RE PROMAN INTERNATIONAL LTD

HCCW 215/2021

[2023] HKCFI 2628

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) PROCEEDINGS NO 215 OF 2021

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REASONS FOR DECISION

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1.  This is the appeal of Seashore Global Group Limited (“Seashore”) from the decision of Master J Wong appointing Mr Jong Yat Kit and Mr Chin Choon Onn of PricewaterhouseCoopers Ltd (“PwC Candidates”) as liquidators of Proman International Limited (“the Company”). At the conclusion of the hearing, the appeal was dismissed with costs for the reasons set out below.

Background facts

2.  The Company is a Hong Kong company ultimately controlled by Mr Pan Sutong (“Pan”).

3.  On 18 May 2022, the Company was wound up by Linda Chan J and provisional liquidators (“PL”) were appointed on the same day.

4.  At the 1^st creditors meeting, 6 proofs of debts totalling approximately HK $76 billion were admitted for voting purposes. The 6 creditors were Bank of China Ltd Shenzhen Branch (“BOCSZ”) (which had petitioned for the winding up), Bank of China Limited Tianjin Branch (“BOCTJ”) (collectively, “BOC”); Seashore, Port Rich Limited, (“Port Rich”, the Company‘s sole director), Goldin Properties (Tianjin) Co Ltd (“Goldin Tianjin”, the Company’s wholly-owned subsidiary) and Keen Able Limited.

5.  At the 1^st creditors meeting held on 25 October 2022, apart from the PwC Candidates, Seashore had nominated Mr Lai Kar Yan (“Mr Lai”), Mr Yeung Lui Ming (“Mr Yeung”)[1] and Mr Kam Chung Hang (“Mr Kam”) of Deloitte Touche Tohmatsu (“Deloitte” and collectively, “Deloitte Candidates”).

6.  As appears from the table below, Seashore, Port Rich, Goldin Tianjin and Keen Able representing 55.27% of the total claims voted in favour of the Deloitte Candidates while BOC representing 44.73% of the total claims voted in favour of the PwC Candidates.

Name of creditor	Amount of debt admitted for voting purpose (HKD)	%		Voted for
Seashore	$18,904,189,681.15	24.90%	55.27%	Deloitte Candidates
Port Rich	$5,954,218,705.00	7.84%
Goldin Tianjin	$1,964,051,271.21	2.59%
Keen Able Ltd (“Keen Able”)	$15,138,393,977.87	19.94%
BOCSZ	$5,230,136,027.90	6.89%	44.73%	PwC Candidates
BOCTJ	$28,722,792,977.16	37.84%

7.  The day before the 1^st creditors meeting, Deloitte submitted a disclosure statement pursuant to section 262 C of Cap 32 (“the Disclosure Statement”). BOC which opposed their appointment set out their opposition in a letter dated 30 November 2022 from their solicitors, King & Wood Mallesons (“KWM”) to the PL (“the objection letter”).

8.  The PL submitted a report to the court on 29 December 2022 and applied for an order that the Deloitte Candidates be appointed as the liquidators of the Company.

9.  The matter came before the Master who appointed the PwC Candidates culminating in the present appeal.

Applicable principles

10.  A convenient statement of the applicable principles for determining disputes as to the identity of liquidators is to be found in the judgment of Harris J in Re Value Food Supply Limited [2021] HKCFI 2975 at §11[2]:

“ (1) When a company is insolvent, the majority votes of the creditors will in the normal course prevail because they have the primary interest in the outcome of the liquidation.

(2) However, the creditors holding the majority vote do not have an absolute right as to the choice of liquidator because the appointment of a liquidator has to be conductive to both (i) the proper operation of the process of liquidation, and (ii) justice as between all those interested in the liquidation.

(3) The office-holder needs to both act and be seen to act in the best interests of creditors and to properly investigate all claims.

(4) A liquidator should not be a person nor be the choice of a person who has a duty or purpose which conflicts with the duties of the liquidator.

(5) By contrast, it is not an objection to a liquidator that he is allied to or the choice of a person who is concerned to pursue the claims of the company through the liquidator.”

11.  Harris J (at §12) added:

“The application of these principles does not involve simply determining arithmetically which of competing candidates has got the most votes. The court can have regard to the characteristics of each creditor, which may be relevant to an assessment of the weight to be given to their views. Generally more weight will be given to the views of creditors who are independent of the ownership of the Company than those who are associated with it, because their circumstances may reasonably be thought to suggest that they will be influenced by considerations other than simply maximising the recovery for unsecured creditors.”

12.  In Re Legend International Resorts Limited, unrep., HCCW 1139/2004, 7 March 2011, Fok JA (as he then was) at §§30 and 32 remarked that a liquidator should not only be independent and impartial, but also be seen to be so. Any conflict of interests or even over-familiarisation should be discouraged. Liquidators owe a duty to avoid any conflict of duty and interest and also, separately, a duty to act impartially.

13.  In cases where the liquidation calls for the investigation of debts, the investigation should be undertaken by insolvency practitioners who are seen to be totally independent of the management of the company and are seen to be completely impartial: see Re Winspower Limited, unrep., HCMP 621/2006, 20 June 2006 at §16.

This appeal

14.  Mr Jenkin Suen, SC and Mr Avery Chan, counsel for Seashore, submitted that the majority of creditors voted for the Deloitte Candidates who would normally be appointed liquidators. BOC’s objections set out in the objection letter is that the Deloitte Candidates are not seen to be independent. The issue is whether there is any substance in that objection.

15.  Pausing there, the voting resulted in a difference of 10.5% which the PL considered to be marginal.[3]

16.  It is obvious from the authorities cited above that the court is not bound to appoint the choice of the majority to be the liquidator. Rather, the court has a discretion whether or not to do so depending on the circumstances.

17.  Mr Bernard Man SC and Mr Thomas Wong, counsel for BOC, submitted that Port Rich and Goldin Tianjin, respectively the Company’s sole director and the Company’s wholly-owned subsidiary are obviously affiliated entities. If their votes are disregarded, the position between the camps is razor thin (44.84% v 44.73%) involving a difference of a mere 0.11%. The reality is that the 2 camps have essentially the same amount of votes.

18.  While Mr Suen submitted that the votes of the affiliated entities should be discounted rather than disregarded, he did not provide the court with any formula or mechanism for arriving at the appropriate discount. For the court to select a random figure would be unsatisfactory and unprincipled. The submission itself is an implicit acknowledgement that full weight should not be accorded to the votes of these affiliated entities.

19.  In the absence of any mechanism for ascertaining the appropriate discount and having regard to the characteristics of the affiliation (respectively the sole director and wholly-owned subsidiary of the Company), the only workable solution is for the votes of the affiliated entities to be disregarded.

20.  As will become apparent, whether or not those votes are disregarded or discounted makes no difference to the outcome.

21.  In their objection letter, BOC set out some of the applicable principles (about which there is no dispute). Mr Suen highlighted the following and in particular, he noted the use of the word “has” and not “had”:

•  A liquidator should not be a person or the choice of the person who has a duty or purpose which conflicts with the duties of the liquidator.

•  By contrast, it is not an objection to a liquidator that he is allied to the choice of a person who is concerned to pursue the claims of the company through the liquidators.

The Disclosure Statement

22.  The Disclosure Statement made by the Deloitte Candidates in pertinent part read:

“(1) We confirm we are not disqualified under section 262B of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUMPO”);

(2) None of the relationships set out in subsection 2 of section 262D of  CWUMPO exist in this matter with respect to [the Deloitte Candidates].”

It is BOC’s case that those statements are untrue.

(a)  Section 262B

23.  The winding up of the Company is deemed[4] to have commenced on 7 June 2021 when the petition was presented.

24.  No fewer than 3 contemporaneous documents stated that Deloitte served as auditor of the Company and its indirect parent company Goldin Properties Holdings Limited (“GPHL”) until 7 February 2020:

•  GPHL’s Director’s Report dated 31 October 2020 for the year ended 31 March 2019;

•  consent to act signed by the Deloitte Candidates in Pan’s bankruptcy dated 10 August 2022; and

•  Deloitte’s letter dated 11 April 2023 to Seashore’s solicitors, signed by Mr Lai[5] (“the April 2023 letter”).

25.  In their Further Reply Skeleton lodged in the late afternoon of the day prior to the hearing before the Master, BOC raised the point that the Deloitte Candidates were (in the absence of the court’s leave) disqualified from acting as liquidators by reason of section 262B(3)(e) of Cap 32[6] and that the Disclosure Statement was factually incorrect.

26.  At the hearing before the Master on 15 June 2023, surprisingly, no explanation was forthcoming for that state of affairs.

27.  After the hearing, Seashore’s solicitors sent a letter to Deloitte on the same day to bring the new point raised to Deloitte’s attention and suggested that if Deloitte decided to respond, to do so within 7 days to ensure that the full picture is provided to the court and all concerned before the Master’s decision is handed down.

28.  Deloitte’s responded by letter on 20 June 2023 (“the June 2023 letter”). It was signed by Mr Kam [7] maintaining that:

1)  the Disclosure Statement was correct;

2)  GPHL retained Deloitte to serve as auditor for GPHL and its subsidiaries (including the Company) for the year ended 31 March 2018 which was completed by 31 August 2018 when the report was signed (“the 2018 audit”), that being the last audit engagement for the Company and that Deloitte was not retained to perform the 2019 or any other audit engagement;

3)  BOCs leading counsel’s “misunderstanding” stemmed from the “resignation statement[8]” made in the April 2023 letter sent 5½ months after the making of the Disclosure Statement;

4)  the date 7 February 2020 stated in the resignation statement “is in fact a mistake”; Grant Thornton had written that day to Deloitte enquiring if there was any reason why they should not accept appointment as auditors and Deloitte had replied on 26 February 2020;

5)  subsequently, the date of 7 February 2020 “was mistakenly referred to as the date of resignation”.

29.  Mr Man noted that quite apart from the fact that Grant Thornton’s letter was not even produced, there was no evidence from the individual(s)[9] who had prepared the 3 documents listed in §24 above as to what records or documents had been consulted/reviewed that could have given rise to the mistake[10].

30.  The 3 occasions on which 7 February 2020 was referred to as the resignation date occurred on 31 October 2020, 10 August 2022 and 11 April 2023, spanning a period of almost 30 months.

31.  KWM replied to Deloitte’s letter the same day pointing out that it raised more questions than answers, and inspired little confidence in the Deloitte Candidates in that Deloitte’s assertion[11] that the April 2023 letter was sent 5 ½ months after the Disclosure Statement is misleading given the 2 earlier occasions[12] which occurred well before the date of the Disclosure Statement.

32.  Following the receipt of KWM’s letter, Deloitte wrote to the Master on 21 June 2023 concerning that letter but without actually providing clarification regarding any of the matters it raised.

33.  The Master’s Decision was handed down the same day.

34.  For the purposes of section 262B, the relevant period is the period of 2 years before the winding up which commenced on 7 June 2021. In other words, the period is from 7 June 2019 to 6 June 2021.

35.  Although Grant Thornton audited the 2019 accounts, the earliest date Grant Thornton could have become involved for the 2019 audit would have been after receipt of Deloitte’s letter of 26 February 2020. There is no evidence that sheds light on the audit situation for the period of almost 18 months from 1 September 2018 to 26 February 2020, part of which falls within the two-year period mentioned in the preceding paragraph.

36.  In my view, the statement that the 2018 audit was the last audit engagement for the Company needs to be taken with a pinch of salt in the absence of evidence for the termination of the relationship.

37.  Deloitte had been GPHL’s and the Company’s auditor since April 2007. So for upwards of 10 years Deloitte had been engaged as auditor year on year. When and how that relationship was brought to an end are not known but it would be surprising if it had not generated some correspondence. The termination of that relationship is unlikely to have been inconsequential. One would have thought that it would have been relatively straightforward to pinpoint exactly the date the relationship terminated from the relevant records.

38.  In the circumstances, the absence of any evidence in that regard is disappointing. One is left with a strong impression that a full and frank disclosure has not been made.

39.  In my view, Deloitte’s explanations are decidedly underwhelming and highly unsatisfactory. There is simply no evidence as to how the mistake came to be made nor how it came to be repeated. In this regard, it should be noted that the signatory to

(i)  the April 2023 letter was also one of the signatories to the consent to act; and

(ii)  the June 2023 letter was also one of the signatories to the consent to act.

40.  That evidence is particularly relevant where the person involved is one of the Deloitte Candidates as it goes to his suitability to be appointed and to take up the role of liquidator.

41.  In the circumstances, I do not accept the statement in §1 of the Disclosure Statement to be correct.

42.  It follows that the Deloitte Candidates are disqualified, no prior leave having been obtained from the court pursuant as required by section 262B (3).

(b)  Section 262D[13]

43.  The covering letter to the Disclosure Statement disclosed that on 27 May 2022, at the instigation of the local government in Tianjin, DAHK was engaged to provide independent financial advisory and restructuring advisory services to Goldin Tianjin, the Company’s wholly-owned subsidiary.

44.  DAHK, Deloitte’s affiliate, took up the role of providing financial and restructuring advisory services to Goldin Tianjin just over a week after the winding up order was made. At that time, two of the then three Deloitte Candidates were directors of DAHK.

45.  A report dated 30 May 2022 (“the Deloitte Report”) was produced in which DAHK argued in favour of restructuring and strongly opposed any liquidation or bankruptcy against the Company and Pan. It expressed the following opinion (see Deloitte Report p 28):

“… in order to maximise the interests of all stakeholders, we strongly recommend that the parties put all relevant litigation, liquidation bankruptcy proceedings on hold until the restructuring proposal is implemented.”

46.  In fact, both Pan and Port Rich adduced the Deloitte Report in support of their applications made on 27 June 2022 and 19 August 2022 respectively for staying the Company’s winding up order. Both applications were eventually abandoned with costs to BOCSZ.

47.  A subsidiary point taken by BOC was that Deloitte had not been forthcoming about DAHK’s engagement by Goldin Tianjin by claiming that it was made “at the instigation of the local government in Tianjin”. Suffice it to say that in view of the conflicting evidence, it would not be desirable for any tentative view to be expressed on the matter at this stage. In the scheme of things, the point is of minor significance.

48.  Rather, what is significant is that in §2 of the Disclosure Statement, the Deloitte Candidates declared that none of the relationships set out in section 262D (2) of Cap 32[14] exists.

49.  DAHK only ceased to be Goldin Tianjin’s financial advisor on 30 September 2022. As Mr Yeung and Mr Lai[15] were both directors of DAHK, the relationship specified in section 262D(2)(a)(ix) clearly existed. It follows that §2 of the Disclosure Statement is factually incorrect.

Conflict of interest and/or lack of impartiality

50.  Seashore took up 3 points made in the objection letter under this rubric. Those together with other matters arising at the hearing are considered below.

(i)  BOC’s statement that Pan has been in financial difficulties since 2015

51.  That statement was said to give rise to the need for the Company’s liquidators to investigate its assets and affairs which would likely include tracing the Company’s records back to the 2015. As Deloitte served as auditors of the Company and its affiliates and for its indirect parent GPHL from April 2007 to March 2018, it would mean that if the Deloitte Candidates were appointed, they would be investigating accounts audited by their own firm.

52.  Mr Suen submitted that the basis of BOC’s statement appeared to be linked to certain incidents that only happened in December 2018, rendering it but a bare assertion, unsupported by documentary evidence.

53.  However, it transpires that BOC’s statement was based on the judgment delivered when the Company was wound up: see Pan Sutong v Bank of China Limited [2022] HKCFI 1450 at §7.

54.  Seashore further submitted that, in any event, the objection based on the supposition that Deloitte would have to investigate its own audited accounts lacks specificity. In Re Winspower Limited, unrep., HCMP 621/2006, 20 June 2006, 5 specific or particular areas of concern had been identified. Here, no areas of concern arising from accounts audited by Deloitte have been particularised or identified.

55.  I do not read Winspower as laying down any general principle that unless areas of concern are specified or particularised, the court will not order an investigation. Each case must turn on its particular facts.

56.  In the present case, the Company’s statement of affairs shows a deficiency exceeding 32 billion and it would not be surprising if the liquidators would have to trace records back to the time when Pan’s companies started to experience financial difficulties, namely, 2015. It may entail looking into the accounts prepared by Deloitte. It is no answer to say that BOC has not identified specific areas of concern arising from those accounts.

57.  When BOC challenged Port Rich’s debt as it is not reflected in the Company’s audited financial statements (“AFS”) [16], Seashore considered the allegation a red herring stating that “there is no information in [the Company’s] AFS regarding the debt of all of its creditors[17]” (emphasis added).

58.  BOC submitted that if there is no information in the Company’s AFS regarding the debts of all of its creditors, that is a good reason for the court not to appoint a former auditor of the Company as the liquidators may have to look at how the audited accounts came to be prepared. I would respectfully agree.

59.  BOC provided another example. That concerned their complaint that the contingent liability of the Company qua guarantor to Seashore was not recorded in GPHL’s audited accounts.

60.  Seashore’s response was that while it is in no position to comment on the accounting practice of GPHL, it considered that “an omission in one of the [AFSs] of [the Company’s] indirect parent company alone is plainly insufficient to cast any doubt on Seashore’s proof of debt[18]”.

61.  Its response misses the point sought to be made. It illustrates the probable need for the liquidator to look at how the GPHL’s AFSs came to be prepared. It is obviously undesirable and inappropriate for the auditor in question to be appointed liquidator. Investigations should be undertaken by insolvency practitioners who are seen to be totally independent of the management of the Company and are seen to be completely impartial:. Winspower (at §16) .

(ii)  Deloitte’s acknowledgements of conflict of interest on 17 June 2022

62.  As regards Deloitte’s two acknowledgements on 17 June 2022 that they were unable to act as the Company’s liquidators because they were conflicted out, Seashore submitted that Deloitte’s acknowledgements were made in response to KWM’s enquiry as to whether Deloitte could act as liquidators. The enquiry would not have been made had KWM not considered Deloitte to be a suitable candidate.

63.  That KMW considered Deloitte suitable as a candidate in June 2022 does not assist Seashore. It was made at a time when KMW were not aware of DAHK’s advisory engagement by Goldin with a view to potential restructuring and that 2 of the Deloitte Candidates were directors of DAHK.

(iii)  Deloitte opposes the winding up and liquidation of the Company

64.  The relevant passage from the Deloitte Report is set out in §45 above. Mr Suen’s response (ostensibly on behalf of Seashore but could well have been on Deloitte’s behalf) to the effect that Deloitte did not give consent to the Company to use their Report cannot erase the fact that a strong recommendation was made in the Deloitte Report in favour of restructuring.

65.  A related matter is the reference to DAHK’s advisory engagement in the April 2023 letter, stating that on the completion of phase 1 of the engagement (which Deloitte considered to be “solely a fact finding exercise[19]”), a report was issued on 30 June 2022 (“the Final Report[20]”). Surprisingly, the Final Report is not in evidence and, inexplicably, no reason has been given as to why it that is the case.

66.  In the circumstances, BOC submitted (not without reason) that the court should infer that the Final Report would have further refuted Deloitte’s assertion that DAHK’s engagement was but a “fact finding exercise”.

(iv)  Acceptance of Seashore’s nomination by the Deloitte Candidates

67.  Mr Suen’s explanation for the Deloitte Candidates’ acceptance of Seashore’s nomination 4 months after their acknowledgement of being conflicted out was because by then DAHK’s services had been terminated[21] and there was no longer any conflict. The court was reminded of the use of the word “has” used in the principle cited in §21 above.

68.  BOC expressed scepticism over the explanation since on 10 August 2022, when DAHK’s engagement was still extant, the Deloitte Candidates consented to act as Pan’s trustee in bankruptcy.

69.  Seashore explained that the conflict of interest that existed in June 2022 was Deloitte’s advisory role with a view to restructuring and their role as the Company’s liquidators and such conflict is absent in taking up the role of Pan’s trustee in bankruptcy.

70.  In so far as a distinction was sought to be drawn between the disclosure requirements for appointing a trustee in bankruptcy from those for appointing a liquidator, those distinctions do not undermine the point that it is the impartiality of the insolvency practitioner that really matters and a person who is tainted by conflict of interest should not be appointed.

71.  Further, given that Pan’s personal assets include his interest in his group of companies, a conflict of interest could well arise in the role of taking on the role of his trustee in bankruptcy.

72.  In fact, Linda Chan J had expressed serious reservations about appointing the Deloitte Candidates as Pan’s trustee in bankruptcy at the first 30-minute hearing. Those remarks have not been assuaged by Seashore’s submissions.

Conclusion

73.  Given the court’s view on the matters contained in the Disclosure Statement, it follows that the Deloitte Candidates are disqualified from acting as liquidators.

74.  After filing the notice of appeal on 4 July 2023, on 24 August 2023, Seashore filed a summons seeking retrospective leave for the Deloitte Candidates to be appointed auditors even if the Court were to find that they only ceased to be auditors in February 2020 (“the leave summons”).

75.  It stands to reason that Seashore would not have taken out the leave summons without having ascertained that Deloitte/Deloitte Candidates are willing to assume that role.

76.  Retrospective leave is sought because of the failure to disclose the existence of a relationship prohibited under the legislation. That failure is said to be attributable to a mistake as to the date Deloitte ceased to be auditors.

77.  The Deloitte Candidates have known since 20 June 2023 of the 3 occasions in question. The leave summons was taken out 2 months later, providing ample time for Deloitte to look into how the mistake arose, and how it was that it came to be repeated. The only evidence in support of the leave summons is from Sun Wei Yung Kevin, a director of Seashore who was not privy to and, obviously, not in a position to deal with those matters.

78.  The absence of evidence from Deloitte on these matters to justify why they should be given dispensation from the prohibition is not explicable unless a full and frank disclosure might jeopardize their prospects of being appointed. As explained in §§39-40 above, it may raise doubts as to the suitability of the party involved.

79.  In view of the foregoing matters, I do not consider it appropriate to grant retrospective leave. Accordingly, the leave summons is dismissed with costs.

80.  Whether the court proceeds on the basis that the 2 camps of creditors have the same amount of votes or whether it adopts the voting outcome giving the Seashore camp a marginal majority matters not.

81.  Not a single criticism or adverse remark has been made in the papers or in oral submissions about the PwC Candidates whose conduct is beyond reproach.

82.  The same cannot be said of the Deloitte Candidates. That is apparent from the matters considered above and it is unnecessary to repeat the misgivings that the court has expressed. In the circumstances, I have no doubt that it would best serve the interests of all the creditors that the PwC Candidates be appointed.