ROCKAPETTA INDUSTRIAL CO LTD v. KWOK CHIN WING AND OTHERS

HCCW 743/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 743 OF 2002

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D E C I S I O N

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1.  There are two summonses before me, both are taken out under section 219 of the Companies Ordinance, Cap. 32.  Section 219(1) provides that:

“The court may, at any time after making a winding-up order, make such order for inspection of the books and papers of the company by creditors and contributories as the court thinks just, and any books and papers in the possession of the company may be inspected by creditors or contributories accordingly, but not further or otherwise.”

2.  The summons taken out first in time, on 20 January 2005, was by the liquidators of the company in question, Rockapetta Industrial Company Limited, now known as RIC Trading Limited (“the Company”).  The liquidators seek directions whether or not Kwok Chin Wing (“Kwok”) and/or his authorised agents are entitled to inspect the books, papers and documents of the Company, and the scope of the documents of the Company to be provided for inspection.

3.  This summons was served on Kwok, and on the other 4 members of the committee of inspection.

4.  This summons was issued by the liquidators because Kwok’s solicitors did not see fit to take out an application, despite having had their attention drawn to this provision since 27 October 2004.  In extensive correspondence exchanged with the liquidators in December 2004 and January 2005, the stance of Kwok’s solicitors was that the liquidators should provide the documents and information sought by them without an application under section 219, the suggestion that they should apply for leave from the court was “totally outrageous”, and the liquidators were repeatedly threatened with an application to seek costs against them personally if Kwok was required to take out his application.

5.  I do not think this is a stance now maintained by Kwok.  In the closely written submissions of 32 pages of Kwok’s counsel, there is no suggestion that the liquidators should have provided the documents without the need for an application.

6.  It does not seem to me that the liquidators could be criticised in issuing the summons.

7.  The second summons was taken out on 3 February 2005 by Kwok against the liquidators.  He seeks an order that he, his solicitors, accountants and agents be at liberty to inspect the books, papers and documents of the Company.

8.  It seems to me entirely superfluous for Kwok to issue a second summons.

9.  The liquidators initially indicated in correspondence with Kwok’s solicitors they would not oppose Kwok’s application, if he was to apply to court.  I do not think their position has changed materially.  They are still in principle neutral, despite what Kwok has said.  They also wish to seek guidance from the court on the scope of inspection, as there are potential claims of the Company against Kwok that are the subject of their investigation or may require investigation.

10.  As for the other 4 members of the committee of inspection present at the hearing today, they had written to the liquidators on 19 January 2005, before the first summons was issued, that they would object to Kwok’s request for inspection, on the ground that this might jeopardize possible legal actions by the Company against Kwok regarding preferential payments made to him within 2 years of the winding up.

11.  Since then, the 2^nd respondent, Ma Yum Kai of Wealthy Transport Company, has indicated that he would take a neutral stance.

12.  The other 3 respondents, which are companies related to the Company, would seem to have held out their opposition a little longer, but they too have indicated today that they are taking a neutral stance.

13.  That makes the task for me today a simple one.  I have been referred to all the relevant authorities on the statutory provision.  They are cases in England and Australia.

14.  The general principles are not in dispute.  The section only applies to documents in the possession of the Company (In re North Brazilian Sugar Factories (1887) 35 Ch D 83 at 86 to 87; In re DPR Futures Limited [1989] 1WLR 778 at 789B).  The court will not allow the provision to be used for a vexatious purpose or to conduct a fishing expedition (In re The Birmingham Banking Company, ex parte Brinsley, In re The Joint-Stock Discount Company, ex parte Buchan (1867) 36 Ch D 150; IACS Pty Limited v Australian Flower Exports Pty Limited (1993) 10 ACSR 769 at 774 lines 40 to 50).  The powers to be exercised are prima facie to be exercised for the purposes of the winding up and for the benefit of those who are interested in the winding up (In re North Brazilian Sugar Factories, supra. at 87; In re DPR Futures Limited, supra. at 788H to 789A).  The Australian courts have taken a more liberal approach in this regard, creditors have been able to obtain orders for inspection for the purpose of furthering their own interests rather than benefiting the winding up (Re MMC Pty Limited (in liquidation)) (1992) 10 ACLC 365; Re BPTC Ltd (1992) 7 ACSR 291; and Re William Lawrence (Globe Dyeworks) Pty Ltd (in liquidation)(1993) 12 ACSR 181).

15.  There is no need to resolve whether the English cases should be followed or the more liberal approach in Australia should be preferred.  Kwok is evidently very dissatisfied with the apparent lack of progress of the liquidators in their work and asserted that the reason why he seeks inspection is to enable his own advisers to ascertain the affairs, assets and liabilities of the Company, with a view to increasing the assets realised and disclaiming bogus liabilities.  That must be a reason for the benefit of the winding up.

16.  It is clear to every one, and it is accepted by the liquidators, that the matters raised by Kwok for which inspection is sought are areas which require investigation by the liquidators.  There is no need at all to subject these matters to a close and critical analysis and this is hardly a fruitful exercise, as evidence is not complete at this stage and it would not be appropriate for the liquidators or the court to come to a view that the positions taken by Kwok on those matters must be right or would probably be right.

17.  I see no reason not to exercise my discretion to allow inspection by Kwok in the circumstances.  I do not think inspection should cause unnecessary delay in the winding up or would otherwise hinder the work of the liquidators, provided of course that the inspection permitted is to be done in a “reasonable and pragmatic” manner, as Kwok has promised he would do in his 4^th affirmation.  This is something that his advisers should bear firmly in mind.

18.  I should also mention that I do not see the need for heavy supervision or policing of the order for inspection, as envisaged by the liquidators’ counsel.

19.  I turn to the scope of the inspection.

20.  Kwok has stated 5 matters in which he would like to have inspection of documents:

(1)	the alleged liabilities of the Company to 7 related companies of HK$233,062,389.24 in the statement of affairs;
(2)	the alleged contingent liabilities in the statement of affairs of HK$38,720,361.00;
(3)	the alleged debts due to the Company of HK$170,978,331.00 in the statement of affairs;
(4)	the disposal of 70% interest of the Company in Shenzhen Rockapetta Toys Company Limited (“SRTCL”), which was a major asset of the Company, to Rockapetta Toys Ltd, allegedly after the commencement of the winding up; and
(5)	the allegation that the Company had continued to trade, whether on its own account or as agent for SRTCL, after the presentation of the winding-up petition.

21.  There being various specific areas in which Kwok would like to carry out his own investigation, there is no need and it would not be appropriate to order a general inspection of books and records of the Company.

22.  I order that Kwok be allowed to inspect the books and records of the Company limited to the 5 specific areas that I have mentioned.

23.  I now come to costs.  There are various sets of costs to deal with.  I would like to preface this by saying that these applications should have been a simple matter.  It is most unfortunate that the parties have made things a lot more complicated than they actually are.

24.  Kwok’s solicitors had adopted a strident, intransigent and unnecessarily confrontational stance.  Their allegations of breach of duty against the liquidators are quite unnecessary.  If such allegations are well founded, they should take out an application to remove the liquidators or seek other directions to protect their client’s interest.  The present applications are simply not the appropriate occasion for these allegations to be ventilated.

25.  Because of this stance, the liquidators found it necessary to deal with the allegations of breach of duty and impropriety on their part and to seek legal assistance.  This has added to the costs of the liquidation.

26.  Had the solicitors of Kwok adopted a more sensible attitude, and put his case in a more temperate way in the evidence filed, the additional work and costs might well have been avoided.

27.  I would first set out the respective positions taken by the parties on costs.  Miss Eu, SC seeks an order as follows:

(1)	the liquidators, the 2nd, 3rd to 5th respondents should pay Kwok’s costs of both summonses which are heard together;
(2)	the liquidators should be ordered to bear such costs personally;
(3)	insofar as the liquidators had filed unnecessary and irrelevant evidence in these applications which Kwok has to deal with, the costs should be ordered against the liquidators on a common fund basis;
(4)	as for the liquidators’ own costs, they should be deprived of the costs of instructing solicitors because the appointment of solicitors was irregular and invalid.

28.  Mr Thomas Au for the liquidators seek an order as follows:

(1)	the liquidators’ costs in both summonses should be paid by Kwok and the 3rd to 5th respondents, jointly and severally;
(2)	alternatively, the liquidators’ costs should be paid out of the estate of the Company, save for the costs incurred by the liquidators in filing unnecessary evidence;
(3)	as for Kwok’s costs, the liquidators should not be made to bear his costs personally, nor should his costs be allowed from the estate of the Company.  There should be no order as to costs.

29.  Mr Victor Yeung for the 2^nd respondent submitted as follows:

(1)	the 2nd respondent should not be responsible for Kwok’s costs;
(2)	the 2nd respondent’s costs in this application should be paid out of the estate of the Company.

30.  Mr Harold Ng for the 3^rd to 5^th respondents submitted as follows:

(1)	the 3rd to 5th respondents should not be responsible for Kwok’s costs;
(2)	the 3rd to 5th respondents should not be responsible for the liquidators’ costs;
(3)	the costs of the 3rd to 5th respondents should come out of the estate of the Company.

31.  I turn to Kwok’s costs first.  There is no justification at all that the liquidators should bear his costs personally, despite the elaborate submissions made on his behalf.  I do not think the liquidators had acted unreasonably or improperly, in filing the evidence to answer the matters raised in Kwok’s 3^rd affirmation, or in engaging solicitors and counsel to act for them in these applications.  I do not think there is any want of reasonable professional skill and care of the liquidators in their handling of these applications.

32.  I turn to consider if the other respondents should pay Kwok’s costs.  The 2^nd respondent has taken a neutral stance fairly early on. The 3^rd to 5^th respondents have not taken an active role in opposition although they did not make clear they are also neutral until very late in the day.  I do not think their conduct is such that should justify a costs order to be made against them.

33.  This leaves the possibility if Kwok should recover his costs in the application out of the estate.  I agree with Mr Au that it is necessary for Kwok to apply to court for an order for inspection.  The fact that he has incurred more costs than he would otherwise have done cannot be attributable to others, having regard to the correspondence exchanged.

34.  Insofar as Kwok’s costs are concerned, I make no order as to his costs on each of the applications.

35.  I come to the liquidators’ costs.  The liquidators should have their costs paid.  The choice is whether these costs should come out of the estate or be paid by Kwok and/or other of the respondents.  I was very inclined at one stage to opt for the latter, in view of the comments I made earlier regarding the way the applications were handled on Kwok’s behalf.  I have decided not to depart from the usual course to order the liquidators’ costs to come out of the estate.  I hope this would serve as an exhortation and reminder that Kwok’s advisers would conduct themselves in a more measured and moderate way when dealing with the liquidators in future.

36.  I order the liquidators’ costs in this application are to come out of the assets of the Company.  These costs are to include work to be done in collating the documents to be provided for inspection and the manpower deployed to oversee the inspection.  The costs allowed would be subject to the approval of the court, and I emphasis that only reasonable costs would be allowed.

37.  As for the costs of the liquidators in instructing solicitors, I see no reason to disallow that.  The alleged irregularity in the appointment of solicitors to act for them in the applications is highly technical.  To put the matter beyond doubt, I exercise my inherent jurisdiction to give retrospective sanction to authorise the liquidators to pay the costs of the solicitors out of the estate of the Company (Re Associated Travel Leisure and Services Limited (in liquidation)[1978] 2 All ER 273).

38.  I do not propose to reduce any part of the liquidators’ costs insofar as some of the evidence filed was not strictly necessary or relevant to the present applications.  I would take a broadbrush approach.

39.  As for the costs of the other respondents, I see no reason why their costs should come out of the estate of the Company.  I refuse their applications for costs.