RE CHINA METAL RECYCLING (HOLDINGS) LTD

HCCW 210/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 210 OF 2013

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D E C I S I O N

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1. This is an application brought by the provisional liquidators of China Metal Recycling (Holdings) Limited (“China Metal”) against Mr Chun Chi Wai for an order for private examination under s. 221 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32).  The petition for the compulsory winding up of the company was presented to the court by the Securities and Futures Commission (“Commission”) on 26 July 2013.

Background

2. China Metal is a company incorporated in the Cayman Islands and registered under s. 333 of the repealed Companies Ordinance (Cap. 32) as a non-Hong Kong company.  It has numerous subsidiaries in other jurisdictions including Mainland China and Macau.  The business of the Group (by which I mean China Metal and its subsidiaries) consists of purchasing scrap metal from suppliers and producing recycled scrap metal products as well as reselling, without further processing, scrap metal purchased.  The shares of China Metal were first listed on the Main Board of The Stock Exchange of Hong Kong, Limited on 22 June 2009.  About HK$1,685 million, net of expenses, was raised by the initial public offering.

3. Mr Chun and his wife, Madam Lai Wun Yin, founded the Group.  He is the sole shareholder and director of Wellrun Limited (“Wellrun”), through which he has a 53% shareholding in China Metal.  He is the Chairman of the Board of Directors of China Metal and was, until the appointment of the provisional liquidators, its CEO. 

4. Six months after the company’s shares became listed, on 22 December 2009, the Commission formally began an investigation under s. 182 of the Securities and Futures Ordinance (Cap. 571) in relation to suspected publication of false or misleading information inducing transactions in the shares of the company during or around the period from 10 June to 17 November 2009.

5. The Commission has since come to the view that there were substantial overstatements of profits in the Prospectus for Global Offering and the 2009 Annual Report of China Metal.  The Commission alleges that the profits were overstated because a number of purchases said to have been made in 2007 to 2009 by a subsidiary of China Metal, namely, Central Steel (Macao Commercial Offshore) Limited (“Central Steel Macao”) from three suppliers, called Lane Tone, Jason Metal and Cheung Fat respectively, were not genuine transactions.  The petition alleges that about 38%, 64% and 90% of the gross profits for the years 2007, 2008 and 2009 respectively, as reported in the Prospectus and Annual Report, are fictitious.

6. The Commission believes that there was a round robin of funds in 2008 in that Central Steel Macao’s funds were paid out to the bank accounts of these three suppliers, then to the bank accounts of two supposed customers of Central Steel Macao, called Qi Le and Metallurgical, and then back to the bank account of Central Steel Macao.  The amount of money that allegedly went round a circle in this manner is said to come to over US$277 million.

7. The Commission has also investigated the books of the Group for the financial year 2012 and examined 342 bills of lading for the trades supposedly carried out by Central Steel Macao during that year.  This has led the Commission to conclude that there are serious doubts about the authenticity of these bills of lading and other transaction documents and, overall, about the genuineness of the trading transactions of Central Steel Macao.

8. The Commission also claims that its investigation has revealed certain connections among China Metal and the entities that are supposed to be the principal suppliers and customers of Central Steel Macao.  These are described in paragraphs 42 to 51 of the petition.  For example, the expense for incorporating Cheung Fat, a supplier of Central Steel Macao, was apparently paid by a cheque issued by a BVI company called Worldwide International Inspection Ltd, but Mr Chun Chi Wai and his wife Madam Lai Wun Yin were the signatories of the current account of that company with the bank, and Madam Lai was stated in the bank account opening documents as the sole director and shareholder.  Cheung Fat’s office telephone number as stated in another set of bank account opening documents was the same as the number of Asia Steel (HK) Limited, a subsidiary of China Metal.  The sole signatory of Cheung Fat’s bank account was one Mr Xie, who was also the sole signatory for the account of Metallurgical, a supposed customer of Central Steel Macao.

9. In January 2013, following a report published by the Glaucus Research Group that China Metal has deceived the market about the size of its business, trading in the company’s shares on the Stock Exchange was suspended.  As the conditions imposed by the Stock Exchange for resumption of trading have not been met, trading in the shares has remained suspended.

10. On 26 July 2013, pursuant to s. 212 of the Securities and Futures Ordinance, the Commission presented a petition to the court for the compulsory winding up of China Metal on the ground that it is just and equitable that it should be wound up.  It is alleged in the petition that China Metal and Mr Chun have contravened, inter alia, s. 300(1) of the Securities and Futures Ordinance in that China Metal had employed a “device, scheme or artifice with intent to defraud or deceive” and engaged in an “act, practice or course of business which is fraudulent or deceptive, or would operate as a fraud or deception” in making the Global Offer and inviting subscription for shares.

11. The petition states that

“61. In light of the evidence of fraud and dishonesty on the part of the senior management of the Company, in particular the existence of records of fictitious transactions, forged documents, and round robin of funds …, the Commission has grave concerns about the Company and also lacks confidence in the conduct and management of the Company’s affairs. Such conduct, in the Commission’s view, amounts to intentional and dishonest deceit of the public. …”

“62. There is evidence to suggest that Chun was directly involved in it, and might have orchestrated, the fraud. …”

12. The petition concludes that:

“the affairs of the Company (i) have been mismanaged to such an extent which renders it desirable in the public interest to wind up the Company in order to protect the interest of the members of the Company and the general investing public and (ii) need to be thoroughly investigated as a matter of urgency in order to protect the interest of its public shareholders, creditors and other stakeholders”.

13. On the same day, on the ex parte application of the Commission, Harris J appointed Mr Cosimo Borrelli and Ms Chi Lai Man Jocelyn as joint and several provisional liquidators of China Metal.  On 2 August 2013, their appointment was extended until further order of the court.  The order of appointment provides them with the power to take control of all of China Metal’s subsidiaries, whether in Hong Kong or otherwise.  The same two individuals have also been appointed provisional liquidators of Central Steel Macao and another subsidiary of China Metal, namely, Huan Bao Steel Limited, based on separate petitions for the winding-up of these two subsidiaries in Hong Kong.

14. At the end of July 2013, prompted by their concerns about payments of over HK$1 billion from the bank accounts of the Group immediately prior to their appointment, the provisional liquidators obtained an urgent Mareva injunction against Mr Chun and other defendants (including his wife and the suppliers and customers of Central Steel Macao mentioned above) up to the value of HK$1.68 billion, and caused a writ of summons to be issued in the name of China Metal and Central Steel Macao against these defendants (HCA 1412/2013). 

15. A statement of claim was filed in HCA 1412/2013 on 4 October 2013.  Largely adopting the allegations in the petition presented by the Commission, it claims that Mr Chun, in fraudulent breach of his duties to the plaintiffs and with the assistance of the other defendants, orchestrated and controlled the fictitious transactions and round robin of funds.  The other defendants are sued for dishonest assistance in Mr Chun’s breach of duties and, together with Mr Chun, for conspiracy using unlawful means.  It is pleaded that Mr Chun and Wellrun are liable for knowing receipt of cash and scrip dividends equivalent in value to HK$0.8 million and HK$357.4 million, out of total dividend payments made by China Metal of HK$672.9 million in the years 2009, 2010 and 2011.

16. Further, it is claimed that between 13 June and 29 July 2013, Mr Chun caused Central Steel Macao to remit approximately HK$1.96 billion to Cheung Fat and Pacific Metal, and that between 18 June and 24 July 2013, Mr Chun caused Central Steel Macao to remit a total of approximately HK$140 million to Healthy World and Gold Dragon.  These entities are all supposedly suppliers of Central Steel Macao, but the payments were not made for any legitimate commercial purpose.  Essentially, it is alleged that in the short period leading up to the appointment of the provisional liquidators, Mr Chun wrongfully caused over HK$2 billion to be spirited away from the Group to those entities.

17. By way of relief, the plaintiffs claim against Mr Chun and his wife (i) an indemnity for any claims against China Metal arising from the initial public offering, the Prospectus and the 2009, 2010 and 2011 Annual Reports; (ii) equitable damages or compensation for breach of trust and fiduciary duty; and (iii) damages for conspiracy.  The plaintiffs claim against the other defendants principally for the sums of money remitted from the Group to them.

18. For his part, Mr Chun denies the alleged wrongdoing and denies that the transactions in question were fictitious.  He explains that Central Steel Macao was established as an offshore company for tax purposes.  He says that the allegedly suspicious matters identified by the Commission are explicable and satisfactory explanations had been given to the professionals during the due diligence and audit performed prior to the listing of China Metal.  He criticises the Commission for overlooking the fact that the entities Qi Le and Metallurgical did not always act as customers but also sometimes as agents or intermediaries for others in the scrap metal trading with the Group. 

19. Further, he says Glaucus had published its adverse reports about China Metal in order to profit from short-selling the company’s shares.  He relies on the fact that as required by the Stock Exchange in 2013, Ernst & Young had been engaged by China Metal to conduct an independent forensic review, and was ready to issue its report vindicating his position but for the presentation of the petition herein.  He has also exhibited the draft audit report prepared by China Metal’s auditors in July 2013 which included an unqualified audit opinion.

20. It is not for me to delve deeply into the allegations in the petition and the matters raised by Mr Chun or by the other directors of China Metal in opposition.  The petition has been set down for trial in February 2015.  For present purposes, I proceed on the basis that there is a winding-up petition presented in good faith which is being vigorously opposed.

The present application

21. On 21 February 2014, the provisional liquidators took out a summons for various orders against Mr Chun.  Paragraphs 1 and 2 seek orders for the purpose of enabling the provisional liquidators to take control of the Mainland subsidiaries of China Metal, such as orders requiring Mr Chun to take steps to procure the appointment of the provisional liquidators or their representatives as directors or legal person’s representatives of those subsidiaries. Paragraph 3 seeks an injunction to restrain Mr Chun from interfering with the business and affairs of China Metal and any of its subsidiaries and associated companies.  These parts of the summons have been, or are being, dealt with by Harris J, and form no part of the application before me.

22. What the provisional liquidators seek before me are orders in terms of paragraphs 4 to 7 of that summons. 

23. Mr Chun initially opposed the entirety of the summons.  By a letter of his solicitors dated 29 April 2014, however, Mr Chun has essentially agreed to provide the affirmations and books and papers referred to in paragraphs 5 to 7 of the summons subject to certain qualifications.  The main dispute between the parties before me is whether I should make an order in terms of paragraph 4 of the summons, namely:

“The Respondent be examined on oath before a Master of the High Court of Hong Kong in relation to the promotion, formation, trade, dealings, affairs or property of the Group (including its current and former subsidiaries) and its associated companies for the purpose of identifying and preserving the assets of the Group.”

24. For his part, in his solicitors’ letter dated 29 April 2014, Mr Chun contends that an order for examination is premature and states that he is willing to provide assistance by giving written answers to a questionnaire setting out the precise questions the provisional liquidators wish to ask.  This proposal was not acceptable to the provisional liquidators who have therefore pursued the application for an order for private examination.

Discussion

25. S. 221 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) provides:

“(1) The court may, at any time after the appointment of a provisional liquidator or the making of a winding-up order, summon before it any officer of the company or person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs, or property of the company.

(2) The court may examine him on oath concerning the matters aforesaid, either by word of mouth or on written interrogatories, and may reduce his answers to writing and require him to sign them.

……”

26. The principles governing the exercise of the power under s. 221 are not in dispute.  They have been summarised by Lord Millett in The Joint & Several Liquidators of Kong Wah Holdings Ltd (in compulsory liquidation) v The Grande Holdings Ltd (2006) 9 HKCFAR 766 at §30 and need not be repeated here.

27. It is also not in doubt that the applicant, here the provisional liquidators, must satisfy the court that they reasonably require the information to carry out their functions, and that on a careful balancing of the relevant factors, the examination does not impose an unnecessary and unreasonable burden on the person to be examined in the light of the applicant’s requirements: British & Commonwealth Holdings plc (Joint Administrators) v Spicer & Oppenheim [1993] AC 426, 439D-H.

28. The arguments that have been raised in this case concern principally whether there is jurisdiction to order examination in relation to the subsidiaries of China Metal, whether the applicants have established a reasonable requirement for the order of private examination, and whether the order would be oppressive to Mr Chun.

29. The applicants accept that the burden on the present application lies on them to satisfy the court that they reasonably require the information to be obtained through private examination in order to carry out their functions.  They also accept that the functions of a provisional liquidator are more limited than those of a liquidator appointed after a winding order has been made.  For the purposes of this application, there is no dispute that the relevant functions of a provisional liquidator of a company include identifying and preserving the assets of the company.

30. The provisional liquidators’ case is that the order sought is required for the proper and effective discharge of their duties in relation to the subsidiaries of China Metal in Mainland China (“Mainland subsidiaries”).  They say that Mr Chun was closely involved in the control and management of the Group and particularly in the affairs and business operations of the Group in the Mainland; that he still wields a high degree of control over the operations of the Group and, in particular, the management of the Mainland subsidiaries; and that he is able to procure information from the Mainland subsidiaries and their management when it suits his purposes.

31. In contrast, the provisional liquidators say that they have had little success in gaining access to and taking control of the Mainland subsidiaries.  In particular, they have not yet been appointed as directors and legal representatives of the Mainland subsidiaries or gained access to or control over their bank accounts.  One of the reasons, they say, is that Mr Chun has failed to cooperate with them and has instead sought to obstruct the performance of their duties.

32. In this regard, the provisional liquidators point to the sparse statements of affairs submitted by Mr Chun and Madam Lai and the protracted history of the steps required to obtain assistance from Mr Chun.

33. On 6 August 2013, Hogan Lovells, solicitors for the provisional liquidators, wrote to Mr Chun’s solicitors to request his urgent cooperation and assistance and requested that Mr Chun attend a meeting with the provisional liquidators to assist them.  The letter also criticised Mr Chun for attempting to deal with the assets of the Group and to interfere in the affairs and dealings of the Group.  There was no response to the request for assistance.

34. On 6 September 2013, Mr Chun submitted a statement of affairs pursuant to s. 190 of the Companies Ordinance (since renamed Companies (Winding Up and Miscellaneous Provisions) Ordinance).  In that statement, he stressed he did not have the company’s books and accounts with him since provisional liquidators had been appointed, and stated that reference should be made to the books, records and registers of the company for the requisite information. 

35. On 25 October 2013, Hogan Lovells wrote again to Mr Chun’s solicitors to seek his assistance.  On 30 October 2013, Mr Chun’s solicitors replied, stating that Mr Chun “is willing to do anything he can in order to assist and to achieve what is best for the Company and its shareholders”.  Mr Chun, however, did not agree to have a meeting with the provisional liquidators, and asked them instead to state in writing the areas of enquiry in which they sought his input.

36. On 8 November 2013, Hogan Lovells wrote to Mr Chun’s solicitors setting out a list of six matters with which the provisional liquidators requested Mr Chun’s urgent assistance, as well as to request a meeting with Mr Chun.  The six matters are:

(1)  to change the directorships and legal representative of each of the Mainland subsidiaries from the current directors to the provisional liquidators;

(2)  to provide all certificates and company chops (including the finance chop) of the Mainland subsidiaries;

(3)  to provide lists of the Mainland subsidiaries’ bank accounts including bank name, bank account number and account opening form, and to change the bank signatories to the provisional liquidators for the bank accounts of the Mainland subsidiaries;

(4)  to facilitate the change of bank signatory to the provisional liquidators for the bank accounts of Central Steel Macao in Guangzhou with Bank of China and ICBC by executing (i) a power of attorney; (ii) application letters to the banks; and (iii) change of authorised signatory cards prescribed by the banks;

(5)  to provide full bank statements for the bank accounts of the Mainland subsidiaries; and

(6)  to provide details of all the bank loans owed by the Mainland subsidiaries and the associated securities. 

37. After a further exchange of correspondence, on 26 November 2013, Mr Chun’s solicitors responded on his behalf on requests 2, 3, 5 and 6 above, stating that he “does not have in his possession” any of the certificates, company chops or bank statements of the Mainland subsidiaries, and that he “does not know the exact details” of the Mainland subsidiaries’ bank accounts or bank loans.  The letter stated that to the best of Mr Chun’s information or belief, the Mainland subsidiaries have bank accounts with Bank of China, ICBC, China Minsheng Bank, China Everbright Bank and Shanghai Pudong Development Bank, and have obtained loans from Bank of China, ICBC and China Minsheng Bank.

38. Two months later, in an affirmation filed in HCA 1412/2013, Mr Chun said that the provisional liquidators should already have access to the statements of the account of Central Steel Macao at Bank of China in Guangzhou and that he no longer had authority to have access to that account.

39. On 21 February 2014, the provisional liquidators issued the present summons, on the basis that the assistance sought would assist them in at least the following respects:

(1) identifying any bank accounts held by the Mainland subsidiaries;

(2) ascertaining the historic activity on the bank accounts of the Mainland subsidiaries and the use to which funds were put and what balances stand to the credit of the Mainland subsidiaries;

(3) identifying details of bank loans owed by the Mainland subsidiaries and any associated charges, liens or other security arrangements, which may affect the asset position of the Group;

(4) obtaining an understanding of the affairs and operations of the Mainland subsidiaries; and

(5) stabilising the operations of the Mainland subsidiaries.

40. By the first affidavit of Mr Borrelli dated 19 February 2014, the provisional liquidators explained that they had not been able to become the directors and legal representatives of the Mainland subsidiaries, that they had not been able to change the bank signatory of Central Steel Macao’s account with Bank of China Guangzhou and ICBC Guangzhou, and that they had not been able to establish the business, assets and affairs of the Mainland subsidiaries.

41. In his affirmation filed on 28 March 2014 in opposition to paragraphs 4 to 7 of the provisional liquidators’ summons, Mr Chun stated that he is “willing to cooperate and assist the Provisional Liquidators for the best interests of the company without violating [his] constitutional rights and in accordance with the PRC laws”.  He said that the provisional liquidators had not asked him to assist them in understanding and operating the business of China Metal and the Group, and had not explained to him their business plan and how they would operate the business of the Group. He said that given the investigation by Commercial Crime Bureau and by the Commission and the civil claim in HCA 1412/2013, private examination under s. 221 would give the provisional liquidators an unfair advantage and result in the premature disclosure of evidence.

42. After several hearings before Harris J in March and April 2014, pursuant to the orders of the court under paragraphs 1 to 3 of the summons, Mr Chun eventually on 16 April and 7 May 2014 signed certain documents in relation to the appointment of the provisional liquidators as directors and legal representatives of the Mainland subsidiaries.  By the order of Harris J dated 7 April 2014, Mr Chun was also ordered to assist the provisional liquidators, on reasonable notice, to obtain possession of the original business licence and certificates, company seals and chops of the Mainland subsidiaries including but not limited to attending meetings with the provisional liquidators, providing information on the identity of the persons who may have control or possession of the documents and articles, and signing any necessary documents to authorise such persons to deliver them to the provisional liquidators.

43. Notwithstanding these documents and orders which have come into existence after the date of the present summons, as at the date of the hearing before me, the provisional liquidators have still not gained any meaningful access to and control over the Mainland subsidiaries.  On that basis, the provisional liquidators maintain that the assistance they seek from Mr Chun by way of oral examination is required to identify and preserve the assets of the Mainland subsidiaries and to understand and stabilise their business and operations.

Jurisdiction under s. 221

44. As I understand his submissions, Mr Yu SC, who appears on this application with Miss Sara Tong for Mr Chun, submits that having regard to the provisional liquidators’ purpose, the order sought is legally impermissible because there is no jurisdiction to require Mr Chun to be examined under s. 221 concerning the affairs or property of the Mainland subsidiaries, as opposed to the affairs or property of China Metal itself.  As a matter of fact, the applicants are the provisional liquidators of China Metal (and of Central Macau and Huan Bao), but not of any of the Mainland subsidiaries.

45. Mr Yu refers me to Re Mid East Trading Ltd [1998] 1 BCLC 240.  In that case, the judge at first instance had ordered the Lehman Brothers companies, with which the wound up company Mid East had dealings, to produce documents relating to Mid East under s. 236 of the (English) Insolvency Act 1986.  He further ordered that, for that purpose, documents relating to two other companies called IFCO and Sigma were documents that also related to Mid East (p 249c-e).  But IFCO and Sigma were not subsidiaries of Mid East.  They were companies which were, like Mid East, controlled by one Mr Daouk, who is said to have perpetrated a fraud, acting through those three companies, on a large number of investors.  The Court of Appeal held (at pp 252g–253b), however, that even if the documents that related to IFCO and Sigma also related to Mr Daouk’s fraud, it did not follow that all the documents that related to IFCO and Sigma also related to Mid East.  There being no evidence that all the documents in the Lehman Brothers companies which related to IFCO and Sigma must necessarily also relate to Mid East, the Court of Appeal substituted an order that contained the necessary qualification (p 254c-f).

46. Mr Yu further relies on the following passage in Kong Wah at §62, where Lord Millett said:

“The jurisdiction of the court under s.221 is limited to the production of documents which relate to the company in liquidation and does not extend to documents which relate to its current or former subsidiary or associated companies unless they also relate to the company itself, and this cannot be assumed: see Re Mid East Trading Ltd (supra). But in the present case the orders were limited to the production of documents in respect of five specified matters. The judge was entitled to take the view that each of those matters related to the Companies, and that accordingly any document in respect of them related to the Companies, whether or not they also related to other entities.”

47. Under s. 221(1) the court may summon a range of persons including “any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs, or property of the company”, that is to say, the company in respect of which a provisional liquidator has been appointed or a winding-up order has been made. Under s. 221(2) the court may examine that person on oath “concerning the matters aforesaid”.  The “matters aforesaid” are clearly the promotion, formation, trade, dealings, affairs, or property of the company.

48. Just as the documents required to be produced under s. 221(3) must relate to the company in whose liquidation the application for production is made, I have no difficulty in accepting that the examination under s. 221(2) must concern the promotion, formation, trade, dealings, affairs, or property of that company.  This is plain from the language of s. 221 itself.  The court has no jurisdiction under s. 221 to examine a person concerning some other matter.

49. As Lord Millett made clear in Kong Wah, it cannot be assumed that documents that relate to the current or former subsidiary or associated companies of a company must ipso facto also relate to that company itself.  Likewise, it seems to me whether information concerning a subsidiary company concerns also the promotion, formation, trade, dealings, affairs, or property of the parent company is a question of fact that depends on the circumstances of each case.

50. In s. 221(2), the word “concerning” seems to be used as the equivalent of the phrase “relating to” in s. 221(3).  Both are expressions of wide import.  Further, in various contexts in company law, the expression “affairs of the company” has been held to have a wide meaning. Thus, in R v Board of Trade, ex p St Martins Preserving Co Ltd [1965] 1 QB 603, a case concerning the power of the Board of Trade to appoint an inspector to investigate the affairs of a company under s. 165 of the Companies Act 1948 (the then English equivalent of s. 840 of the Companies Ordinance (Cap. 622)), Phillimore J said at p 613:

“In speaking of ‘its affairs’ in connection with a company the natural meaning of the words connotes ‘its business affairs.’ What are ‘its affairs’ when the company is in full control? They must surely include its goodwill, its profits or losses, its contracts and assets including its shareholding in and ability to control the affairs of a subsidiary, or perhaps in the latter regard a sub-subsidiary such as Atholl Houses Ltd. In ordinary parlance the affairs of the applicant company must surely have included its shareholding in T. G. Tickler Ltd., and its power in virtue of that shareholding to control the board of that subsidiary and the disposition of Atholl Houses Ltd., the wholly owned sub-subsidiary.”

51. In Rackind v Gross [2005] 1 WLR 3505, a case that concerned the meaning of the phrase “the affairs of the company” in the provision on unfair prejudice found in s. 459 of the Companies Act 1985 (the equivalent of s. 724 of the Companies Ordinance (Cap. 622)), Sir Martin Nourse said, at §26, after quoting the above passage from ex p St Martins Preserving Co Ltd:

“The observations of Phillimore J demonstrate that the expression ‘the affairs of the company’ is one of the widest import which can include the affairs of a subsidiary. Equally, I would hold that the affairs of a subsidiary can also be the affairs of its holding company, especially where, as here, the directors of the holding company, which necessarily controls the affairs of the subsidiary, also represent a majority of the directors of the subsidiary. …”

52. In Scottish Co-operative Wholesale Society Ltd v Meyer 1954 S.C. 381, a case concerning the provision for remedy against oppressive conduct of the affairs of a company found in s. 210 of the Companies Act 1948, Lord President Cooper said at 391:

“In my view, the section warrants the court in looking at the business realities of a situation and does not confine them to a narrow legalistic view.”

This statement was expressly approved by Viscount Simonds when that case went on appeal to the House of Lords ([1959] AC 324, 343), as well as by Ralph Gibson LJ in Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360, 368, which was a case on s. 459 of the Companies Act 1985.

53. Likewise, in In reDernacourt Investments Pty Ltd, Baker Davis Supply Co Pty Ltd v Dernacourt Investments Pty Ltd (1990) 2 ACSR 553, 556, cited with approval in Rackind v Gross [2005] 1 WLR 3505 at §29, Powell J, sitting in the Equity Division of the Supreme Court of New South Wales, said:

“The words “affairs of a company” are extremely wide and should be construed liberally: (a) in determining the ambit of the “affairs” of a parent company for the purposes of s 320, the court looks at the business realities of a situation and does not confine them to a narrow legalistic view; (b) “affairs” of a company encompass all matters which may come before its board for consideration; (c) conduct of the “affairs” of a parent company includes refraining from procuring a subsidiary to do something or condoning by inaction an act of a subsidiary, particularly when the directors of the parent and the subsidiary are the same …”

54. In my view, there is no reason to adopt any more restrictive interpretation of the word “affairs” in s. 221.  On the contrary, as Bokhary and Chan PJJ said in Kong Wah at §2, “the section’s language and its purpose combine to call for a wide interpretation of the court’s powers thereunder”.

55. Thus, the Court of Appeal has held in Re Nardu Co Ltd [2008] 4 HKLRD 165 at §16, a case on s. 221 itself, that

“information concerning the “dealings” or “affairs” of the company … are wide enough to cover, in an appropriate case, information concerning the activities of a subsidiary of the company concerned”.

The court considered that where the principal asset of a subsidiary has been disposed of, rendering the subsidiary valueless, it was within the ambit of the section for the liquidator of the parent company to seek information regarding what has become of the asset of the subsidiary. Citing Re Grandactual Ltd [2005] EWHC 1415 (Ch) at §29 and Re Step by Step Ltd (HCMP 838-840, 842-851 and 1208/2007 & HCA 2712/2006; 26 October 2007) at §47, the court also considered that it could in appropriate cases be said that conduct of the affairs of one company also constitutes conduct of the affairs of another when the first company either is controlled by or has control of the other.

56. In Re United Pacific Trading Ltd (in liquidation) (HCCW 424/2006, 21 May 2009) at §14, a decision on an application under s. 221, Kwan J, citing Re Nardu Co Ltd, said:

“[T]he affairs of a subsidiary could be regarded as the affairs of a holding company for present purpose if the latter had de facto control over the former, which would normally be satisfied via the control of the composition of the board of directors or by the control of the voting power exercisable by the shareholders”.

57. Having regard to these principles, it seems to me that the information concerning the Mainland subsidiaries sought by the provisional liquidators is likely to be information concerning the affairs, dealings and property of China Metal.  China Metal is the holding company of the Group, with the business operations actually carried out by the subsidiaries.  China Metal itself was incorporated in the Cayman Islands, no doubt for the purpose of the listing in 2009.  It is evident from the affirmations and pleadings filed on behalf of Mr Chun in these proceedings and in HCA 1412/2013 that he regards the entire Group as one single enterprise carrying on a scrap metal recycling business in the Mainland.  The statement of affairs submitted by him refers broadly to stock and inventory, factories and machinery, and land and buildings in various part of Mainland China, which in all probabilities are property held directly by the Mainland subsidiaries, as the assets of China Metal.  Indeed, the headquarters of the Group is China Metal Recycling Investment Co., Limited in Shanghai, one of the Mainland subsidiaries, said to be the “business hub” of the Group. 

58. Mr Yu says the provisional liquidators have a duty to preserve the assets of China Metal, not the assets of its subsidiaries.  The assets of the Mainland subsidiaries are therefore outside the purview of their office.  With respect, this argument takes far too narrow a view of the scope of the provisional liquidators’ functions.  I leave aside the position with respect to a company in which the company in provisional liquidation holds only a small shareholding in proportion to the entire issued share capital, as to which different considerations may apply.  Here, in contrast, we are concerned with subsidiaries, i.e. companies over which the company in liquidation have a substantial measure of control.  To preserve the value of the shareholding owned by a company in a subsidiary, it may well require a liquidator to take active steps in turn to preserve the assets of the subsidiary.  On the facts of this case it is clear to me that the provisional liquidators have a duty to get informed about the affairs and assets of the Mainland subsidiaries and where necessary to take steps to protect them. 

59. It is no doubt in recognition of the business reality that paragraph 4(k) of the order appointing the provisional liquidators expressly gives them the power to take control of and exercise all rights which China Metal may have in relation to any of its joint-ventures, subsidiary or associated companies or other entities in which China Metal holds an interest. Paragraph 4(x) sets out further specific powers granted to the provisional liquidators in respect of the subsidiaries of China Metal.

60. I therefore reject the contention that there is no jurisdiction to make the order for examination for the intended purpose.

Reasonable requirement of the provisional liquidators

61. Another main point taken by Mr Yu SC is that the provisional liquidators have not made out a case that the information they seek is reasonably required for the performance of their functions.  In considering this question, I bear in mind the principle established by the authorities that “great weight should be given to the views of the liquidator, for he is an officer of the court and alone has the necessary knowledge of the problems facing him in understanding the affairs of the company and his reasons for seeking production of documents in the terms proposed” (per Lord Millett in Kong Wah at §27).

62. It is said that the six matters raised in Hogal Lovells’ letter of 8 November 2013 on which Mr Chun’s assistance was sought have all been dealt with by Mr Chun either voluntarily or pursuant to subsequent specific orders of the court or will be dealt with by Mr Chun under paragraphs 5 to 7 of the summons.  Mr Yu submits that no additional purpose would be served by oral examination of Mr Chun.  He submits further that, if the documents signed by Mr Chun are insufficient to enable the provisional liquidators to become directors or legal representatives of the Mainland subsidiaries, no amount of oral examination will alter that fact.  However, the fact is that the provisional liquidators have not obtained access to or control over the Mainland subsidiaries.  They have not even been able to lay their hands on the bank statements of those subsidiaries.  That being the case, it cannot be said that the provisional liquidators could investigate and find out for themselves the assets and businesses of the subsidiaries.  They are strangers to the Group and need the assistance of its former officers in order to carry out their duties.

63. Moreover, the six matters raised in November 2013 were the matters in respect of which the provisional liquidators then required Mr Chun’s urgent assistance.  They were not stated to be the only matters on which information is required from Mr Chun.  In the same letter, the provisional liquidators also asked for a meeting with Mr Chun, which, as I have stated above, had never taken place.

64. The provisional liquidators have stated in their evidence the purpose of the application, as explained above.  Although the summons does not confine the order for examination sought to the Mainland subsidiaries, I think that intention is implicit in the evidence filed.  Mr Yu criticises the provisional liquidators for not being more specific about what they precisely need, but Miss Chan’s riposte is that as strangers to the Group and without the information they have sought from Mr Chun, it is difficult for the provisional liquidators to be more specific.  This seems to me to be a matter of degree.  On the materials before me, I am satisfied that an oral examination is reasonably required to enable the provisional liquidators to carry out their functions.

65. There is some attempt by Mr Chun to downplay the level of his knowledge of the affairs of the Group.  But it is in my view indisputable that he played a key role in the management of the Group.  He was the founder, Chairman, Chief Executive Officer and controlling shareholder of the Group.  He was, and had remained up to the date of the hearing, the legal representative and director of China Metal Recycling Investment Co., Limited in Shanghai, which was the headquarters of the Group.  The evidence adduced by the provisional liquidators also contains numerous examples of Mr Chun’s involvement in the management and operations of the companies within the Group.  The suggestion that the oral examination will be pointless because Mr Chun was not closely involved in the affairs of the company is, in my view, wholly unfounded.

66. Moreover, it appears to me from the evidence that Mr Chun continues to have the ability via his influence, connections or power to obtain information relating to the Group from the Group’s former and current staff and related persons.  He has been able to produce various documents for his own purposes in these winding-up proceedings as well as in HCA 1412/2013.

67. It has also been said on behalf of Mr Chun that four of the Mainland subsidiaries are in bankruptcy administration in the Mainland (apparently as a result of applications made by creditor banks), and that the subsidiaries of these four subsidiaries are in turn probably also covered by such bankruptcy administration.  There is therefore no basis for order private examination under s. 221.  On the evidence, I think it is fair to say that, where bankruptcy administrators have been appointed under the laws of Mainland China in respect of particular subsidiaries, it may not be possible for the provisional liquidators actually to take possession or control of the assets of such subsidiaries.  But this is not a ground for opposing the examination altogether.  Nor do I think it would be right to restrict the order for examination in such a way as to preclude questions that touch upon the subsidiaries in bankruptcy administration.  They may have had dealings with other subsidiaries in the Group.  Further, the provisional liquidators, representing China Metal as the holding company, are likely to need information to deal with the bankruptcy administrators in order to protect the company’s interests. 

68. Mr Yu also opposes the application on the ground that many businesses have been terminated by the provisional liquidators.  The evidence does show that some businesses have been terminated.  In any event, that only means the provisional liquidators would not need information for the purpose of carrying on those businesses.  They still need to ascertain and take control of the assets of the subsidiaries in question.

Potential oppression to Mr Chun

69. Mr Chun contends that, since he has indicated in his solicitors’ letter of 29 April 2014 that he is willing to answer written questionnaires prepared and served by the provisional liquidators, it is unnecessary and would be oppressive to subject him to oral examination.  There is, however, no rule of law or practice requiring a liquidator to seek answers to a written questionnaire before applying for an order for private examination. It is a question of balancing the need of the officer-holder and the prejudice to the proposed examinee in each case.  In the present case, it is already many months since the provisional liquidators were first appointed.  Leaving aside the reasons therefor, the fact is that they have not been able to obtain full access to the Mainland subsidiaries and still require information from Mr Chun to achieve a proper understanding of the assets, liabilities, businesses and affairs of those subsidiaries.  The history of the correspondence between the parties thus far demonstrates that it will be far more efficient and effective to have an oral examination than a written one.  It is not conducive to the proper and effective performance of their responsibilities to make the provisional liquidators enter into further lengthy correspondence to elicit the required information in a piece-meal fashion.

70. I recognise that subjecting a person to examination is usually more oppressive to him than merely to require him to produce documents, and that an order for oral examination is likely to be more oppressive than an order to answer a written questionnaire.  But it must also be remembered that Mr Chun is not a third party to the company who has got caught up in its provisional liquidation.  He was the company’s former director and Chief Executive Officer.  He is under a statutory duty to provide a statement of the company’s affairs (see s. 190 of the Ordinance).  As a person who has been required to provide a statement of affairs, he has a statutory duty to attend on the provisional liquidators and give them all information that they may require (see r. 39(2) of the Companies (Winding-up) Rules (Cap. 32H)), and to answer all such questions as may be put to him, and give all such further information as may be required of him by the provisional liquidators in relation to the statement of affairs (see r. 41).  Seen in this light, any complaint by Mr Chun based on the general inconvenience and oppressiveness of oral examination can have little weight.

71. On behalf of Mr Chun, Mr Yu SC contends there is specific prejudice in this case because Mr Chun is a person suspected of fraudulent wrongdoing and is a defendant in HCA 1412/2013.  It would be unfair and oppressive for him to be orally examined in relation to such matters prior to the trial of the relevant proceedings.  I am satisfied, however, that any oppression feared in this regard is adequately tempered and addressed by the following matters. 

(1) The applicants being provisional liquidators, they have, correctly in my view, not sought a free-ranging private examination over all the affairs of China Metal or the Group but an order for examination “for the purpose of identifying and preserving the assets of the Group”.  The evidence filed in relation to the provisional liquidators’ reasonable requirement, and therefore the intended examination, concerns the Mainland subsidiaries.  The alleged fraud was perpetrated in relation to Central Steel Macao, not the Mainland subsidiaries.  Mr Chun has failed to show any real overlap between the two areas and why oral examination about the Mainland subsidiaries would necessarily mean he would be examined about Central Steel Macao. 

(2) Moreover, the provisional liquidators have expressly accepted that the private examination will not touch upon the matters in question in HCA 1412/2013.  This can be made clear in the order for private examination itself.  The matters in question in HCA 1412/2013 seem to be identical to the complaints in the winding-up petition but, to avoid doubt, I consider that any oral examination should also not touch upon the allegations of wrongdoing in the petition.  It is not the purpose of s. 221 to improve the position of the petitioner in contested winding-up proceedings.

(3) The provisional liquidators are content for the court to order that the transcript and content of the private examination of Mr Chun shall not be disclosed or provided to any third party including the Commission and the police without the permission of the court.

72. It is also said that with the petition coming up for trial in February 2015, in which Mr Chun would take part, it would be oppressive to Mr Chun to be cross-examined twice.  As to this, it seems to me the nature of an examination under s. 221 is not cross-examination.  Its purpose is not to discredit the examinee or to elicit admissions for the purposes of adversarial proceedings, but to obtain information concerning the affairs of the company to enable the liquidator to carry out his duties expeditiously and effectively. The provisional liquidators do not act for the petitioner.  They are officers of the court appointed to protect the interests of the company pending the petition. 

73. It is also said that it would be unfair for Mr Chun to have to spend time to be orally examined and to be distracted from his preparation for opposing the petition.  I do not accept this would cause oppression to Mr Chun.  There are still a number of months before the trial of the petition.  I do not think an oral examination of the nature intended would operate to obstruct Mr Chun in preparing for his defence against the petition. Nor has Mr Chun gone into concrete details in his evidence in this regard.

Conclusion on paragraph 4 of the summons

74. Looking at the matter in the round and balancing the provisional liquidators’ need for information against any oppression to Mr Chun, I take the view that the oral examination should be permitted.  There will accordingly be an order in terms of paragraph 4 of the summons, with the proviso that:

(1) the examination is to relate to the Mainland subsidiaries;

(2) the examination shall not touch on any matters in question in HCA 1412/2013 or in the petition in HCCW 210/2013;

(3) the provisional liquidators shall not disclose or divulge the content or the transcript of the examination to any third party without the permission of the court.

Paragraphs 5 to 7 of the summons

75. By paragraph 5 of the summons, the provisional liquidators seek an order that Mr Chun do make an affirmation in relation to the bank accounts of the Mainland subsidiaries and all sums of money owed by the Mainland subsidiaries and any security granted in respect of such indebtedness.  No real objection to this application has been raised by Mr Chun.  I grant an order in terms of that paragraph.

76. By paragraph 6 of the summons, the provisional liquidators seek an order that Mr Chun produce all books and papers in his custody or power relating to the Group, including but not limited to all original certificates of the Mainland subsidiaries and copies of all bank statements of the bank accounts of the Mainland subsidiaries.  This is opposed on the basis that the order sought is too wide.  It is submitted on behalf of Mr Chun that the order should be confined to the Mainland subsidiaries and the categories of documents which are required by the provisional liquidators to carry out their functions should be identified.  I agree that the order should be confined to the Mainland subsidiaries as it is in relation to those subsidiaries that the provisional liquidators have experienced difficulty in performing their tasks and have mounted this application.  I do not, however, think that it should be further cut down by specifying particular categories of documents falling within the order.  As Lord Millett said in Kong Wah at §30(8), “the court must take care not to cut down the width of the order sought by the liquidator in a way which would risk making it ineffective”.  It seems to me because of the difficulties encountered, the provisional liquidators have so little knowledge of and access to the Mainland subsidiaries that there would be a risk of making the order ineffective if I were to compel them to reduce its scope to specific classes of documents.  I shall therefore make an order in terms of this paragraph with the addition of the words “and in particular relating to the PRC Subsidiaries” after the phrase “relating to the Group”.

77. I also make an order in terms of paragraph 7 of the summons, which requires Mr Chun, where the books and papers ordered to be produced are no longer within his custody or power, to make and provide an affirmation stating, inter alia, when they were removed from his custody or power, the identity of the person to whom the documents were given, and the present whereabouts of the documents.

Further orders

78. I give the parties liberty to apply.

79. As an order nisi, I order that the costs of the summons insofar as they relate to paragraphs 4 to 7 of the summons and the costs of the hearing before me on 14 May 2014 be paid by Mr Chun to the provisional liquidators forthwith, to be taxed if not agreed.