THE OFFICIAL RECEIVER v. YAN KWOK KEE GAY AND ANOTHER

 HCMP 407/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 407 OF 2004

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JUDGMENT

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1.  In these proceedings commenced on 11 February 2004, the Official Receiver applies pursuant to section 168H of the Companies Ordinance, cap. 32, for an order that the respective respondents shall not, without leave of the court, act as a director or liquidator of a company, a receiver or manager of a company’s property, or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation, management of a company (“disqualification order”).

2.  Initially, both respondents opposed the application.  The hearing was therefore intended to be a full trial of the application.  At the commencement of the hearing, the 2^nd respondent through counsel, accepted that a disqualification order should be made against him under the Ordinance and sought to adopt the Carecraft procedure.  In the case of the 1^st respondent, in the course of Mr Au’s opening submissions against him, he indicated that he also agreed to be subject to a disqualification order.  Disqualification orders were accordingly made against the 1^st and 2^nd respondents for three years and six years respectively.  I now reduce my oral reasons into writing.

The 2^nd respondent

3.  The basis of the 2^nd respondent’s acceptance of a disqualification order and the matters that he agreed to and accepted are set out in a document entitled “Schedule for Carecraft Procedure” (“the Schedule”), which he put in at the hearing.

4.  As is commonly known, Carecraft procedure is a summary procedure for disqualification proceedings.  Although there is no Practice Direction in Hong Kong governing this procedure, given that the intention of the procedure is to save time, costs and expenses, the statement of agreed facts should in general be lodged with the court before the hearing.  Indeed, in England, the Practice Direction requires the statement to be submitted to the court no less than two days before the hearing. The emphasis is on allowing the court sufficient time to read and consider the agreed facts in advance.  I shall return to deal with this in the context of the mitigations put forward.

5.  The basis on which the 2^nd respondent accepts that a disqualification order should be made against him is set out in paragraphs 8 to 12 of the Schedule.  Additionally, the 2^nd respondent accepts that after his re-appointment as director to YCK in October 1997, he was aware that the company was in dire financial situation.  On the basis of the matters and facts agreed and accepted by him, I am satisfied that the case for a disqualification order has been made out against the 2^nd respondent.

6.  The Official Receiver and the 2^nd respondent have not been able to agree on the appropriate period of disqualification.  Under the section, the period for disqualification can range from 1 to 15 years.  The Official Receiver says that this is a case fit for the lower end of the 6 to 10 years bracket.  For the 2^nd respondent, however, it is said that a period within the first bracket of 5 years or below is appropriate.

7.  The mitigations proffered on behalf of the 2^nd respondent are set out in paragraphs 13 to 17 (mistakenly numbered as paragraphs 13-16 and 14) of the Schedule.  Additionally, Mr Wong raises the following matters.  Firstly, he says that in 1995, the 2nd respondent was only a minority member on the board of YCK.  Secondly, it is said that the problems regarding failure to prepare accounts, audited report and financial statement of YCK only arose in the period after the 2^nd defendant had resigned as director and before his re-appointment, i.e. during the period when he was not a director.  Thirdly, in respect of the non-compliance with statutory filing obligations in connection with four other companies, no prejudice has resulted to the creditors of these companies.  Fourthly, it is said that the 2^nd respondent had made admissions and also accepted that an order should be made against him.  Fifthly and lastly, it is said that he had no previous record of being subject to a disqualification order.

8.  In determining the length of disqualification, it is important to have regard to the purpose of the disqualification order.  As agreed by counsel, disqualification order is not intended to be a punishment or penalty for the director in question.  The fundamental objective is the protection of the public from misconduct or irresponsible behaviour of directors and people who manage companies.  The public, in this sense, encompasses investors and creditors.

9.  For this reason, in the case of the 2^nd respondent, I am of the view that his breach of fiduciary duty and non-co-operation with the Official Receiver and the Liquidator are particularly serious. 

10.  In respect of the 2nd respondent’s breach of fiduciary duty, Mr Wong points out that the two substantial sums of expenses incurred by YCK for YCKI took place when the 2^nd respondent was not a director of YCK.  Quite apart from the fact that substantial sums of expenses were also incurred by YCK for YCKI and YCKCCL during the period when the 2^nd respondent was a director of YCK, the essence of the breach of fiduciary duty allegation is not or is not confined to the incurrence of the expenses.  Rather, the gravamen is the neglect and failure to take steps to recover the indebtedness due by YCKI and YCKCCL when, clearly, YCK was itself insolvent.

11.  It also matters not that YCKI and YCKCCL might well have refused or been unable to repay, a matter which is not borne out by the evidence before the court.  The expenses YCK incurred for YCKI and YCKCCL are of very substantial amounts.  At the same time, the 2^nd respondent was throughout responsible for these companies. 

12.  The gravity of the 2^nd respondent’s case is compounded by his non-co-operation upon being enquired by the Liquidators and Official Receiver.  As submitted by Mr Au, the 2^nd respondent’s refusal to provide the accounts of YCKI and YCKCCL to the Liquidators or the Official Receivers had rendered the tasks of liquidation very difficult.  This in turn has prevented the Liquidators or Official Receivers from getting in and securing or recovering assets of YCK.  The harm and prejudice fall squarely on the creditors of the company.  The non-co-operation of the 2^nd respondent had been maintained throughout.

13.  It is also relevant to note the conduct of the 2^nd respondent in these disqualification proceedings.  As the submissions of Mr Au show, the 2^nd respondent had, in fact, no convincing or credible reason for his failure to co-operate with the Official Receiver over the accounts of the companies.  The explanations he offered in his affirmations filed in these proceedings are plainly unsustainable, being contrary to the objective documentary evidence available.

14.  As to the failure to maintain financial records and to prepare financial statements and accounts of YCK and YCKI, it is correct to say that in the case of YCK, the default first arose before the 2^nd respondent’s re-appointment to the board in October 1997.  But that is not a mitigating circumstance because it is a continuing default that had continued well after his re-appointment.

15.  Further, the failure is not an inadvertent one in view of the clear warning from the company’s auditor.  There is no doubt that the 2^nd respondent was aware of his duty and also of the need to prepare the accounts and financial statements.  Indeed, he and the 1^st respondent had, as the evidence reveals, taken steps to appoint Fan & Mitchell to prepare the accounts and statements, but had failed to proceed beyond the point of appointing the firm.  The failure has understandably added to the difficulties of the Liquidator and the Official Receiver.

16.  I accept that YCK is part of a family business and that the falling-out in the relationship among the family members might well have presented difficulties to the management of the company.  But that does not lessen the statutory and fiduciary duties a director owes to, among others, creditors dealing with the company.

17.  I also accept that the 2^nd respondent had at the hearing agreed to the making of a disqualification order.  This has, to some extent, reduced the hearing time, but it has done little to reduce the costs and overall time incurred for these proceedings.  As I noted in the beginning, these disqualification proceedings were first on foot in February 2004.  It has taken over a year to come to this stage.  The acceptance of a disqualification order at the commencement of the trial therefore carries little weight in terms of mitigation.

18.  I am prepared to accept that there is in this case no suggestion of fraud and dishonesty. I also accept that the 2^nd respondent is now 68 years of age, such that the length of disqualification should not be too long as to completely disable him from ever being a director or engaged in company management.

19.  Notwithstanding these and the mitigations advanced on behalf of the 2^nd respondent, having regard to the matters that I have outlined, in particular the gravity of the case, I am of the view that disqualification for a period at the lowest end of the second bracket, namely 6 to 10 years, is called for.  Accordingly, I make a disqualification order against the 2^nd respondent for a period of six years.

The 1^st respondent

20.  As for the 1^st respondent, he and the Official Receiver had agreed on the materials in support of a disqualification order.  The agreed materials were set out in a document signed by the 1^st respondent and the Official Receiver (“the Agreed Materials”).  The 1^st respondent confirms that he understands and agrees with the contents of it.

21.  On the basis of the Official Receivers’ 1^st, 2^nd, 4^th and 5^th Reports as admitted by the 1^st respondent, and considering the 1^st respondent’s admissions of breaches and failure of duties as set out in paragraph 3 of the Agreed Materials, I am satisfied that a case for a disqualification order under section 168H of the Ordinance has been made out against the 1^st respondent.

22.  The Official Receiver and the 1^st respondent are in agreement that the disqualification order should be for a period of three years.

23.  From the perspective of protecting the public, the breach of fiduciary duty on the 1^st respondent’s part is no less serious than that of the 2nd respondent.  The 1^st respondent had also not been forthcoming in the initial stage of enquiries by the Liquidators and the Official Receiver.

24.  However, at a subsequent stage, notably after the public examination of him and the 2^nd respondent, the 1^st respondent had been much more forthcoming.  He had since provided useful assistance and information to the Official Receivers.  Some of these have proved to be of use and value in these proceedings.  The Official Receiver acknowledges this, too.

25.  Although the 1^st respondent had also resisted the disqualification application until the trial of it, the affirmation he filed in these proceedings is more in the nature of explaining his belief and the omissions.  He had not endeavoured to paint any misleading picture or exonerate himself by means of incorrect factual assertions.  In my view, this and his co-operations with the Official Receiver underline the difference between the gravity of his case and that of the 2^nd respondent.

26.  Overall, in view of the above matters and having regard to the stance adopted by the Official Receiver, I am prepared to accept that a three years’ disqualification is appropriate for the 1^st respondent.  And I order accordingly.

Costs

27.  Both respondents accept that costs should follow event.  The Official Receiver’s costs of the application against the 1^st respondent herein are to be paid by the 1^st respondent to be taxed if not agreed.  Similarly, the Official Receiver’s costs of the application against the 2^nd respondent herein are to be paid by the 2^nd respondent to be taxed if not agreed.