these duties is:

"	(1)	To ensure that those who are concerned with the direction and management of companies who trade with the privilege of a limited company do maintain sufficient accounting records to enable them to know what the position of the company is from time to time.  Without that information, they cannot act responsibly in making decisions whether to continue trading.
	(2)	if the company fails, the company records are to enable the liquidator to identify and recover or exploit the company's assets.  His task would be made extremely difficult, if not impossible, if the company had failed to comply with obligation to keep proper books of account."

19. This case, in my view, clearly points to the importance of the requirement of directors to vigilantly fulfill such duties imposed upon them.

20. Having come to decision above, I will now next consider whether the two respondents are unfit to be directors.  From my findings above, it is clear that the two respondents are not competent to act as a director or engage in the management of a company.  In coming to this conclusion, I have also further considered all the factors as set out in Schedule 15 of the Companies Ordinance.  I have not just confined myself in considering those factors, I have also considered all the facts in this case.

21. The explanation given by the 1st Respondent today, as I have stated above, does not make me come to a contrary view that because he trusted his employers, therefore, he should be excused from exercising the duties imposed upon him by law.  So far as ground Three is concerned, I find Mr Lam's explanation was simply not satisfactory.  There is simply no explanation from him as to why he, together with his brother, the 2nd Respondent, have chosen to apply the funds of the companies in that way through companies controlled by them.  There is clearly a misapplication of the company's funds.

22. Taking the matter as a whole, I am of the view that the respondents are simply unable to handle corporate affairs in any responsible manner.  I am thus bound by section 168H to make a disqualification order against both of the directors. 

Period of Disqualification

23. Subject to the minimum and maximum disqualification periods specified in the Companies Ordinance, in section 168H(4), the length of disqualification is left to a court's discretion.  According to the English decision of Re Sevenoaks Stationers (Retail) Limited [1990] BCC 765 at 771H to 772H, three brackets have been identified and followed.  In this application, the Official Receiver is contented to rely on the minimum bracket of two to five years' disqualification.  This bracket applies to cases where though disqualification is mandatory, the facts are not very serious. 

24. In this application, the Official Receiver submits that according to the default of the two respondents, the appropriate disqualification period shall be three years.  Miss Ho, later on during the hearing, was prepared to submit that in light of the 1st Respondent's presence and his effort in putting forward mitigations, she was contented to accept a disqualification for 2½ years, a slight discount of six months. 

25. I take the respondents' misconducts seriously, especially the misapplication of the companys' funds.  Having considered the matter in the round, I accept that the facts of this case justify a disqualification at the top end of the minimum bracket.  I further consider the submissions made by the 1st Respondent.  Although I find his explanation was far from adequate in mitigating for any substantial length of reduction, however, I am prepared to give some discount in light of his sincerity in making an effort to mitigate against the default that he has made.  In that regard, I agree with the Official Receiver's submissions that a discount of six months would be appropriate.  I further accept the submissions that should in the absence of any mitigation of whatever type, the appropriate period for both the respondents should have been three years.

26. Hence, I make an order that the two respondents shall not, without the leave of the court be:

(1)	A director of a company;
(2)	A liquidator of a company;
(3)	A receiver/manager of a company's property; or
(4)	In any way, whether directly or indirectly, concerned or take part in the promotion, formation or management of a company for a period of 2½ years, for the 1st Respondent, and three years for the 2nd Respondent, beginning on the 21st day when this order is made, pursuant to Rule 10, Cap. 32K.

27. The Respondents do pay the costs of the application to be taxed if not agreed.