THE JOINT & SEVERAL LIQUIDATORS OF NARDU CO LTD (IN LIQUIDATION) v. GU LAI YUN AND OTHERS

CACV 244/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 244 OF 2007

(ON APPEAL FROM HCCW NO. 318 OF 2005)

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JUDGMENT

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Hon Tang VP (giving the judgment of the Court):

1. The company, Nardu Company Limited, is in liquidation. It has a paid-up capital of $10 million, and indebtedness of over $311 million. Its only significant assets are shares in a PRC company called Panyu Lucky Rich Real Estates Development Limited (“PLR”), a joint venture company established pursuant to an agreement between the company and Panyu Yuwotou Real Estate Development Company (“Panyu Yuwotou”).

2. PLR was the legal owner of two commercial developments and 49 unsold residential units (“the properties”) which are part of the commercial / residential development in Panyu Yuwotou called Times Place. According to Barma J:

“4. … It appears that the development of Times Place was the main business activity of PLR, and (through its interest in PLR) of the Company.”

3. The winding-up petition was presented on 26 April 2005, provisional liquidators were appointed. The winding-up order was made on 22 June 2005 and the liquidators were appointed.

4. The provisional liquidator had attempted to secure control over PLR. On 27 September 2005, they wrote to Panyu Yuwotou, PLR and various courts and other authorities on the Mainland informing them of the winding up of the company and of their appointment. They also purported to discharge the existing board of PLR and appoint a new legal representative for PLR. They also indicated that any disposal by PLR of its assets would require their approval. In such connection, on 19 October 2005, they met with one of PLR’s directors, a Ms Wu Xiaodan, and representatives of Panyu Yuwotou and Mainland authorities.

5. However, on 24 October 2005, PLR entered into a Settlement Agreement with a company called Tat Yeung Investments Limited (“Tat Yeung”), under which PLR agreed to transfer the properties to Tat Yeung in partial satisfaction of a debt of some RMB100 million odd which was said to be owing by PLR to Tat Yeung.

6. For the purposes of the Settlement Agreement, the properties were valued at about RMB75 million. The Settlement Agreement was executed by the 1^st respondent and the said Ms Wu on behalf of PLR and the 5^th respondent on behalf of Tat Yeung.

7. The 1^st respondent was a director of the company between 17 April 2003 and 15 September 2004. He was also a director and the legal representative of PLR. It was the 1^st respondent who concluded and entered into the Settlement Agreement with Tat Yeung on behalf of PLR. His authority to act on behalf of PLR was disputed by the liquidators.

8. The result of the Settlement Agreement and its implementation is that PLR has been rendered valueless. Various proceedings had been commenced in the PRC by the liquidators. And this includes an action against the 1^st respondent, Ms Wu and Tat Yeung to set aside the Settlement Agreement, and to seek compensation (of some RMB 25 million) for the loss caused to PLR by the transfer of the properties at an undervalue. Judgment was given against the liquidators on 15 November 2006, when their claims were dismissed. The liquidators’ appeal was dismissed by the Higher People’s Court of the Guangdong Province on 10 May 2007, after the conclusion of the hearing before Barma J but before judgment.

9. Two sets of proceedings have also been commenced in Hong Kong, however, they do not directly involve any of the respondents.

10. The facts appeared from the judgment of Barma J and are not disputed. According to the learned judge:

“The relationship between the Company and the Respondents

13. All of the Respondents are connected with the Company, or other companies associated with it, all being part of a group of companies ultimately held by China Chengtong Hong Kong Company Limited (‘Chengtong Hong Kong’). Chengtong Hong Kong holds 36% of the shares of a company called China Chengtong Development Group Limited (‘Chengtong Development’), 99% of the shares of Tat Yeung, and (indirectly) 44.12% of the shares of Galawell Development Limited (‘Galawell’), which in turn is the major shareholder of the Company, holding 51% of its issued shares. Galawell is also the Company’s largest creditor.

14. The 1^st Respondent was a director of the Company between 17 April 2003 and 15 September 2004. He was also a director and the legal representative of PLR. It was the 1^st Respondent who concluded and entered into the Settlement Agreement with Tat Yeung on behalf of PLR. The Liquidators contend that he had no authority to do so, as his authority to act on behalf of PLR had been terminated by the provisional liquidators prior to the entering into of the Settlement Agreement. This is disputed, as the 1^st Respondent suggests that his supposed removal by the provisional liquidators was invalid, as there had been no board resolution of PLR for his removal. However, in my view, it is not necessary to attempt to determine this question for the purposes of this application.

15. The 2^nd Respondent is a director of PLR. He is also a director of Chengtong Development.

16. The 3^rd Respondent is also a director of PLR, and is the company secretary of Chengtong Development.

17. The 4^th Respondent is a director of the Company. He is also a director of Galawell. According to the Liquidators, a member of their staff was told by another director of the Company that the 4^th Respondent was in a position to provide financial information relating to the Company. This is disputed by the 4^th Respondent, who says that this was not said, and that all that the other director did was to suggest that the Liquidators could approach him to see if he could provide any information about the Company and its finances.

18. The 5^th Respondent was a director of the Company from 30 August 2004 until 7 January 2005. He is also a director of Tat Yeung and Galawell. He was the person who dealt with and entered into the Settlement Agreement on behalf of Tat Yeung.

19. The 6^th Respondent is the chairman of the Chengtong group of companies, and is a director of both Chengtong Hong Kong and Chengtong Development, but not of either the Company or PLR.

20. The 7^th Respondent is a director of Tat Yeung and Chengtong Development. He too, does not appear ever to have been a director of either the Company or PLR.”

11. The liquidators have made repeated efforts to obtain contact details of the respondents, and to seek information from them, concerning the circumstances of the making of the Settlement Agreement. However, no response of any substance was obtained from any of the respondents.

12. The liquidators issued their application under section 221 of the Companies Ordnance, Cap. 32, on 27 September 2006 against seven individual respondents, and sought, as against each of them, orders for (1) the production of certain categories of documents that are said to relate to the Company; (2) the making of affirmations to explain what has become of such documents where they were previously, but are no longer, in their possession, custody or control; and (3) their oral examination in relation to the affairs of the Company.

13. Mr Jonathan Chang, counsel for the 1^st to the 3^rd respondents, submitted that section 221 was inapplicable, since, essentially, the application related to documents and information concerning the Settlement Agreement and hence PLR, and not the Company.

14. He submitted Joint & Several Liquidators of Kong Wah Holdings Ltd v Grande Holdings Ltd [2007] 1 HKLRD 116 is authority that it cannot be assumed that documents relating to subsidiaries would ipso facto relate to the company in liquidation, and this must be established by evidence of the facts of the particular case or else it falls outside section 221 of the Companies Ordinance.

15. But as the learned judge said in para. 37 of the judgment:

“37. I also note that in the Kong Wah case itself (supra), the application related not only to the companies in liquidation, but also to documents and information concerning subsidiaries of those companies (see paragraph 16 of the judgment). As was held in paragraph 62 of the judgment, while it could not be assumed that documents relating to a subsidiary would ipso facto relate to the parent company in liquidation, the judge was entitled, in that case, to take the view that the documents sought (which were limited, as is the case here, to documents relating to particular matters) related to the companies in liquidation, whether or not they also related to other entities.”

16. With respect, we agree with the learned judge’s conclusion that under section 221 the information that can be ordered to be provided includes any information concerning the “dealings” or “affairs” of the company and that these words are wide enough to cover, in an appropriate case, information concerning the activities of a subsidiary of the company concerned.

17. Here, we believe it is legitimate for the liquidators to try to find out whether and if so why its principal asset, namely the shares of PLR, are now valueless. It is the affairs of the company to learn whether and if so why its investment has gone so terribly wrong.

18. As the learned judge put it:

“35. … Where, as here, the Company has, on the evidence, but one main function, that being to hold shares in PLR, and PLR has (or had) but one principal asset (the property in the PRC), it does not seem to me to be going beyond the terms of the section to regard what has become of the property as concerning the affairs or dealings of the Company.”

19. Mr Chang submitted that whether the affairs of a subsidiary could be regarded as the affairs of the holding company depends on whether the holding company could be said in fact to control the affairs of the subsidiary. He referred us to the case of Hough v Hardcastle, Re Grandactual Ltd [2006] BCC 73, and in particular to para. 29 from the judgment of Sir Donald Rattee:

“29. Mr Green submits that, on the basis of such Court of Appeal authority, it is at least arguable that the affairs of IL are the affairs of the company. I disagree. The essence of the decisions of the Court of Appeal in the two cases I have cited was in my view that it may in certain cases be possible to say that conduct of the affairs of one company also constitute conduct of the affairs of another when the first company either is controlled by or has control of the other. That, if I may say so, is perfectly understandable. However, that principle is of no avail to the petitioners in the present case, in which IL had no power to control the company and was subject to no power of control by the company. Mr Green sought to argue that the first to third respondents as directors of the company had control over IL. This they clearly did not. They had control over IL but as shareholders of that company. In my judgment, the fact that they also had control over the company cannot be said to make the affairs of one company the affairs of the other, and I so decide. In my judgment, it is a point that can and should be decided now on this application at this stage and not allowed to go to a trial. In my judgment, there is no real prospect that Mr Green’s argument on the point could be improved by anything that might emerge at a trial.”

20. Hough was concerned with unfairly prejudicial conduct under section 459 of the Companies Act 1985.

21. Re Step by Step Ltd & Other, HCMP 838-840, 842-851 & 1208/2007; HCA 2712/2006 (unreported, judgment dated 26 October 2007) was also concerned with petitions under section 168A of the Companies Ordinance, and was therefore concerned with the questions of unfairly prejudicial conduct in the affairs of the company. Kwan J said:

“47. The way in which a parent company exercises its powers as a majority shareholder of its subsidiary can constitute conduct in the affairs of its subsidiary (Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] AC 324; Nicholas v. Soundcraft Electronics Ltd. [1993] BCLC 360 at 363d to 365c, 367b to 371i). Conversely, the way in which the affairs of a subsidiary are conducted can constitute unfairly prejudicial conduct in respect to the parent company’s affairs (Re Citybranch Group Ltd., Rackind v. Gross [2005] 1 WLR 3505 at 3511C to 3515C, paras. 21 to 33; In re Norvabron Pty. Ltd. (No. 2) (1986) 11 ACLR 279 at 292; In re Dernacourt Investments Pty. Ltd. (1990) ACSR 553 at 556, 561; Re Dartina Development Ltd., HCCW No. 368 of 2005, 12 October 2005, paras. 30 to 37). The requisite element of de facto control by one company over the affairs of another company would normally be satisfied in the situation of a parent and subsidiary, via the control of the composition of the board of directors, or by the control of the voting power exercisable by the shareholders.”

22. Here, it would appear that the company had de facto control over the PLR, by the control of the voting power exercisable by the shareholders so even the control test is satisfied.

23. The other grounds of appeal go to the exercise of discretion by the learned judge.

24. Mr Chang’s 2^nd ground is that the court would not make an order under section 221 “merely for the asking” and that there was no case to be enquired into since:

“12. The Liquidators’ two lines of attacks on the Settlement Agreement (lack of authority; transfer at gross undervalue) were not supported by any cogent evidence; and in any event, such contentions were rejected in the P.R.C. Court: (1) the valuation was performed by a Court appointed institution and thus legally effective [117]; (2) the Liquidators’ removal of the 1st Respondent had certain defects, and it ‘cannot be accurately held that he had been removed from his office’ [118]. The P.R.C. Court further confirmed that Tat Yeung as PLR’s creditor (which is not disputed), was entitled to acquire PLR’s assets to set off against the outstanding debt through legal means [119]. The Liquidators’ appeal had also failed.

13. The Respondents’ P.R.C. expert legal opinion confirmed that the removal notice issued by the Provisional Liquidators was defective: (1) for want of registration with the relevant authorities [124]; and (2) for PLR’s board failure to pass a confirmatory resolution [125]. The Liquidators had not adduced evidence to the contrary.”

25. But, as Ms Teresa Wu, counsel for the liquidator, submitted it is well-established that in determining whether there is a reasonable requirement, great weight should be given to the views of the liquidators who would have detailed knowledge of the problem that exist in relation to the state of affairs of the company and the information required. See Joint Liquidators of Chark Fung Securities Co Ltd & Others v Chan Kwong Hung [2001] HKLRD 772 at 776.

26. This goes to the exercise of the discretion. There is no basis upon which we can interfere with the learned judge’s exercise of discretion. Nor do we agree that the decisions by the mainland courts are necessarily conclusive.

27. As for the 3^rd ground, Mr Chang submitted that the order was oppressive, having regard to the multiple litigation in relation to the Settlement Agreement. But the learned judge made specific reference to the element of oppression in relation to the 1^st respondent who was a party to hostile litigation with the liquidators, and the liquidators clearly contemplate future claims against him for dishonest assistance or knowing receipt. The learned judge recognized that there was an important element of oppression in requiring the 1^st respondent to produce documents and to be orally examined, although the element of oppression in relation to the 3^rd and 4^th respondents was less. The learned judge weighed the oppression to the respondents against the liquidators’ need and he took the view that the balance should come down in favour of the liquidators, because without such orders, “it would not seem possible for the liquidators to even reconstitute the knowledge which should be available to the Company in relation to the Settlement Agreement”. As Mansfield J explained in the Federal Court of Australia in In Re Moage Ltd (in liquidation) [1997] 15 ACLC 1034 at pages 1045-1046:

“A liquidator, when engaged in litigation on behalf of a company which is being wound up, or when contemplating instituting such litigation, is not in the same position as an ordinary litigant. The liquidator comes to the company as an officer of the court under a duty and responsibility to get in and maximise the assets of the company for distribution for the benefit of creditors. In the discharge of his or her duty and function, the liquidator comes to the company with limited or no knowledge of the company’s assets, business and affairs. The liquidator is therefore in a position of disadvantage to make informed decisions of both a legal and a commercial nature necessary to carry out the winding up.

The legislature has recognised this position of disadvantage and addressed the problem by the enacting of s 596B of the Law and its predecessors. The effect of the legislation is to place a liquidator in a privileged position to obtain information relevant to and necessary for the proper discharge of his or her statutory function. The seeking of information to make decisions as to whether or not litigation ought to be embarked upon or continued in itself is no more than ‘an exercise of his duties and fulfilment of his responsibilities as a liquidator’: per Bryson J in Lombard Nash International Pty Ltd v Berentsen (1990) 8 ACLC 1213 at 1217.” Grosvenor Hill (Queensland) Pty Ltd v Barber and Another [1994] 120 ALR 262 at page 267

28. There is no reason why this court should interfere with the learned judge’s exercise of discretion.

29. Nor can we draw any adverse inference from the learned judge’s decision to decline making an order against the 5^th and 7^th respondents. We agree with Ms Wu that it showed that he had duly exercised the discretion and appropriately balanced the oppression to different parties.

30. Mr Chang submitted that the learned judge adopted a circular approach when he declined making an order against the 5^th and 7^th respondents, at least partly because he was minded to make orders against the 1^st to the 3^rd respondents, thus lessening the liquidators’ need to obtain the same from officers of Tat Yeung.

31. Mr Chang submitted that the same logic applied equally to the 1^st to 3^rd respondents. In other words, the learned judge might have made an order against the 5^th and 7^th respondents so that it would be unnecessary for an order to be made against the 1^st to the 3^rd respondents. The effect of Mr Chang’s submission is that either the learned judge made an order against all the respondents, or that he should make no order against any of the respondents. That cannot be right.

32. It was an appropriate exercise of discretion for the learned judge to decide against whom the order should be made. He has exercised that discretion. We can see nothing wrong with the exercise of the discretion.

33. Mr Chang submitted that the order should be narrowed down, given the liquidators’ focus on the circumstances surrounding the making of the Settlement Agreement. Thus he submitted that the production order should be confined to documents relating to the business or transaction connected with or leading to the Settlement Agreement and the examination on oath should also relate only to the Settlement Agreement.

34. What limitation would be appropriate must depend on the circumstances, and the order should not be couched in terms which are wider than is necessary.

35. In Re Kong Wah Holdings Ltd, Lord Millett NPJ, after reviewing the authorities, said:

“45. These and other cases on the section and the corresponding provisions overseas show that the need to identify the documents to be produced with sufficient particularity is not a jurisdictional requirement, but rather an aspect of the balancing exercise and so a matter of discretion. The liquidator must show that he is reasonably entitled to require production of the documents in the terms by which he describes them; the court must ‘do what it can’ to define them as closely as possible consistently with making the order effective.”

36. Here, having regard to the main function of the company, namely to hold shares in PLR, we do not believe it is necessary to limit the production order. It has not been shown that the apparent width of the production order would operate oppressively.

37. As for the examination on oath, the protection of the examinee in the course of examination could be entrusted to the court before whom the examination is conducted. Rule 62 of the Winding Up Rules.

38. For the above reasons, the appeal is dismissed with costs.