RE WING FAI CONSTRUCTION CO LTD

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 735 OF 2002

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DECISION ON COSTS

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1.  At the close of the examination of Mr Johnny Chuang (“the Examinee”) pursuant to section 221 of the Companies Ordinance on 4 May 2005, the Joint & Several Liquidators (“the Liquidators”) made an application that the Examinee pays their legal costs incurred in the examination of the Examinee.  Mr Ridgeon, who appeared for the Examinee, opposed the application, indicating at the same time that he was not prepared to argue the matter and required time to prepare the submissions.  As a result, I adjourned the application and gave directions for the filing of written submissions.  Both sides had in accordance with the directions given, lodged and served their submissions.

The arguments

2.  The main argument that the Liquidators relied upon in seeking costs against the Examinee is the conduct of the Examinee.  It is said that the section 221 examination would not have been necessary but for the Examinee’s unreasonable refusal to attend an interview with the Liquidators.  The Liquidators draw support from the decision of Master Wolley ordering the directors of Wing Fai Construction Company Limited (“Wing Fai”) to pay the Liquidators the costs of their section 221 examinations, and the decision of Kwan J, upholding Master Wolley’s decision on appeal.

3.  The Examinee opposes the costs application, contending that he and the China Rich Group had legitimate concerns that the Liquidators would abuse the examination in order to gain an advantage in the litigations between the Liquidators and China Rich Group in circumstances where the Examinee had already outlined his evidence in an affirmation.     Wing Fai was a company within the China Rich Group.  The Examinee argues that there were good reasons why the examination should have taken place under the supervision of the court and he should not be penalized with an adverse costs order.  It is also argued that the position of the Examinee is different from that of the directors of Wing Fai and that the decision of Master Wolley does not bind this court.

Reasons for decision

4.  Costs is a matter of the court’s discretion.  I agree that in determining the costs order for a section 221 examination, it is highly relevant to establish the reasons that necessitate the examination.  The reasonableness or otherwise of the examinee’s conduct and his co-operation with the liquidators or the lack of it are therefore pertinent considerations.

5.  In the present case, the reasons and background leading to the Liquidators’ decision to examinee the former officers of Wing Fai had been summarized in paragraphs 3 to 8 of Kwan J’s decision of 12 March 2004, granting the Liquidators’ application to examine the Examinee subject to certain undertakings from the Liquidators (“Kwan J’s decision”).   It is of relevance to note that it has a difficult liquidation and the Liquidators had scanty information and documents about Wing Fai and its affairs.

6.  Paragraph 14 of Kwan J’s decision also set out the Examinee’s connection and employment with the China Rich Group.  Among other things, the Examinee was the company secretary of Wing Fai from 6 January 2000 to 12 December 2001.  He is a qualified accountant.  It transpired from his answers in the examination that before he joined the China Rich Group, he was employed by Deloittes and had been involved in auditing the accounts of the China Rich Group, including Wing Fai.  Further, in the course of his employment with the China Rich Group, he was responsible for consolidating the group accounts.  As such, one would have thought he should have come across the accounts of Wing Fai and would have some ideas about the financial and/or accounting affairs of Wing Fai.  Indeed, Kwan J found that the Examinee was involved in the drawing up of important financial documents for Wing Fai and that he is in a position to provide to the Liquidators material information relating to the financial affairs of Wing Fai.

7.  In the circumstances, it is only reasonable that the Liquidators wish to interview the Examinee for the purpose of seeking information and assistance.  The Liquidators first made the request to interview the Examinee by letter dated 13 November 2003.  The Liquidators indicated in the letter that the Examinee was entitled to be accompanied by a legal representative at the interview and that a list of questions and issues to be covered in the interview would be forwarded to him 48 hours prior to the time scheduled for the interview.

8.  The Liquidators received no reply to the letter and a chaser was sent on 3 December 2003.  By a letter dated 10 December 2003, the Examinee’s solicitors informed the Liquidators that the Examinee had on 26 November 2003 made an affirmation in HCCW 253/2003.  The letter further said that the Examinee was a witness of fact in proceedings relating to China Rich Group and its directors, and that the Liquidators were attempting to gain litigation advantage by abusing its powers under section 221.  The Liquidators were requested to supply a questionnaire to demonstrate that the questions intended to be put to the Examinee did not relate to the matters contained in his affirmation and the proceedings.

9.  The Liquidators responded by letter dated 11 December 2003, refuting the suggestion that they were abusing their powers and were seeking to gain a litigation advantage.  The Liquidators requested the Examinee to reconsider his position with regard to attending an interview, and undertook to provide to the Examinee a list of questions 48 hours prior to the interview.  The Liquidators indicated that if the Examinee did not agree to the request, they would proceed to make a section 221 application. 

10.  By letter dated 15 December 2003, the Examinee’s solicitors repeated their request for a questionnaire for the purpose of considering the request to interview the Examinee.  Further correspondences were exchanged during which the Examinee maintained his stance that he would only consider whether to attend an interview after seeing a questionnaire from the Liquidators. 

11.  On 6 January 2004, the Liquidators applied under section 221 for an order to orally examine the Examinee.  Prior to that, examinations of three former officers of Wing Fai had commenced and adjourned part-heard.  Upon their application to stay their examinations on the ground that they were parties or material witnesses in proceedings that had commenced since the making of the examination orders, Deputy Judge To ordered on 9 February 2004 that the examination of one former officer should not proceed but the examinations of two other officers should proceed subject to undertakings from the Liquidators that they would not put questions on certain matters. 

12.  Prior to the hearing of the section 221 application against the Examinee, the Liquidators offered to provide undertakings limiting the scope of the examination, similar to those ordered by Deputy Judge To.  Shortly before the hearing of the application, the Examinee’s solicitors wrote to the Liquidators, requesting other undertakings as conditions to the Examinee consenting to attending an examination.  At the hearing on 12 March 2004, the Liquidators offered two further undertakings but refused the other undertakings requested by the Examinee.  In the end, Kwan J granted the order of examination along the line of the undertakings offered by the Liquidators.  The further undertakings sought by the Examinee were refused by Kwan J.  Kwan J ordered the Examinee to pay the Liquidators the costs of the application and two-thirds of the costs of the hearing.  One-third of the Liquidators’ costs of the hearing were disallowed as Kwan J considered that the Liquidators should have offered the two further undertakings before the hearing.

13.  I had gone into the events leading to the examination order against the Examinee at some length because it appears from the submissions that the Examinees and the Liquidators have different views on the circumstances surrounding the making of the order.  The events underlying the examination order are also important considerations in determining the costs issue. 

14.  In light of the events set out above, I agree that the Liquidators are justified in saying that the Examinee had not been co-operative, as a result of which they were driven to conduct an examination in court instead of holding a voluntary interview with the Examinee.  Having regard to the Liquidators’ offer to conduct the interview in the presence of the Examinee’s legal representatives and to provide a list of questions 48 hours before the interview, the Examinee had not acted reasonably in insisting on being provided with a questionnaire before he would consider the Liquidators’ request of an interview.   Indeed in the letter dated 15 December 2003 to the Liquidators, the Examinee’s solicitors acknowledged that the Liquidators were at liberty to approach the Examinee for assistance on a voluntary basis.  Notwithstanding that, the Examinee would not agree to a voluntary interview, and would only consider the request for interview after seeing the Liquidators’ questionnaire.  

15.  As to the Examinee’s concerns that the Liquidators might attempt to abuse the examination to gain a litigation advantage, they have to be assessed against a number of matters. 

16.  Firstly, the Liquidators’ request to interview the Examinee was made well before the Examinee made his affirmation of 26 November 2003, and the Examinee had not responded to the request until being chased up by the Liquidators.   Secondly, the Examinee was not a party to any proceedings brought by the Liquidators.  Any concern that the China Rich Group may have over the effect and implications of the interview or examination of the Examinee on litigations relating to China Rich Group and/or the directors is irrelevant to whether the Examinee should render assistance to the Liquidators for the present liquidation.  Thirdly, the dispute in the winding-up proceedings for which the Examinee made the affirmation was resolved in September 2003 before the Examinee’s affirmation was filed, and the petition was eventually dismissed by consent in March 2004.  Fourthly, the Liquidators have pointed out that despite claims of the Examinee being a material witness for China Rich Group, the Examinee had only made one affirmation and has not appeared thus far to be a witness in any of the proceedings.

17.  It must be recognized that whatever concerns the Examinee may have, they were not sufficient to defeat an examination order, as demonstrated by the decision and order of Kwan J.   The undertakings given by the Liquidators only show that the Examinee was entitled to seek some safeguards to the ambit of the questions to be put.  They do not justify the Examinee’s approach in insisting on being supplied with a questionnaire before considering whether to agree to an interview.  

18.  The upshot of all these is as the Liquidators contend, the examination proceedings were necessitated by the stance adopted by the Examinee.  The Liquidators were entitled to be legally represented at the examination.  The legal costs incurred by the Liquidators for the examination should therefore be borne by the Examinee.  There is no justification for disallowing any part of the Liquidators’ legal costs.

19.  Turning finally to the costs decision of Master Wolley in connection with the examinations of the other former officers, I accept they are not binding on me.  However, the decision is illustrative of the principle that the reasons necessitating the examination proceedings and the conduct of the examinee are relevant factors in the determination of costs.  While costs is a matter of discretion and each case has to be considered on its own facts, I am unable to see any material difference between the position of the Examinee and that of the other officers of Wing Fai.                 

Conclusions

20.   For the reasons above, I order that the Examinee pays the Liquidators their legal costs of the examination, including the costs of this application for costs, to be taxed if not agreed.