THE JOINT & SEVERAL LIQUIDATORS OF KONG WAH HOLDINGS LTD (IN COMPULSORY LIQUIDATION) v. FUNG SEE MAN

HCCW 49/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 49 OF 2000

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AND

HCCW 50/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 50 OF 2000

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(Heard Together)

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D E C I S I O N

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1.  I have before me a summons issued by the liquidators of Akai Holdings Limited and Kong Wah Holdings Limited (“Akai”, “Kong Wah”, and collectively “the Companies”) on 16 April 2007 in each of the liquidations under section 221 of the Companies Ordinance, Cap. 32.  They seek an order against Simon Fung See Man that he be examined orally before a Master concerning the affairs of the Companies, their subsidiaries and associate companies as listed in the schedule to the summons (together “the Akai Group”), and that he is to produce all documents within his custody or power which relate to the Akai Group.

2.  As the application is opposed by the respondent, the summonses were adjourned for the filing of evidence and for substantive argument.

3.  It is not necessary to set out the background of these liquidations and the massive insolvency.  These matters have been canvassed in a number of previous judgments.  The liquidators have a very difficult task to perform due to the great complexity of affairs of the Akai Group, the paucity of documents in the beginning and the lack of co-operation of the senior management.

4.  The respondent had a long association with the Akai Group.  In 1990 to 1991, as an external auditor, he was involved in the audits of Akai.  In 1991, he was employed by Akai’s Toronto office as accounting manager and was later promoted to financial controller.  In 1997, he was relocated to work for Akai in Hong Kong as the financial controller, reporting to Clara Loh who was the second most senior person in Hong Kong after James Ting and to Chuck Tam, the chief financial officer, the executive vice-president and a director of Akai.  The respondent resigned as the financial controller on 30 November 1999, but remained as a director of Akai Electric Company Limited (“AECo”) until 29 June 2000, pursuant to the request of Kin Yuen, who acted as the chief financial officer of Akai from January to March 2000.  The respondent had worked with Kin Yuen for a few months before his departure from Akai.

5.  As the Group financial controller of the Akai Group, the respondent was responsible for matters in accounting, auditing, restructuring and related duties.  He co-ordinated the preparation and distribution of monthly financial statements of the Group and liaised with the auditors of the Group in relation to the consolidated financial statements.  He obtained funding in Europe in mid 1999, attended meetings with petitioning creditors and representatives from the Grande entities and their financial advisers, and liaised with Kin Yuen in relation to the restructuring of the Group.  These are set out in Mr Borrelli’s 32^nd affidavit, paragraph 9.  In addition, the respondent was the director of 13 entities (and with one exception are listed in the schedule of subsidiaries and associate companies annexed to the summons).  Seven of the 13 entities were involved in substantial transactions under investigation by the liquidators.  In his capacity as a director of AECo, he attended board meetings at which resolutions were purportedly passed to pledge the Akai trademarks to Tremendous Springs Limited against funding allegedly provided by the latter to AECo.

6.  The respondent had attended 3 interviews with the liquidators for a total of 6 hours on a voluntary basis in May and July 2004.

7.  In January 2006, the liquidators through their solicitors requested the respondent to attend further interviews to assist in their investigation.  For the avoidance of doubt, the liquidators made clear that the request for assistance did not concern matters which were the subject of a writ action of Akai against the respondent and another (this is HCCL No. 20 of 2005).

8.  The respondent’s solicitors replied asking the liquidators to specify the matters on which they sought to interview the respondent and to confirm that the answers he gave would not be used against him in the police investigation.

9.  In the reply of the liquidators’ solicitors dated 8 February 2007, they explained why there is a need for further investigation, as the liquidators are in possession of substantial documentation not available to them when interviews were conducted in 2004, and some of the information previously provided by the respondent did not reconcile with the additional documentation subsequently obtained by the liquidators.  The liquidators have no intention of providing the respondent’s answers to the police, and thought it best to examine the respondent in court so that he would have the protection of rule 62 of the Companies (Winding-Up) Rules if the police should seek a transcript of the examination.

10.  On 10 April 2007, the respondent’s solicitors stated that he is not prepared to consent to an application under section 221.

11.  The principles on the exercise of the court’s discretion under this provision are well established.  I have been reminded by both counsel of the relevant propositions which they extracted from the cases frequently cited in this regard, including the judgment of the Court of Final Appeal in Joint & Several Liquidators of Kong Wai Holdings Limited v Grande Holdings Limited (2006) 9 HKCFAR 766.  I do not propose to set out the propositions.  I merely wish to say that I do not agree with Mr Barlow, SC for the respondent in his submission that the Court of Final Appeal has laid down a requirement, which goes to the jurisdiction of the court in making an order under section 221, that liquidators are required to identify at an early stage of the liquidation what steps are required to be taken to discharge their duties, so that if they should fail to do so owing to incompetence or negligence, their failure could not be condoned and the court would hold that they have not made out a reasonable requirement for an order under the provision.  This formulation of Mr Barlow was founded on dicta of Bokhary PJ and Chan PJ at 774I, paragraph 2.  I do not think the Court of Final Appeal has laid down any inflexible requirement or obligation of the kind.  As submitted by Miss Chan for the liquidators, whether liquidators are able to identify at an early stage of the liquidation what promising paths they can pursue and what blind alleys they had best avoid must depend on what sort of materials that the liquidators have on hand.  The present case is a prime example.  It was not until late 2004 that the liquidators began to make meaningful headway in obtaining documents and information from various sources.

12.  In this application, first and foremost, I would need to be satisfied that the liquidators have established a reasonable requirement to orally examine the respondent and to require him to produce documents in his power and custody.

13.  In determining this, I place great weight on the views of the liquidators as they would have detailed knowledge of the problems which existed in relation to the affairs of the Akai Group and the information required of the respondent.

14.  The respondent was a senior officer of the Akai Group.  He had worked for Akai for 9 years and had substantial duties as the financial controller of the Group.  The liquidators say he played a greater role than he had led them to believe in a number of substantial transactions, as a result of their further investigations since late 2004.  These transactions resulted in significant losses to the Group.  The respondent became a director of a number of companies in the Group at the time when the Grande Group became closely involved in the affairs of the Akai Group.  He was involved in assisting the Grande Group in their dealings with AECo after he resigned as the financial controller of Akai until mid 2000.  In the 32^nd affidavit of Mr Borrelli, he summarised the transactions in respect of which the respondent’s further assistance is required in paragraph 12, and the areas of investigation he considered the respondent would be able to assist in paragraph 21.

15.  I reject without hesitation the respondent’s allegation that the liquidators were incompetent or negligent in that they did not raise with him in the earlier interviews the matters they now seek his further assistance, or that the liquidators were dilatory in the discharge of their duties.  Much of the documentation which has assisted the liquidators was only made available to them after the interviews with the respondent in 2004.

16.  Mr Barlow advanced other arguments that the jurisdictional basis for making an order is not made out.  His arguments ran as follows:

(1)	Kong Wah must be considered separately from Akai.  The respondent had very little to do with Kong Wah, as he did not hold office in that company.
(2)	In the supporting affidavit of Mr Borrelli, he referred to the Akai Group and transactions of various companies in the Akai Group that he would wish to investigate further with the respondent.  There is nothing to link these transactions or companies in the Group with Akai or with Kong Wah.
(3)	296 companies were listed in the schedule to the summons, there is no evidence to link these subsidiaries or associate companies with Akai or Kong Wah in that their affairs must relate to Akai or Kong Wah.

17.  I reject these arguments.  As mentioned earlier, the respondent was the Group financial controller, he had discharged the functions of accounting, auditing, restructuring and other related duties to the Group, not just in relation to Akai, which was the entity that employed him.  The respondent has not challenged the correctness of the companies listed as subsidiaries and associate companies in the schedule to the summons.  See also the judgment of the Court of Final Appeal at 777J to 778B on the observations as to the group structure of Akai.  In an application of this nature, the liquidators are not required to make out a case for documents or information in as much detail as would be required in an application for discovery.  Given the complexity of the affairs of the Akai Group, I do not think it would be appropriate to cut down the width of the order sought in the summons.

18.  I am satisfied that reasonable requirement is clearly made out in this instance.

19.  Next, I would need to strike a balance between the reasonable requirements of the liquidators and the need to avoid making an order that is unreasonable, unnecessary or oppressive to the respondent.

20.  The pending action against the respondent in HCCL No. 20 of 2005 is irrelevant, as the liquidators have made clear from the start that further investigation would not cover the subject matter of that action.  The respondent’s belief that the present application was made to harass him and force him to make a settlement offer in the pending action is groundless surmise.  It is not supported by any cogent evidence.  Oral examination could have no possible prejudice to the respondent in his defence of that action.

21.  The respondent claimed that it is unnecessary to make a court order as he is prepared to provide voluntary assistance to the liquidators.  However, he also stated that he is only prepared to answer written questions and swear an affidavit to verify his answers.  He is not prepared to attend an oral interview or examination.  I do not consider it satisfactory or appropriate that the further investigation is to be carried out by a questionnaire, in view of the great complexity of the transactions under investigation.

22.  The respondent claimed he is not able to assist in providing information on the 296 subsidiaries and associate companies listed in the schedule to the summons.  There is no suggestion that he was involved in or has knowledge of each and every one of these companies.  There is certainly material to support the liquidators’ belief that the respondent is in a position to give meaningful assistance in respect of the companies in which the respondent was a director, and the companies that are the subject of their further investigation.

23.  The respondent said that for the last year, he has been living and working in China, initially in Beijing and now in Shenzhen, and he cannot afford to take time off work to come to Hong Kong for the examination.  Further, he has not been served personally with the summons.  I fail to see the relevance of these matters.

24.  The summons was served on the respondent’s solicitors.  Mr Barlow submitted that a respondent to an application for an order for examination under section 221 cannot be compelled to attend for examination before the Hong Kong court, citing Re B+B Construction Company Limited [2005] 2 HKLRD 478 at 483B to D.  But Rogers VP also said at 482I that “to suggest that a court should refrain from making an order for examination of an officer of a Hong Kong company under section 221 in circumstances where it otherwise would be appropriate to do so, simply on the basis that he is resident abroad flies in the face of any concept of corporate governance as it is understood.”  I am unable to see how the fact that the respondent is residing in China would be a factor in his favour in the exercise of my discretion.

25.  As for an order to produce documents, the respondent stated that about a month before he left Akai, James Ting had transferred all Akai’s books and records to the Grande Group and he has no documents in his possession.  In the summons, the liquidators seek production of documents in the respondent’s power or custody, not documents in his possession.  The liquidators are aware that the respondent was responsible for setting up and maintaining offshore entities on behalf of the Akai Group and their investigations have revealed that the respondent is still listed as the ‘client of record’ with various providers of offshore company services.  They consider that the respondent is in a position to authorise third parties holding documents of such offshore companies to release them to the liquidators.  I agree that is sufficient basis for an order to be made for the production of documents.

26.  The balance clearly comes down in favour of the liquidators.  I would make an order in terms of each summons.  I order the respondent to pay the liquidators’ costs in the preparation of the 34^th affidavit of Mr Borrelli and the costs of the hearing today.