THE OFFICIAL RECEIVER v. KO KOK HONG AND ANOTHER

HCMP1155/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS No. 1155 of 2006

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J U D G M E N T

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1. This is an application by the Official Receiver for a disqualification order against the 1st Respondent, Mr Ko Kok Hong, and the 2nd Respondent, Madam Yeung Kit-ngo.  Such application was made under section 168H of the Companies Ordinance.

2. The Respondents were at all material times directors of the company in question, Kin Lee Ko Construction Company Limited (“the Company”).  The Originating Summons of this action was served on the Respondents personally on 14 June 2006.  Both Respondents filed acknowledgement of service indicating that they do not intend to contest the present application.  No affirmation evidence was filed by the Respondents.

3. At this hearing both Respondents confirmed to this court that they accepted all the factual allegations made against them as contained in the Official Receiver’s report and the Affidavit of the Treasury Accountant, Madam Mak.  They have no factual dispute to those allegations.  Accordingly, this court will accept all the factual allegations contained in the Official Receiver’s Report and Affidavit of Madam Mak as the factual foundation for the purpose of this application.

4. I find that both Respondents were directors of the company during the period when the Company was insolvent.  As a result Section 168H(1)(a) of the Companies Ordinance is satisfied.  What the Official Receiver is required to establish is that the conduct of the Respondents as directors of the Company, either taken alone or taken together with their conduct as directors of any other company or companies, make them unfit to be concerned in the management of the company.  A disqualification order is mandatory if such requirements under Section 168H(1) are satisfied.

5. In determining the question of unfitness the court shall have regard to those matters mentioned in Part I and Part II of the 15^th Schedule of the Companies Ordinance.  I accept the submissions of the Official Receiver that the present case falls within paragraph 1 of Part 1 and paragraph 3 of Part II of the 15^th Schedule.  Furthermore, the court can take into account other matters of misconduct not specified in the said 15^th Schedule in determining whether that conduct amounts to unfit conduct.

6. In this Judgment, I am not going to repeat the background of the Company in question, which has been set out in details under paragraphs 7 to 11 of the Report of the Official Receiver, save to say that both Respondents were appointed as directors of the company since 1992 up to the date when a winding up order was made against it on 5 February 2003. 

7. On evidence, I accept the analysis of the Treasury Accountant, Madam Mak, that the Company went into its insolvency during the period from April 2001 to January 2003.  Her analysis was also supported by other evidence to show that the Company was insolvent.  This includes that according to the general ledger of the Company, the Company had wages in arrears and outstanding MPF contributions amounting to HK$3.5 million from January 2002 to January 2003. 

8. Furthermore, during the period, the Labour Tribunal had made various awards against the Company in the total sum of $550,000-odd, being claims made by ex-employees.  Furthermore, the proof of debts filed by the MPF amount to $525,000-odd, being outstanding MPF contributions and surcharges due by the Company for the said period.   Since the Respondents have no dispute on the factual allegations made against them, I accept that the Official Receiver has established by evidence produced to show misconduct as contained in the Report of the Official Receiver.  I accept that the Respondents were in breach of their duties as directors of the company by causing the Company to enter into unfair preference transactions liable to be set aside, which transactions are to the detriment of the general creditors of the Company. 

9. During the period from April 2001 to January 2003, the Company had paid monthly rental of $28,000 to a company called Kenswick Enterprises Limited (“Kenswick”) for letting a property owned by Kenswick at Fairview Park, Yuen Long, New Territories.  Such property was used as the residence of the Respondents, and is still the residence of the Respondents up to today.  Furthermore, both Respondents have been the only directors of Kenswick since August 1995, and they are also the shareholders of Kenswick.

10. Given the insolvent position of the Company during the period from April 2001 to January 2003, rental payments made by the Company to Kenswick, which is related to the Respondents, amount to unfair preference transactions.

11. Furthermore, according to the audited financial statements of the Company for the year-end March 2001, the Company owed the 1st Respondent a sum of $4 million-odd.  Through examination of the general ledger of the Company by the Treasury Accountant, during the period from April 2001 to January 2003, the 1st Respondent had made 24 withdrawals in the total sum of $3.1 million-odd out of the Company’s funds.  Such withdrawals were, according to the accounting records, for repayments of an amount due by the Company to the 1st Respondent.  As a result the amount due by the Company to the 1st Respondent was reduced down to $1.4 million.

12.  Although the 1st Respondent tried to explain to the Official Receiver that these withdrawals were used for company purposes, he later changed his explanation to that such withdrawals were used for repayment of the personal loan borrowed by the 1st Respondent from his friends and relatives.  According to the investigations of the Official Receiver, 13 of such cheque payments made in the total sum of $1.3 million-odd were made directly to the 1st Respondent and 4 of those cheques were made to a company called Kin Lee Civil Engineering Limited, whereby the Respondents were also directors.

13. I do not accept the explanation of the 1st Respondent that these moneys were used for the purpose to repay loans obtained from friends and relatives, since he cannot produce any documentary evidence to prove such allegations.  In any event, money of the Company should be used for the purposes of the Company rather than for the individual purpose of the directors.  Such withdrawals amounts to unfair preference and such transactions will amount to detriment to the interests of the general creditors of the Company.

14. The next complaint made by the Official Receiver against the Respondents was their breach of duties in making timely payments of MPF contributions.  Not just they failed to make contributions as an employer, they also failed to make contributions for those parts that they had deducted from the salaries of the ex-employees, which should be used solely for the purpose of making contributions to the MPF funds.  I take a very serious view on this particular misconduct.  I have already warned both Respondents that this misconduct may amount to a criminal offence and it will not be condoned by this court.

15.  The Company had continued to operate and pay rental to a related company of the Respondents during the period.  However, they neglected their prime duty to make contributions to the MPF funds.  They used the money, which were held on trust for their employees, for purposes which are not permitted by the law.  This amounts to a breach of trust and I must take it that this is a serious misconduct.

16.  Lastly, I must say that the Official Receiver takes the view that both Respondents knowing that the company was insolvent continued to trade.  Obviously from the management accounts of the company as at March 2002 and January 2003 the Company had a net current liability and shareholder deficit of $3.5 million and such deficit had been increased to $7 million as at January 2003.  Obviously the Respondents acted in breach of their duties in causing the Company to continue to trade during the insolvent period when they know or ought to have known that there was no reasonable prospect that the Company could avoid going into an insolvent liquidation.

17. In conclusion, I find that all the allegations of the Official Receiver against the Respondents are established so as to render them unfit to be concerned in the management of the Company.  It is mandatory for this court to make a disqualification order against both Respondents. 

18. In considering the appropriate period of disqualification against the Respondents, I bear in mind that the objectives of the order are to protect the public against the future conduct of companies by persons whose past record as directors of insolvent companies have shown them to be a danger to their creditors.  Such period should reflect the gravity of the misconduct as established by evidence and the period must serve a deterrent effect to the directors concerned.

19.  I also bear in mind the guidelines and the tariffs laid down by the English Court of Appeal in the case of re Sevenoaks Stationers (Retail) Limited.  I also take into account those mitigating factors put forward by the Respondents.  I accept that in this case they did not contest the proceedings so that the matter can be concluded within a reasonable period of time.  However, I do not accept those explanations tendered by the Respondent as to the use of those trust moneys for purposes other than making contributions to the MPF funds.  Obviously from what the Respondents have told this court, it just showed their ignorance of the company law and blatant disregard to the statutory duties imposed upon the employers. 

20.  Taking this into account, I take the view that this case should fall within the top end of the minimum bracket and I take the view the appropriate disqualification period in this case, as suggested by the Official Receiver, should be 5 years. 

21.  Accordingly, I will make the following order.  Usual disqualification order be made against the 1^st and 2^nd Respondents for a period of 5 years, effective from the beginning of the 21^st day after the date of this order. 

22. Perhaps let me explain for the Respondents.  If you are still acting as directors of any companies you must take positive steps to cease acting as directors, such as if you are still directors of that company called Kenswick, you must cease acting as directors and you must do that within 21 days from today.  Otherwise you commit another criminal offence and if the Official Receiver discovers that you still continue to act as directors, they may apply for a second disqualification order against you based on this misconduct and that the disqualification period will be a much longer period.  I would like to remind you that for a disqualification order the minimum is one year, the maximum is 15 years.  So you must take positive steps to cease acting as directors.  If you have any doubts please seek independent legal advice.

(Discussion re costs)

23. In respect of costs, I do not see any reason why I should depart from the general principle that costs should follow the event.  Since the Official Receiver succeeds in this application, I make the following order on costs.  Costs of this action including costs of today’s hearing be to the Official Receiver, to be taxed if not agreed.