PINEMILL CO. LTD. v. LAI HONG SAN AND OTHERS

HCCW 19/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 19 OF 1998

____________

____________

____________

______________

JUDGMENT

______________

1. This is an application by the first and fifth respondents to dismiss the action brought by the liquidators of Weihong Petroleum Company Ltd (“the Company”) against them for want of prosecution. The action arose following the compulsory winding up of the Company in 1998.

Background facts

2. The Company was incorporated in June 1995 and the second and fifth respondents became shareholders and were appointed its directors on 13 December 1995.

3. The fifth respondent is a company named Weihong Investment (Holdings) Company Ltd which, at all material times, the first respondent (a shareholder and director of the fifth respondent) controlled.

4. Initially each of the second and fifth respondents held 50% of the issued shares of the Company. On 22 August 1996, the second respondent transferred one half of his 50% holding to the fifth respondent, resulting in the second and fifth respondents being respectively the registered owners of 25% and 75% of the issued share capital of the Company.

5. Between 13 December 1995 and 29 October 1996, the second and fifth respondents were the directors of the Company. As the fifth respondent was a corporate director, the first respondent was the primary officer discharging the corporate functions of the fifth respondent, including its duties as a director of the Company.

6. In about August 1996, the third and fourth respondents became signatories of the Company’s bank accounts and remained such signatories until May 1997. They were appointed directors on 29 October 1996 but resigned on 20 November 1996.

7. The Company was wound up in 1998 on the petition of Pinemill Company Ltd (“Pinemill”), based on a default judgment arising from the Company’s failure to pay for supplies of oil to the value of approximately US $2.5 million and accrued interest of approximately US $0.4 million. Pinemill was and remains the Company’s sole creditor.

8. The liquidators obtained an order in May 2000 to conduct a private examination under section 221 of the Companies Ordinance, Cap 32 (“the Ordinance”) of the first to fourth respondents as well as of DS Cheung & Co, a firm of solicitors responsible for drawing up documentation relating to the transfer of the Company’s interest in a venture concerning the development and operation of a bonded oil terminal and pier in Daya Bay (“the DB Venture”) to Grand Petroleum Holdings Ltd (“Grand Petroleum”).

9. Subsequent to the examination, the liquidators obtained an order from Kwan J dated 8 October 2003 to commence proceedings under section 276 of the Ordinance against the respondents seeking compensation in respect of alleged breaches of fiduciary duties and/or duties of care as set out in the Points of Claim filed on 29 November 2003.

10. As pleaded, the complaints may be summarized as follows:

(1)  Improper payments

  The respondents had made substantial improper payments amounting to almost $217 million in the aggregate to themselves and/or parties with whom they were associated between 25 June 1996 and 16 January 1997. The payments complained of were particularized in six schedules attached to the Points of Claim.

(2)  The DB Venture

a.  The DB Venture was the Company’s interest acquired through a Joint Operation Contract made on 1 December 1995 and an equity joint venture contract made in May 1996, leading to the establishment of an equity joint venture company (“the EJV Company”). The Company was entitled to 70% of the pre-tax profits from the operation of the terminal and pier for the purpose of the import, storage and sale of petroleum products.

b.  The respondents, in various subsequent agreements, acknowledged the receipt by the Company of substantial sums from investor (s) in return for an interest in or a portion of its interest in the DB Venture but failed to account for the same.

c.  Notwithstanding the fact that the Company’s interest was acknowledged by the respondents to be of a substantial value amounting to HK $400 million, the respondents stripped the Company of its interest in the DB Venture for no consideration. Essentially, the DB Venture was not to be continued by the Company but by Grand Petroleum, a company then owned by the third and fourth respondents and one Alex Wong through nominees and corporate vehicles and which was allowed to operate the business on a trial basis from about August 1996.

d.  Pinemill delivered 7 shipments of gasoil pursuant to contracts entered into with the Company in August 1996 and substantial amounts were outstanding thereunder.

e.  In November 1996 the first, second, third and fourth respondents through their nominees and corporate vehicles entered into with a Shareholders’ Agreement allowing Grand Petroleum to undertake the DB Venture to the exclusion of the Company and undertook to procure that the Company cease to trade on or before 31 March 1997 at a time (ie November 1996) when the Company had substantial outstanding payments due to Pinemill for the gasoil shipments.

(3)  The payment of $105 million

  The respondents allowed the Company to pay a total amount of HK $105 million to nominees of the third respondent, Alex Wong and the fourth respondent, purportedly for the purpose of repaying alleged indebtedness when in fact the Company had not received any payments from those nominees in the first place or, if payments had been made to the Company, the same had been misapplied or misappropriated by the respondents.

The striking out application

11. The first and fifth respondents seek to strike out the action brought by the liquidators against them on the basis of inordinate and inexcusable delay resulting in real prejudice and abuse of process.

Delay

12. Although the winding up order was made in January 1998 and the events in question largely took place during the period of 14 months between December 1995 and January 1997, the absence of proper books and records, the lack of cooperation from the directors and the need for a section 221 examination made it impossible for the liquidators to have commenced the action any earlier than November 2003. Accordingly, it is not suggested that the liquidators were dilatory in commencing the action; the first and fifth respondents make no complaint in that regard.

13. Mr Yau (who with Ms Jo Siu appeared for the first and fifth respondents) complained of two periods of delay. The first is said to run from May 2006 until July 2010 and the second period from August 2010 to December 2011.

The first period

14. Mr Yau was unable to explain the relevance of May 2006 as a starting date. From the chronology he had prepared for the hearing, it is clear that the liquidators had taken out a summons on 31 July 2002 (re‑dated 23 July 2003) for directions for the filing and service of pleadings, discovery, the filing and service of witness statements as well as for an order that the transcripts of the section 221 examination of the first to fourth respondents, and of the transcripts of the examination and of the affidavits and affirmations filed by or on behalf of DS Cheung, Esq., pursuant to section 221 be admissible generally for the purpose of the application pursuant to section 276 of the Companies Ordinance against each and every one of the respondents.

15. By an order dated 8 October 2003 (“the 2003 order”), Kwan J gave detailed directions under the summons. On the admissibility of transcripts in evidence, Kwan J ordered that the transcript of the examination of a respondent under section 221 be admissible in evidence against that respondent subject to all just exceptions, but on the general admissibility of the transcripts as evidence against each and every one of the respondents,she directed that the matter be adjourned for argument.

16. In the result, the resolution of the general admissibility issue took some time. It culminated in her order dated 29 June 2006 (“the 2006 order”) dismissing the liquidators’ application. That order was filed on 19 July 2006.

17. From my perusal of the documents filed with the court, the period of inactivity only commenced after 19 July 2006 and not earlier and I so find.

18. The end date of the first period, July 2010, was the signing of the witness statement of Darach E. Haughey on behalf of the liquidators on 12 July 2010. That is a substantial document with no fewer than 130 exhibits. For present purposes, the first period complained of will be taken to relate to the period of 4 years from 20 July 2006 to 12 July 2010.

19. Between 20 July 2006 and 12 July 2010, the only events discernible from the record are a notice of change of name of solicitors on 18 February 2008 and a notice of intention to proceed dated 2 April 2009.

The second period

20. The end date of this period coincides with the taking out of a case management summons by the liquidators on 11 November 2011. However two months prior to that, on 2 September 2011, the liquidators had served a notice of intention to proceed. Since that was followed shortly by the case management summons, I do not consider that the second period should extend beyond August 2011. Accordingly, I find that the second period ran from 13 July 2010 to 31 August 2011, a period of 13 months.

21. That said, the rationale for dividing the delay into two separate periods is not apparent. Cumulatively, the two periods taken together span five years and that is the delay with which the present case is concerned.

Case management conference

22. To complete the chronology, it should be mentioned that a case management conference took place on 20 January 2012 following the liquidators’ summons. Harris J made a peremptory order for the filing and service of Points of Defence by 8 March 2012 by, inter alia, the first and fifth respondents, granted leave to the liquidators to serve the witness statement of Mr Haughey by 26 January 2012 and ordered that all interlocutory applications be made by 8 March 2012.

23. The first and fifth respondents filed their respective Points of Defence on 7 March 2012 and took out the present summons to strike out on 8 March 2012.

Whether the delay was excusable

24. The liquidators have exhibited a document (reproduced below) briefly chronicling the relevant events and action taken by them and their advisers from May 2006 to 2011.

DATE	EVENT
From May 2006	·  Preparation of application for, inter alia, the examination transcripts of the various respondents to be admitted as evidence against other respondents.   ·  Hearing of the above application.
2007	·  Change of solicitors from Holman Fenwich & Willan to DLA Piper.   ·  Obtaining Counsel’s and Senior Counsel’s opinion on the action and way forward.   ·  Collating the relevant documents for the Liquidators’ witness statement.   ·  Commencement of preparation of the Liquidators’ witness statement.
2008	·  Continuing preparation of the Liquidators’ witness statement.   ·  Seeking out exhibits for the Liquidators’ witness statement.   ·  Seeking advice from Counsel on the merits of the claim.   ·  Meeting with funder of the action.
2009	·  Seeking advice from Senior Counsel on the action.   ·  Filing of Notice of Intention to Proceed.   ·  Continuing preparation of the Liquidators’ witness statement.   ·  Continuing to seek out and/or review and/or approve exhibits for the Liquidators’ witness statement.   ·  Meeting with funder of the action.
2010	·  Finalising the Liquidators’ witness statement.   ·  Finalising exhibits to the Liquidators’ witness statement.   ·  Filing of Notice of Intention to Proceed.
2011	·  Obtaining Counsel’ opinion on merits.   ·  Filing of Notice of Intention to Proceed.   ·  Issue of Case Management Summons.

25. As earlier noted, the application for the general admission of the transcripts as evidence against all respondents was dismissed by the 2006 order. Since the events relied on for 2006 had already occurred by the end of June 2006, they do not explain inaction for the second half of 2006.

26. However, the impact of the 2006 order on the action, from an evidential point of view, following the dismissal of the liquidators’ application regarding the general admissibility of the section 221 transcripts against the respondents would have had to be assessed and evaluated and I am prepared to accept that that exercise would have taken some time given that the section 221 examinations spanned some 20 days between July 2001 and February 2002 and would have covered a lot of ground. But it would seem from the chronology that there was a hiatus of at least 6 months when nothing was done. It was not until 2007 that counsel and senior counsel’s advice was sought on the action and the way forward.

27. It is Mr Haughey’s evidence that in the course of 2007 (without indicating the month), the liquidators changed solicitors to the present firm (DLA Piper) because the partner of the previous firm of solicitors (Holman, Fenwick & Willan) handling the matter was leaving Hong Kong on a permanent basis. There is no record in the court file showing the change of solicitors; there is only a “Notice of Change of Name (of solicitor)” filed on 18 February 2008 showing a change of name from “Dibb Lupton Alsop” to “DLA Piper”. The notice did not state on whose behalf that firm was acting.

28. In § 11 of Mr.Haughey’s affidavit, he referred to that notice as “in effect a Notice of Change of Solicitors”. With respect, that cannot be so as they are two distinct and different matters. Perhaps, through inadvertence, the need to file a Notice of Change of Solicitors had been overlooked.

29. Be that as it may, there is no reason to doubt that a change of solicitors did occur. I also accept that it would have taken the new firm a period of time to read into the case but I note that there is no evidence from the firm itself on the matter. If it be suggested that it took the new solicitors until February 2008 or 14 months to get up to speed as the chronology might imply, I would reject such a suggestion. A period of 14 months is way beyond what is reasonable and acceptable for the new firm to acquaint itself with the case.

30. Leaving aside the change of solicitors issue, the action taken by the liquidators from mid-2006 to August 2011 comprised the following:

(1)  seeking advice from counsel and/or senior counsel;

(2)  drafting and finalising the liquidators’ witness statement, collating, reviewing, finalising and/or approving exhibits for the same; and

(3)  meeting twice with the funder of the action who is the petitioning creditor Pinemill, the sole creditor of the Company.

31. It is far from clear on how many occasions during this period counsel/senior counsel’s opinion(s) was/were sought. While the chronology appears to suggest four, it is difficult to understand why advice on the merits had to be sought on three different occasions, in the absence of new developments or material. Further, it is not suggested that any delay was attributable to delay on the part of counsel.

32. In any event, the bulk of the work related to the witness statement. That task began sometime in 2007 and, seemingly, took over 3 years to complete. No explanation has been given as to why the action then remained dormant for another year before directions were sought.

33. Making due allowance for the change of solicitors, I do not consider that the tasks the liquidators did accomplish should have taken them much beyond say the end of 2008 or early 2009 had the liquidators proceeded with reasonable diligence to prosecute the action. On any view, the time that they did take was grossly excessive recognising, as I do, that the witness statement is a substantial item that required considerable time and effort to put together.

34. It should be mentioned that in April 2009 as well as September 2010, the liquidators filed notices of intention to proceed. However, those notices, unlike the one sent in September 2011, were not followed by any positive step in the proceedings. Those notices took matters no further and did not have the effect of progressing the action. I fail to see their relevance in the context of excusable delay.

35. Looking at the matter broadly, I consider that the delay that has occurred in the present case in respect of which there is no reasonable excuse to be of the order of 30 months.

The applicable principles for striking out for want of prosecution

36. The applicable principles are to be found in Wing Fai Construction Co. Ltd (in liq) v Yip Kwong Robert [2012] 1 HKLRD 589. As the Court of Final Appeal made clear at §§ 80 and 88, the remedy the first and fifth respondents seek involves the exercise of a judicial discretion. The court must decide whether or not “in the circumstances, it is just to strike out”.

37. I will highlight several of the general points made in the judgment of the Chief Justice which are particularly pertinent in present case:

(1)  Striking out for want of prosecution is a remedy of last resort and should only be made in “plain and obvious” cases, and where there has been abuse: § 73.

(2)  Abuse can take many forms. Inordinate and inexcusable delay causing real prejudice would be an abuse: § 75 (3).

(3)  It has never been thelawthat mere delay would be sufficient to justify an order to strike out: § 75 (5).

(4)  In the court’s consideration of delay, regard is to be had to the factors enumerated by Neuberger J (as he then was) in Annodeus Ltd v Gibson (unrep., The Times, 3 March 2000): § 75 (5).

(5)  Where abuse is clearly in clearly demonstrated, proceedings can be struck out even where prejudice to the defendants cannot be shown: § 75 (7).

(6)  The conduct of the parties “will be relevant both to the critical question of abuse as well as to the overall justice in the case”: § 75 (8).

Real prejudice

38. This application is supported by two affirmations filed by Kwok Yuen Shan Rosetta, the solicitor for the first and fifth respondents. In § 6 of her first affirmation, Ms Kwok relied (by way of general statement) on the dimming of memories of witnesses and asserted that in the circumstances there is a substantial risk that a fair trial will not be possible. Her second affirmation added nothing to the first on the question of prejudice.

39. As regards the ‘dimming of memories of witnesses’, the Chief Justice had this to say in Wing Fai Construction at § 75 (8):

“If it is sought to be argued that time has dimmed the memories of witnesses, the court will usually want to know what steps have been taken by the defendant to take instructions, or proof or locate witnesses: cf the remarks of Ribeiro JA in Hymer v Mass Transit Railway Corp [2000] 2 HKLRD by 589, 610D-J. The court will certainly want to know what the true nature of the defence is, in order to assess the extent of the prejudice suffered by a defendant.”

40. Ms Kwok’s affirmations do not mention any steps having been taken by the first and fifth respondents to preserve relevant evidence.

41. During the section 221 exercise, the first respondent was examined extensively over a period of five days. Although the transcript is not admissible in evidence as against the other respondents, the first respondent is not prevented from refreshing his memory by reading the transcript of his own examination since that transcript is admissible in evidence against him, subject to all just exceptions. See § 4 of the 2003 order.

42. Two further matters might be mentioned. First, it is the first and fifth respondents’ stance that the witness statement is, in essence, no more than “a slightly expansive version of the Points of Claim”. See § 8 of Ms Kwok’s second affirmation. Second, the fact that the defences filed by the first and fifth respondents on 7 March 2012 (in compliance with the ‘unless order’ made by Harris J on 20 January 2012 on the liquidators’ case management summons) do not disclose the true nature of their defence in the sense that no positive case has been advanced, renders it difficult, if not impossible, for the extent of prejudice suffered to be assessed

43. In those circumstances, I do not consider that real prejudice has been made out or that there is a substantial risk that a fair trial will not be possible.

Abuse

44. A considerable part of the supporting affirmations of Ms Kwok is devoted to a change of shareholding in the fifth respondent. Prior to 21 March 2001, the first respondent and his wife, Leung Man Wa, held 900,000 and 100,000 shares respectively in the issued capital of 1 million ordinary shares in the fifth respondent.

45. On 21 March 2001, 9 million ordinary shares in the fifth respondent were allotted to Pinemill Holdings Ltd (“PHL”) by way of loan capitalisation, the amount of premium involved being $18.728 million. The allotment is reflected in the annual return of the fifth respondent dated 12 January 2002. PHL is the holding company of Pinemill. At all material times, PHL was owned by Yu Chung Wai and Ku Ping Ping.

46. PHL applied for de-registration on 11 September 2003 and was struck off the register in January 2004. PHL was restored to the register by an order dated 7 May 2010 made by consent. PHL’s shareholding in the fifth respondent was transferred to the wife of the first respondent on 2 July 2010. The papers do not reveal the consideration for the transfer although the letter from Pinemill’s solicitors, Messrs Keith Lam Lau & Chan, dated 11 April 2012, appears to suggest that the only condition was that all fees and expenses were to be paid by the first respondent.

47. In her first affirmation, Ms Kwok alleged that the liquidators’ inactivity between 2006 and late 2011 was deliberate, implying that there was an ulterior purpose for their refraining from advancing the proceedings. The veiled suggestion is that PHL was manipulating the case (presumably by causing Pinemill to withhold funding) so as to preclude itself from being liable while in control of the fifth respondent. It appears to be a deduction or inference made by Ms Kwok with no supporting evidence.

48. In her second affirmation, Ms Kwok went so far as to accuse the liquidators of a lack of bona fides in their prosecution of the action. Ms Kwok mentioned “new thinking by the funder and PHL”, but that was no more than pure speculation on her part, given the absence of any supporting evidence.

49. Then in § 16 of her second affirmation, Ms Kwok accused the liquidators of making a mis-statement in one of their affidavits “by stating that for a long time PHL did not realise it actually held shares of the fifth respondent”. Mr Yau was unable to identify the affidavit or passage in question and it would appear that there was no sound foundation for the allegation made.

50. If the only condition for the transfer of the 90% holding to the first respondent’s wife was the payment of the fees and expenses, then, seemingly, PHL would appear to have given away shares of value to the first respondent’s wife. The evidence (which was not challenged) shows the fifth respondent as the registered owner of two vehicles, one being, undeniably, a ‘luxury’ vehicle. That hardly gels with the sinister motives attributed to PHL.

51. In summary, the first and fifth respondents have not discharged the burden of showing that there has been any abuse of process on the part of the liquidators.

Conduct of the parties

52. The Civil Justice Reform (“CJR”) took effect on 2 April 2009. As from that date, all parties to the action and not only the liquidators came under an obligation to take positive steps to advance the proceedings. That is clear from the following passage from the judgment of the Chief Justice in Wing Fai Construction at §75(8) where it is stated that:

“…post-CJR, where all parties to the proceedings have the obligation to prosecute the proceedings and assist the Court in furthering the underlying objectives, it would be highly relevant to consider any failure on the part of the parties here. As far as the defendant is concerned, I would say once again that there is no place anymore for defendants to adopt the attitude of “letting sleeping dogs lie”. No longer will it be possible (if it ever was) for a defendant to sit idly by and do nothing, in the hope that sufficient delay would be accumulated so that some sort of prejudice can then be asserted.”

53. Accordingly, what the first and fifth respondents did or did not do after the introduction of the CJR is a relevant factor to be taken into account.

54. The only extant order at the relevant time was the 2003 order. Had the first and fifth respondents complied with the 2003 order, their respective defences would have been filed by early 2004. Instead, they took no steps to file those defences until some eight years later and only after the making of a peremptory order against them. In this regard, the liquidators are also to be criticised for letting so many years elapse before obtaining a peremptory order against the recalcitrant respondents.

Conclusion

55. While I have found that there has been inordinate and inexcusable delay in the present case, the substantial part of the relevant period of delay is post-CJR. Both sides are equally to blame as regards that period of delay.

56. This is a case where the first and fifth respondents have not been able to demonstrate real prejudice. Nor have they been able to make out a case of abuse by the liquidators. In those circumstances, the overall justice of the case does not mandate the exercise of the discretionary power to strike out.

57. Accordingly, the summons of the first and fifth respondents is dismissed. I also make an order nisi that costs be in the cause.

HCCW 19/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 19 OF 1998

____________

____________

____________

Before: Hon Kwan J in Chambers (not open to public)

HCCW 19/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 19 OF 1998

____________

____________

Coram: Hon Kwan J in Chambers

____________________________

DECISION  ON  COSTS

____________________________

1. On 10 May 2000, an order was made under section 221 of the Companies Ordinance, Cap. 32 by Yuen J (as she then was) for the examination of the 1st to 5th respondents, on the application of Pinemill Company Limited ("Pinemill"), the creditor that had presented a petition to wind up Weihong Petroleum Company Limited ("WHP") on a judgment debt of over HK$19 million. Pinemill is the only creditor that has submitted a proof of debt in the liquidation of WHP. The 2nd, 3rd and 4th respondents are the former directors of WHP. The 1st respondent was and is the majority shareholder and a director of Weihong (Holdings) Company Limited ("WHH"), which had later changed its name to Weihong Investment (Holdings) Limited. WHH and the 2nd respondent owned beneficially the entire issued share capital of WHP and WHH remained as a director of WHP when WHP was wound up on 18 March 1998. The 5th respondent is a firm of solicitors acting for, inter alia, the 3rd and 4th respondents, at the material time.

2. I have related part of the background of the affairs of WHP leading to the order for examination in a Ruling handed down on 21 February 2002 and I do not propose to repeat this. I also refer to the Reasons for Decision of Yuen J on 18 May 2000 for making the order for examination. Suffice it to say that the books and records of WHP were incomplete, substantial sums had passed through the bank accounts of WHP with large amounts paid to the five respondents or to companies controlled by one or more of the respondents. Discrepant versions were given to the liquidators by some of the respondents regarding the whereabouts of the books and records and the business of WHP. No assets have apparently been realised in the liquidation so far.

3. The private examination of the respondents commenced on 10 July 2001 and took 20 days to complete. As the applicant for the order of examination, Pinemill had the conduct of the examination through its counsel, as provided in the order. Pinemill was represented by leading and junior counsel throughout. The liquidators of WHP had also obtained an order from Yuen J on 10 May 2000 for leave to retain solicitors to assist them in the performance of their duties as liquidators and to remunerate those solicitors out of the assets of WHP, subject to the leave of the court. The liquidators, by their solicitors, Messrs Holman Fenwick & Willan, took part in the examination as well, although counsel was not engaged. The liquidators themselves also attended court throughout to give assistance as and when required.

4. At the conclusion of the examination of the last of the respondents on 5 February 2002, I heard an application made by the liquidators against the 3rd and 4th respondents for disclosure of their assets and liabilities on 6 and 7 February 2002. A ruling was handed down on 21 February 2002 refusing the liquidators' application. I adjourned the argument on the costs of the examination of all five respondents, as well as the argument on costs of the application on 6 and 7 February 2002, to a date to be fixed with two days reserved. This hearing took place on 9 and 10 July 2002. Save for the 1st respondent, who filed a Notice to act in person on 6 July 2002, the other respondents were represented by counsel. The 1st respondent did not attend court and gave no explanation in his letter to the court dated 6 July 2002 why he was not in Hong Kong for the dates of the adjourned hearing, which were fixed well in advance. I decided to proceed in his absence.

5. I will first set out the various applications for costs by Pinemill, the liquidators and the respondents.

The application of Pinemill and the liquidators

6. Pinemill and the liquidators seek two sets of costs (as they are represented by separate teams of lawyers) in an order along these lines: (1) against all five respondents, that they should be jointly and severally liable for the costs of the preparation of the examination proceedings; (2) against the 1st to 4th respondents individually, that each of them should pay the costs involved during the days when that individual respondent was examined in court; and (3) that the costs awarded against the respondents should be on an "enhanced" basis, namely, that costs should either be taxed on a trustee basis under O. 62 r. 28(5) of the Rules of the High Court (as in In re Nation Life Insurance Co. Ltd. [1978] 1 WLR 45), or on a common fund basis under O. 62 r. 28(3), with a direction to the taxing master under O. 62 r. 32(2) to allow items not mentioned in the scale, or to allow costs at higher rates than prescribed by the scale (as in American Express International Banking Corporation & Ors. v. Johnson & Anr. [1984] HKLR 372 at 389 to 390 and Re Irish Shipping Ltd. [1985] HKLR 437 at 446 to 447).

7. Pinemill and the liquidators also seek the following orders against these respondents in respect of various applications made in the course of the examination in which Pinemill and the liquidators were successful:

(1) against the 2nd respondent, in a ruling sought by the 2nd respondent on 13 July 2001 that certain questions put to him should be disallowed because of the privilege against self-incrimination;

(2) against the 2nd respondent, in an application of the liquidators on 14 July 2001 for disclosure of assets and liabilities;

(3) against the 3rd respondent, in an application of Pinemill on 10 July 2001 for a warrant of arrest; and

(4) against the 5th respondent, in a ruling sought by the 5th respondent on 5 February 2002 that the 5th respondent should not be required to disclose the name and address of a client unless ordered by the court.

8. Further, and regardless of whether the liquidators should obtain an order that the respondents should pay their costs, the liquidators seek an order (1) that the liquidators' costs allowed by the court should cover the time costs and disbursements of the liquidators themselves in preparing for and attending the examination, in addition to the costs of their solicitors, as their presence is necessary in addition to that of their solicitors, having regard to r. 145 of the Companies (Winding-up) Rules; and (2) that the liquidators' costs should include the costs of the stenographer in the examination and of the certification of the transcript by the stenographers, under the provisions of r. 60 of the Companies (Winding-up) Rules.

The 2nd respondent's application

9. The 2nd respondent seeks an order of costs against Pinemill and against the estate of WHP for the first day of the examination, which was adjourned on the 2nd respondent's application, as wasted costs.

The 3rd and 4th respondents' application

10. These respondents seek an order of costs against the estate of WHP in the unsuccessful application by the liquidators against them on 6 and 7 February 2002 for disclosure of assets and liabilities. They also seek an order of costs against Pinemill as Pinemill had supported that application.

The 5th respondent's application

11. The 5th respondent seeks an order of costs (1) against the estate of WHP for the costs of preparation of the examination including the costs of engaging counsel, from 14 January 2000 (when the 5th respondent served answers to the questionnaire of the liquidators) up to the hearing of the costs application in July 2002, on the ground that the liquidators had failed to seek a waiver of legal professional privilege from the 5th respondent's clients, i.e. the 3rd and 4th respondents, much earlier; and (2) against the estate of WHP and Pinemill for the costs of the 5th respondent's application for a ruling on 5 February 2002 that the 5th respondent should not be required to disclose the name and address of a client without a court order.

The jurisdiction to award costs

12. It is not in dispute that the court does have jurisdiction to award costs in proceedings for examination under section 221. Under section 52A(1) of the High Court Ordinance, Cap. 4, it is provided that "subject to the provisions of rules of court, the costs of and incidental to all proceedings in the Court of Appeal in its civil jurisdiction and in the Court of First Instance, including the administration of estates and trusts, shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid." R. 210 of the Companies (Winding-up) Rules provides that "in all proceedings in or before the court, ... or over which the court has jurisdiction under the Ordinance and rules, where no other provision is made by the Ordinance or rules, the practice, procedure and regulations shall, unless the court otherwise in any special case directs, be in accordance with the rules and practice of the court."

13. An examination under section 221 is a proceeding in the Court of First Instance (see In re Appleton, French & Scrafton, Ltd. [1905] 1 Ch, 749 on section 115 of the Companies Act 1862, the equivalent to section 221). Thus, the general rules and practice applicable to the costs of proceedings in the High Court should apply in this instance. There is no doubt about the power to award cost. The question is how the discretion should be exercised.

14. There is no express provision in Cap. 32 or the rules regarding the costs of the examination proceedings, unlike the situation in England. Under r. 9.6 of the Insolvency Rules 1986, there are these provisions on costs:

"(1) Where the court has ordered an examination of any person under the applicable section [this includes section 236 of the Insolvency Act, which is equivalent to section 221 of Cap. 32], and it appears to it that the examination was made necessary because information had been unjustifiably refused by the respondent, it may order that the costs of the examination be paid by him.

...

(3) Subject to paragraphs (1) and (2) above, the applicant's costs shall, unless the court otherwise orders, be paid out of the insolvent estate.

(4) A person summoned to attend for examination under this Chapter shall be tendered a reasonable sum in respect of travelling expenses incurred in connection with his attendance. Other costs falling on him are at the court's discretion."

15. On behalf of the 4th respondent, Mr Paul Shieh submitted that notwithstanding that we have no express statutory provision as to how the power to award costs may be exercised, the court should be guided by the basic principle that costs are generally awarded in the situation where the applicant for costs has been forced to go to court and incur costs to obtain something (such as some information, documents or order) which the applicant has asked for and which the paying party has unjustifiably declined to provide or failed to do so earlier. He submitted that this is the broad effect of r. 9.6(1) of the Insolvency Rules, which could well have been a codification or modification of the existing law. Where an order under r. 9.6(1) is not made, the effect of r. 9.6(3) is that the applicant's costs of the examination will be paid out of the insolvent estate. Mr Shieh's submission was adopted by counsel for the other respondents.

16. Mr Ambrose Ho, SC submitted on behalf of Pinemill that unlike the English position, the court has an unfettered discretion to award costs and that the court's power to do so should not be confined to the situation as envisaged in r. 9.6(1) of the Insolvency Rules.

The basis for seeking costs against the respondents

17. Mr Ho has referred me to dicta in various cases on why there is a need for an order for examination, the purpose of such an examination and the duty of those who are being examined, particularly former officers who owe fiduciary duties to the company. These cases include In re Rolls Razor Ltd. (No. 1) [1968] 3 All ER 698 at 700, per Buckley J; In re Rolls Razor Ltd. (No. 2) [1970] 1 Ch 576 at 591 to 592, per Megarry J; In re British & Commonwealth Holdings Plc. [1992] Ch 342 at 371, per Ralph Gibson LJ, at 384 and 392, per Woolf LJ and [1993] AC 426 at 438, per Lord Slynn; and In re Jeffrey S Levitt Ltd. [1992] Ch 457 at 472 to 473, per Vinelott J. The purpose of an examination under section 221 is best encapsulated in these words of Buckley J in In re Rolls Razor Ltd. (No. 1):

"The powers conferred by section 268 [of the Companies Act 1948, equivalent to section 221 of Cap. 32] are powers directed to enabling the court to help a liquidator to discover the truth of the circumstances connected with the affairs of the company, information of trading, dealings, and so forth, in order that the liquidator may be able, as effectively as possible and, I think, with as little expense as possible and with as much expedition as possible, to complete his function as liquidator, to put the affairs of the company in order and to carry out the liquidation in all its various aspects, including, of course, the getting in of any assets of the company available in the liquidation. It is, therefore, appropriate for the liquidator, when he thinks that he may be under a duty to try to recover something from some officer or employee of a company, or some other person who is, in some way, concerned with the company's affairs, to be able to discover, with as little expense as possible and with as much ease as possible, the facts surrounding any such possible claim."

18. I accept that a person who is examined under section 221 owes a duty to furnish information sought and there is public interest in ensuring that the examination is carried out thoroughly and expeditiously. As stated by Megarry J in In re Rolls Razor (No. 2), supra at 592A, this process for examination is sui generis and the examinees are not in any ordinary sense witnesses.

19. On the basis of the above dicta, which were made in the context of whether the court should make an order for examination or for production of documents or whether the privilege against self-incrimination is available in such an examination, Mr Ho submitted that in exercising the discretion as to costs in proceedings of this kind, the court should do so in a manner to protect and preserve the efficacy of this process for examination as provided by statute. Effective investigation under this process would necessarily be hampered unless liquidators should be able to pursue the examination with the confidence that those guilty of misconduct, which rendered the examination necessary, should be ordered to pay for the costs incurred in conducting the examination. Otherwise, if the costs were to be paid out of the insolvent estate, the creditors would have to suffer for the misconduct of those responsible and liquidators would be deterred from invoking the statutory procedure because of prohibitive costs.

20. Further, it was submitted that all five respondents had unjustifiably refused to give the information sought by the liquidators, and as a result an examination was rendered necessary, so costs of the examination process should be borne by them along the similar principle in r. 9.6(1) of the Insolvency Rules.

21. Lastly, it was submitted that to award costs against the 1st to 4th respondents is consistent with the principle in equity that a trustee who is guilty of "gross neglect and indefensible refusal" to furnish accounts would be ordered to pay for all the costs of the application for an administration order which were rendered necessary, including the costs of taking and vouching the account, as beneficiaries have a right to expect the performance of their duty by trustees (see Underhill and Hayton, Law Relating to Trusts and Trustees, 15th ed, page 658; In re Skinner [1904] 1 Ch 289 at 292; In re Holton's Settlement Trusts [1918] WN 78). In this instance, the examination was rendered necessary because of the paucity of the information made available to the liquidators. The background leading to the order for examination has been canvassed in the earlier decisions referred to in paragraph 2 above. It was submitted that the paucity of information was a direct result of each of the former directors or shadow directors' failure to keep proper books and accounts and the obscure way in which the affairs of WHP had been conducted by the former directors and that their failure was a "gross and indefensible neglect". Mr Kinnison for the liquidators submitted that there was breach by the 1st to 4th respondents of their obligations under section 121 to keep proper books of account at the registered office or such other place as the directors think fit and under sections 161 and 161B to show in the accounts laid before the company in general meeting the required particulars regarding directors' emoluments and loans to officers. Hence, the burden is on these respondents to justify why the expenses incurred in their examination should not be borne by them. Unless each of these respondents could show that either his examination was not necessary (this issue had already been decided against them when the order for examination was made) or that his examination had been conducted in an improper manner, each should bear the costs of his examination.

22. Complaint was made against the 1st to 4th respondents that they had produced limited documents to the liquidators in purported compliance with the court orders and that they had not done enough to assist the liquidators notwithstanding that they would have access to the documents of WHP and other related companies of which they were directors. It was further submitted that the answers given by each of these respondents in their examination were unsatisfactory in material respects in that they were either unwilling to co-operate in the investigation, or withholding information, or were evasive, contradictory, unconvincing, illogical or economical with the truth. In making this submission, Mr Ho made clear that he is not asking the court to make any finding on the "ultimate issue", e.g. whether the 1st to 4th respondents were guilty of misfeasance or if they were culpable in bringing about the insolvency. In exercising the discretion as to costs, it is necessary for the court to form a "broad view" over "all relevant circumstances" and for that purpose, the court should form a view if the respondents were evasive or whether they have discharged their positive duty to co-operate with the liquidators in the examination process.

23. In respect of the 1st respondent, he gave cursory answers to the liquidators' questionnaire of 8 December 1999. On 21 June 2000, in purported compliance of the order of Yuen J dated 10 May 2000, he filed a list of documents disclosing only five documents. Pursuant to an order I made on 19 July 2001 in the course of the examination, the 1st respondent caused to be provided an affirmation from the accounts clerk of WHH and an affirmation from the financial controller of WHH, and disclosed some further documents in July and August 2001. A further order for discovery was made by consent on 3 December 2001 and the 1st respondent had, in his affirmation made on 30 November 2001, purported to deal with the discovery ordered. He merely stated that he had no control over various companies (Grand Petroleum Company Limited, Grand Petroleum Holdings Limited, Weizhou Daya Bay Import and Export Corporation and Weizhou Weihong Petrochemical Storage and Pier Company Limited - in which he was a director or chairman or would appear to have control) and that he did not at any time retain any documents relating to such companies.

24. As for the 2nd respondent, he filed a list of documents on 8 June 2000 with 73 items and disclosed further documents during his examination in July 2001. He gave an undertaking to provide to the liquidators further documents after his examination, but by a letter of his solicitors dated 27 July 2001, he stated that various documents could not be found, including the accounts of Grand Petroleum Company Limited, of which the 2nd respondent was a director. The 2nd respondent did write to the solicitors who acted for other directors of Grand Petroleum Company Limited seeking copies of the accounts and received a reply that the solicitors did not have in their possession any company documents or accounts of Grand Petroleum Company Limited or Grand Petroleum Holdings Limited.

25. The 3rd, 4th and 5th respondents each filed a list of documents on 27 June 2000, which are identical in all respects save for two additional items in the 4th respondent's list and one additional item in the 5th respondent's list. These respondents were represented by the same solicitors at that time. Although quite a number of documents were disclosed, by and large, the disclosure was limited to formal corporate documentation of various companies.

26. The 3rd respondent filed a supplemental list of documents on 17 January 2002 disclosing only one further item. He also filed an affirmation dated 27 February 2002 stating that he had written to various companies of which he was a director to seek production of relevant documents and the request was apparently to no avail.

27. The 4th respondent filed further lists of documents on 7 November 2000, 30 June 2001, 23 August 2001 and 21 January 2002 and provided additional documents at the beginning of the hearing of the examination in July 2001. The complaint of Pinemill and the liquidators was that production of documents was in a piecemeal manner and that the documents disclosed are still incomplete.

28. As for the 5th respondent, Pinemill and the liquidators sought an order that the 5th respondent should bear the costs of the preparation of the examination proceedings as the 5th respondent had not been "fully prepared" to provide information to the liquidators. I was asked to note the limited information provided by the 5th respondent in answer to the questionnaire and that it was only on 27 August 2001 that the 5th respondent filed a substantial supplemental list of documents, pursuant to a further order for discovery on 19 July 2001, after the 5th respondent had obtained a release from a former client, who is not a respondent herein, to disclose such documents.

29. I do not propose to set out the specific aspects in which Pinemill and the liquidators have criticised and attacked the evidence given by each of the respondents in their examination as unsatisfactory. I have considered those parts of the evidence as set out in the joint written submissions of Pinemill and the liquidators for each respondent and read the relevant parts of the transcript.

The arguments against awarding costs against the respondents

30. Mr Shieh submitted that the appropriate order in this instance is that there should be no order as to costs in respect of both the preparation for and the actual conduct of the examination.

31. Firstly, there should be no presumption or bias in favour of the applicant for the examination that once an order for examination is made under section 221, then prima facie the applicant's costs of the examination should be paid by the respondent.

32. Secondly, for the purpose of exercising the discretion as to costs of the examination, one should distinguish between (1) the standard of corporate governance and the conduct of directors during the lifetime of a company (which is irrelevant for the limited purpose of the present application); and (2) the conduct of the respondents during investigation which was causative of unnecessary costs (which is relevant).

33. Thirdly, as to the need for the examination in the present case, this was not solely due to the absence of proper books and records. As stated in the Reasons for Decision of Yuen J on 18 May 2000, the 1st to 4th respondents had given discrepant versions as to the locations of the books and records and the business transactions. Pinemill had shown a prima facie case for an examination "so that the truth about the affairs of the Company can be ascertained". Besides, the sort of information sought by Pinemill and the liquidators is of a wide-ranging nature in the complex affairs of WHP and related companies. The discrepant versions given by the 1st to 4th respondents did not change in the course of their respective examinations, with each trying to shift blame or responsibility on to the others. Even if such books and records as required by statute had been kept, it would still have been necessary to examine the respondents orally although the examination might not have been as protracted.

34. Fourthly, the fact that discrepant answers had been given before and during the examination does not mean that a view could and should be taken at this stage that any particular respondent or respondents were at fault for the absence of proper books and records and so should bear the costs of the examination. It is not the function of the court to find out the cause or the blame for that state of affairs during the lifetime of a company with a view to awarding costs of the examination. The ascertainment of the truthfulness or otherwise of the answers given in respect of the way that a company had been run should await an adjudication at a different time, by a different tribunal, in a different context, and under different procedural rules, for instance, when proceedings are brought against the directors for a disqualification order or at common law for breach of fiduciary duty. The examination process does not entail a fact-finding exercise by the court as to whether an examinee was or was not telling the truth. There is no "event" at the end of the day. It is not an adversarial trial but merely an information gathering exercise by the applicant, who is usually the liquidator, and it is up to the liquidator to decide what to do afterwards with the information obtained.

35. Fifthly, as for the failure to keep proper books and records, one must not overlook the fact that the 3rd and 4th respondents held office as directors of WHP for less than a month, from 29 October 1996 to 20 November 1996.

36. Sixthly, as for the complaint that documents were produced late and that the documents and information provided by the respondents in answer to the questionnaires are incomplete and inconsistent, it would not have made much difference to the course of the examination. Many questions were asked for the first time during the oral examination. Realistically, the respondents could not be expected to volunteer information to the liquidators in addition to responding to specific requests. Besides, a great deal of the questioning during the examination was directed not at eliciting information but was repeated challenging of the answers given by the respondents orally and in writing. In conducting the examination, Pinemill and the liquidators are entitled to probe and test the respondents' evidence and approach all their answers critically. This, however, does not mean that they could point to such parts of the evidence where the examiner had refused to accept the answers given to say that the respondents were being uncooperative.

37. Seventhly, even if some of the documents were disclosed late by the respondents, there is no rational basis to inflict upon the respondents the substantial costs involved as sought by Pinemill and the liquidators (i.e. the days when the individual respondent was examined in court, plus the time spent in the preparation of the examination proceedings), as the time and costs relating to the obtaining of such documents must have been relatively insignificant compared to the rest of the examination. The discretion of the court to award costs should be exercised with a sense of proportion.

38. Lastly, ordinarily the costs of investigation incurred by the liquidators would be borne by the estate and to that extent, the absorption of the liquidators' costs by creditors is an intrinsic element of insolvent liquidations. In this case, the position would have been the same if the liquidators had conducted a long and thorough investigation into the affairs of WHP and the former directors had voluntarily attended the liquidators' offices for interviews conducted by the liquidators assisted by their lawyers, without an order for examination under section 221. This was similar to the case of the 5th respondent, whose principal later agreed to be interviewed by the legal representatives of Pinemill and the liquidators on 31 January 2002, to avoid the necessity of an examination in court pursuant to the order made against the 5th respondent. The costs of such investigation would simply have formed part of the expenses of liquidation and would have been paid out of the estate. The only difference between such a case and the present situation of the 1st to 4th respondents is that the examination was conducted in court pursuant to an order. As to this, the respondents have already paid the price in that they were ordered to bear the costs in the application for an order of examination for having unjustifiably opposed that application.

If costs of the examination should be awarded against the respondents

39. These are powerful reasons why costs of the preparation of the examination and costs of conducting the examination against the respondents individually should not be ordered against the respondents.

40. I am inclined to agree with Mr Shieh that the real need for the examination is the complexity of the affairs of WHP and the desire of Pinemill and the liquidators to test the information provided by the respondents with follow up investigations. The lack of proper books and records is but a contributory factor. As for the cases cited by Mr Ho where a trustee guilty of gross and indefensible neglect to furnish accounts was ordered to pay all the costs of an application for an administration order which were rendered necessary, including the costs of taking and vouching the account, one must bear in mind that in these cases the charges against the trustee were properly ventilated and the defence of the trustee to such charges was adequately articulated, after which findings were made by the court. It does not seem to me that these cases would provide an apposite analogy to the situation that I am concerned with.

41. Besides, the statutory obligations of directors to comply with sections 121, 161, 161B or 274 are not absolute obligations. There are built in defences such as reasonable steps that have been taken to secure compliance by the company or having acted honestly or establishing that the default was excusable in the particular circumstances. The 1st to 4th respondents may be prosecuted for having contravened any of these statutory provisions or disqualification proceedings may be brought against them, in which event they may wish to rely on the built in defences. The examination proceedings is not an appropriate occasion to make a finding or to form a "broad view", as I was invited by Mr Ho to do, if any of the respondents were in breach of these statutory provisions. I am alive to the undesirability of seeming to affect how the issues of fault and responsibility ought to be dealt with in future proceedings by expressing a broad view on the evidence given in the examination proceedings, which may not be the complete picture. Likewise, in respect of other aspects of misconduct involving breach of fiduciary duty, it does not seem to me that the objections against weighing up the evidence and making findings could be resolved by asking the court to take a broad view on the unsatisfactory nature of the evidence so as to found an adverse costs order against the respondents.

42. I wish to make clear that I am not saying that in no circumstances should the court be taking an overall view of such aspects of the conduct of a respondent that had necessitated an examination, with the view of ordering costs of the examination to be borne by the respondent instead of the estate. I am only holding that in the present circumstances, I am not persuaded that the cases against the respondents for having failed to comply with the statutory obligations or other aspects of their duty as directors are so clear that the court should not hesitate in forming a broad view in the present proceedings for the purpose of exercising its discretion as to costs.

43. I accept the submissions of the respondents that this is not an appropriate case to exercise the discretion to order that the costs of the preparation of the examination and of the conduct of the examination should be borne by the respondents. I make an order that there be no order as to costs of the examination.

44. That being my ruling, it is unnecessary to provide in my order whether Pinemill and the liquidators should have two sets of costs and whether each set of costs should be awarded on an enhanced basis. However, as arguments have been addressed to me, it may be appropriate to indicate briefly my views on these matters. I would not have been inclined to order two sets of costs against the respondents. It is true that there would appear to be no duplication in the work done by counsel as counsel was engaged only for Pinemill in the examination and the liquidators did not appear by counsel throughout. Nevertheless, there are two sets of solicitors' costs and I see no sufficient justification why the respondents should bear two sets of solicitors' costs. I do not think it is a sufficient answer to say that it was Pinemill that had applied for an order of examination and had obtained an order that it was to have the conduct of the examination, as Pinemill (which has been funding the liquidators' costs in the whole exercise) could have made an appropriate arrangement with the liquidators regarding the legal representation for the examination instead of having separate teams of lawyers for Pinemill and the liquidators. I would only have been prepared to award one set of counsel's fees, with a certificate for two counsel, and one set of solicitors' fees against the respondents, to be taxed on a trustee basis.

45. I make the following orders as sought by the liquidators mentioned at the beginning of this decision:

(1) the time costs and disbursements of the liquidators themselves in preparing for and attending the examination proceedings, in addition to the costs of their solicitors, would be treated as an expense in liquidation;

(2) the transcript of the examination is to be certified and signed by the stenographer appointed in these proceedings, under rule 60(3); and

(3) the fees of the stenographer would be treated as an expense in liquidation.

The costs sought against the 2nd respondent

46. Pinemill and the liquidators sought an order against the 2nd respondent in respect of two applications in the course of the examination, which were decided against the 2nd respondent:

(1) a ruling sought by the 2nd respondent on 13 July 2001 that certain questions put to him should be disallowed because of the privilege against self-incrimination; and

(2) an application by the liquidators on 14 July 2001 for disclosure of assets and liabilities.

47. In respect of these applications, I see no reason to depart from the usual rule that costs should follow the event and award costs of these applications against the 2nd respondent, on the basis that I have indicated earlier, i.e. that one set of counsel's fees (with a certificate for two counsel) and one set of solicitors' fees be allowed, to be taxed on a trustee basis.

The costs sought by the 2nd respondent

48. The 2nd respondent seeks an order that Pinemill and the estate of WHP should pay the costs of the 2nd respondent for the first day of the examination, which was adjourned on the 2nd respondent's application, as the hearing bundles were delivered late to the 2nd respondent's legal advisers and the first hearing day was wasted.

49. The first day was spent initially in dealing with various housekeeping matters affecting some or all of the respondents and lasted until 12:15 pm. The examination would have begun with the 1st respondent but he did not turn up as he was hospitalised, so leading counsel for Pinemill would have to start with the 2nd respondent, notwithstanding that he was not entirely prepared for this. I thought it best in the circumstances to adjourn the examination of the 2nd respondent to the following day. I do not think the adjournment was wholly or primarily attributable to the late delivery of bundles to the 2nd respondent, nor do I think the entire sitting on the first day was wasted.

50. I decline to award costs as sought by the 2nd respondent.

The costs sought against the 3rd respondent

51. Pinemill and the liquidators seek an order that the 3rd respondent should bear the costs of an application on the first day of the examination for a warrant of arrest against him as he had failed to appear. This was resisted by Mr Remedios on the basis that the costs incurred in relation to this would have been minimal and should be treated as part and parcel of the day's proceedings. Nevertheless, costs have been incurred as a result and I see no reason in principle why the 3rd respondent should not be liable to pay the costs of this application, which was brought about by his failure to attend court pursuant to the order made against him.

52. I order that the 3rd respondent should pay the costs of the application for a warrant of arrest against him, on the basis that one set of counsel's fees (with a certificate for two counsel) and one set of solicitors' fees be allowed, to be taxed on a trustee basis.

The costs sought by the 3rd and 4th respondents

53. These respondents seek an order against the estate of WHP and against Pinemill in respect of the unsuccessful application by the liquidators, which was supported by Pinemill, that the 3rd and 4th respondents be required to disclose their assets and liabilities.

54. I see no sufficient reason to depart from the normal rule that costs should follow the event, as the respondents were, to a large extent, successful in resisting the orders sought against them. I order that the costs of these respondents are to be borne by the estate of WHP. I decline to make an order for costs of this application against Pinemill, as this was not its application and it had played a minor part in supporting the application.

The costs sought against the 5th respondent

55. Pinemill and the liquidators seek an order that the 5th respondent should bear the costs of the ruling sought by the latter that the firm should not be required to disclose the name and address of a client unless ordered by the court. I had made an order of disclosure on 5 February 2002 after hearing submissions. When I came to deal with the costs of the application, the 5th respondent has claimed to be the successful party and asks for costs of the application against Pinemill and the estate of WHP.

56. In seeking such a ruling from the court, the stance of the 5th respondent was that the firm would like the protection of a court order for it to disclose the identity and address of a client as this information may be protected from disclosure by the duty of confidence owed by a solicitor to his client. Having considered the authorities cited to me, I did not think this was an unreasonable attitude. However, I did not in fact rule on the question whether such information was indeed protected by the duty of confidence, as the 5th respondent did not provide information to the court of any circumstances which might cause the firm to think that it is under a duty of confidence not to disclose the identity and address of the client concerned. I had simply ordered disclosure as a court order is clearly one of the exceptions in which a solicitor may be required to disclose information protected by the duty of confidence.

57. It does not seem to me that the 5th respondent could be regarded as a successful party in the application. I do not think the only alternative open to the 5th respondent was to seek the protection of a court order. The 5th respondent could have formed its own view if the information was protected by the duty of confidence having regard to the circumstances such information was received from the client. The 5th respondent chose not to do so and decided to seek a ruling from the court instead.

58. As for Pinemill and the liquidators, I do not think they could be regarded as the successful parties in the application either.

59. It seems to me the appropriate order in the circumstances is no order as to the costs of the application and I so order.

The costs sought by the 5th respondent

60. The 5th respondent seeks an order against the estate of WHP and Pinemill for the costs of preparation of the examination, including the advice sought from counsel, from 14 January 2000 up to the hearing of the costs application in July 2002, on the ground that the liquidators had failed to seek a waiver of legal professional privilege from the 3rd and 4th respondents much earlier. 14 January 2000 was the date when the 5th respondent provided its answers to the questionnaire and it was asserted that by then the liquidators would have known that the 3rd and 4th respondents were the clients of the 5th respondent.

61. I decline to award costs as sought by the 5th respondent. The 5th respondent was subject to the court order made on 10 May 2000 to be orally examined and to disclose documents in its custody or possession in anywise relating to WHP. It was incumbent on the 5th respondent to comply with the court order. If it is necessary for waiver of legal professional privilege to be sought from the 3rd and 4th respondents, it was for the 5th respondent to seek such waiver. If the 5th respondent claims that any document in its possession is privileged, the claim for privilege should be made in a proper manner in the list of documents filed by the 5th respondent. There is nothing to indicate why the 5th respondent had not taken such steps until well over a year after the order was made in May 2000.

Costs of the present application

62. As for the costs of the present application, I make an order nisi that there be no order as to costs.

Representation:

Mr Ambrose Ho, SC and Mr Liu Man Kin, instructed by Messrs Gary Mak, Dennis Wong & Chang, for the Applicant

The 1st respondent, acting in person, absent

Mrs Dora Chan, instructed by Messrs Herman H M Hui & Co., for the 2nd Respondent

Mr Leo Remedios, instructed by Messrs Johnny K K Leung & Co., for the 3rd Respondent

Mr Paul Shieh, instructed by Messrs Anthony Chiang & Partners, for the 4th Respondent

Mr M C Chiu, instructed by Messrs D S Cheung & Co., for the 5th Respondent

Mr Andrew Kinnison, of Messrs Holman, Fenwick & Willan, for the Liquidators

HCCW 19/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) NO. 19 OF 1998

____________

____________

_______________

R U L I N G

_______________

1. On 10 May 2000, Yuen J made an order under section 221 of the Companies Ordinance, Cap. 32 on the application of Pinemill Company Limited ("Pinemill"), a creditor of Weihong Petroleum Company Limited ("WHP"), that the 1st to 5th respondents do appear before a judge to be orally examined on oath "respecting the affairs of WHP, particularly and without limiting the generality of the foregoing, the purported dealings of WHP with Evernew Consultants Limited, Fancifull Profits Limited and Top Smile Investment Limited, Grand Petroleum Holdings Limited and Fenning International Limited and Weihong (Holdings) Company Limited". The respondents were also ordered to file a list of documents in their custody or possession "in anywise relating to WHP" and serve a copy on Pinemill and the liquidators of WHP within 14 days thereof. The private examination of the five respondents took place before me over a period of 20 days in several sittings from 10 to 14 and 16 to 19 July 2001, 5 to 7 September 2001, 22 to 25 and 29 to 30 January 2002, and 5 February 2002. During the examination of the 1st to 4th respondents, the liquidators sought disclosure from each of these individuals of their assets and liabilities. The 2nd respondent did so without objection and no court order was made in that respect. The 1st respondent had initially indicated through his solicitors that he would not agree to provide an affidavit of his assets and liabilities and the matter would have to be argued. Subsequently, the 1st respondent agreed to do so and an order was made by consent on 3 December 2001. The 3rd and 4th respondents refused to provide the affidavit and it was agreed that it would be more convenient for me to hear submissions and rule on this matter at the end of the examination of the last of the respondents. I heard arguments on this from Mr Kinnison for the liquidators, Mr Remedios for the 3rd respondents and Mr Shieh for the 4th respondent on 6 and 7 February 2002 and I am indebted to counsel for their submissions and research.

2. I propose to give only a brief background of WHP and its affairs insofar as it is necessary to make my ruling comprehensible, in case there may be proceedings in future against some of these respondents.

3. Pinemill presented a petition to wind up WHP in January 1998, having obtained a default judgment of over HK$19 million in July 1997. Pinemill had supplied petroleum products to WHP and the latter sold them to customers in the mainland at a profit. A winding-up order was made in March 1998 and the liquidators were appointed in June 1998. Notwithstanding two statements of affairs were filed in May and June 1998, the liquidators had not been able to carry out a proper review of these statements because most of the books and records of WHP were missing. Questionnaires were served by Pinemill on the former directors but the replies received were inadequate for the liquidators to gain a proper understanding of the operations and activities of WHP. Hence, Pinemill applied for an order under section 221 to examine the respondents. It was the only creditor that had submitted a proof of debt in the liquidation.

4. WHP was incorporated on 6 June 1995. On 13 December 1995, Weihong (Holdings) Company Limited ("WHH") and Yue Chun Shan, the 2nd respondent herein, were appointed directors. WHH and the 2nd respondent together owned beneficially the entire issued share capital of WHP. Lai Hong San, the 1st respondent herein, is the majority shareholder and a director of WHH. Before July or August 1996, the 1st and 2nd respondents were responsible for the running of WHP. The 2nd respondent had resigned as a director on 14 November 1997. WHH remained as a director at the time WHP was wound up.

5. In December 1995, WHP had entered into a joint operation contract with a Chinese entity known as Weizhou Daya Bay Bonded Oil Terminal to carry out operations involving the import and export of petroleum products at Weizhou, Daya Bay. In May 1996, WHH entered into an equity joint venture contract with a Chinese entity known as Weizhou Daya Bay Import and Export Corporation pursuant to which an equity joint venture company known as Weizhou Weihong Petrochemicals Storage and Pier Company Limited ("the EJV Company") was established. The EJV Company had entered into various construction contracts to build storage facilities for petroleum products and a pier at Weizhou, Daya Bay.

6. Tong Chi Keung and Liu Ying Shing Claudius, the 3rd and 4th respondents herein, were appointed directors of WHP on 29 October 1996. They had however operated the business of WHP on a trial basis from about August 1996 before their formal appointment as directors, as they have said in their oral examination. They both resigned on 20 November 1996, not long after a shareholders' agreement dated 11 November 1996 relating to Grand Petroleum Holdings Limited ("GPH") was made between Fenning International Limited ("Fenning"), New Bright Enterprises Limited ("New Bright"; which is owned by the 1st respondent), Tierce Development Limited ("Tierce"; which is owned by the 2nd respondent) and GPH. The shareholders of Fenning were Evernew Consultants Limited ("Evernew"; which is owned by the 3rd respondent), Top Smile Investment Limited ("Top Smile"; which is owned by the 4th respondent) and Fancifull Profits Limited ("Fancifull"; which is owned by one Alex Wong Ching Ping).

7. It was recited in the shareholders' agreement that HK$105 million was advanced to WHP by Evernew, Top Smile and Fancifull as at the date of the agreement to enable WHP to meet its working capital requirements. Whether they had done so was a matter that had been gone into in considerable length in the examination of the respondents. The respondents have disclosed a number of receipts issued by WHP for some of the payments alleged to have been received by WHP from the shareholders of Fenning but the liquidators have not been able to identify such payments from the bank records of WHP.

8. By the shareholders' agreement, Fenning, New Bright and Tierce became shareholders of GPH, holding 49%, 31% and 20% respectively and the 1st to 4th respondents were appointed the first directors of GPH. The shareholders' agreement also provided for the funding of GPH. There was to be an initial funding of HK$105 million and it was to be provided in this manner: (1) WHP was to "repay" to the shareholders of Fenning the sum of HK$105 million; (2) the shareholders of Fenning were to advance to Fenning immediately HK$105 million; (3) Fenning was to advance to GPH immediately HK$105 million; and (4) GPH was to advance to WHP immediately HK$105 million, which would be interest free and repayable on demand. It was further provided that such interests of WHP and WHH in the petroleum business, including their interests in the contracts concluded with the various Chinese entities referred to above, were to be transferred to Grand Petroleum Company Limited (a wholly owned subsidiary of GPH) and the EJV Company and that WHP was to cease trading by 31 March 1997.

9. It is the liquidators' contention that the business interests of WHP were transferred away for a nil consideration, in view of the round robin arrangement for the funding of GPH as provided in the shareholders' agreement. The liquidators seek a full disclosure of the assets of the 3rd and 4th respondents to find out whether they had received any secret profit or commission from the transferees or other entities for sanctioning the transfer of the interests and assets of WHP. This is the first ground for seeking an affidavit on assets and liabilities of the respondents. I shall refer to this as the "secret profit" ground.

10. In August 1996, the 3rd and 4th respondents were added as signatories to the existing bank accounts of WHP at the Kincheng Banking Corporation and the new accounts opened at the Liu Chong Hing Bank Limited. The 4th respondent was the sole signatory of the group B signature in the Liu Chong Hing Bank accounts and his signature was required on every cheque drawn on those accounts. Based on the materials supplied by these banks, the liquidators have identified certain material transactions that would require explanation from the 3rd and 4th respondents. I shall refer to these as "questionable transactions" and they would be dealt with in detail in due course. Although copies of the cheques of WHP for the questionable transactions were obtained by the liquidators who would have known the payees of the cheques or the identity of the person who had endorsed the cash cheques, the liquidators would wish to see the bank statements of the 3rd and 4th respondents to find out how the money was spent after the funds were received by the respondents. The liquidators were not satisfied with the explanation given by these respondents in the oral examination as to how the funds were spent and they wish to verify the respondents' answers by looking at their bank statements. This is the second ground upon which the liquidators would require an affidavit from these respondents disclosing their assets and liabilities.

11. The third and last ground on which the liquidators would require disclosure of the assets and liabilities of the 3rd and 4th respondents is to ascertain whether it is worth pursuing them to judgment. I shall refer to this as the "powder and shot" ground. On that basis, the disclosure sought is along similar lines as an order for disclosure against a judgment debtor under Order 48 of the Rules of the High Court.

The disclosure sought

12. I attach as a schedule to this ruling the terms of the draft order sought by the liquidators for ease of reference. It is noted that the respondents are required to give disclosure of information on affidavit and to produce relevant documents or to give authorisation to the liquidators to approach the relevant bodies to obtain such documents, insofar as they are not in the possession of the respondents.

13. For the disclosure sought on the "powder and shot" ground, the liquidators would require disclosure to be given from some time in 1996 up to present. The scope of the disclosure sought is very wide indeed. The respondents are required to disclose all assets beneficially owned by them or by any entity in which they held 25% or more of the interest. Assets include bank accounts, wages or other emoluments, shares and all real and personal property with a value of over HK$50,000.00. They are required to disclose all outgoings and liabilities relating to the affairs of WHP over the six year period and as at the date hereof, details of their own outgoings and liabilities exceeding HK$10,000.00. I understand from counsel that they have not been able to find any reported case in England or Australia in which the court had ordered disclosure and production of documents of such a wide ranging nature under similar legislation in a companies winding up.

14. In respect of the disclosure sought on the "secret profit" ground, the liquidators seek disclosure and production of documents from one or two months of three alternative start dates: 8 February 1996 (the date when the 3rd respondent's wife Wong Miu Yee signed a contract with WHP to purchase 49% interest of WHP in the projects of the bonded oil terminal and pier in Weizhou, Daya Bay for the sum of HK$200 million), July 1996 (when the 3rd and 4th respondents and Alex Wong Ching Ping were approached to invest in WHP according to a letter of the 4th respondent's solicitors to the liquidators dated 26 November 1998), or 1 September 1996 (the date when WHP's interest in the joint operation contract was cancelled and a substitute joint operation contract was made between Grand Petroleum Company Limited and the Chinese entity). The end date of the disclosure and production of documents sought is one to two months from 15 to 31 October 1997 (15 October 1997 was the date when a shareholders' agreement relating to GPH was made between Fenning, Tierce and GPH by which the terms regulating the participation of the shareholders in GPH were set out after Fenning had purchased the entire shareholding of New Bright in GPH). Under this ground, the liquidators would only seek an order under paragraphs 1 and 2 in the schedule, limited by the start and end dates as I have mentioned.

15. For the disclosure and production of documents sought on the "questionable transactions" ground, the liquidators seek a start date of one to two months before the transaction in question during August to November 1996 and an end date of one to two months from 16 January 1997 (the date of the last questionable transaction made from the bank account of WHP to GPH). The liquidators seek an order in terms of paragraphs 1, 2 and 7 in the schedule, limited by the start and end dates in the way as described.

16. I propose to consider the disclosure sought first on the "powder and shot" ground, then on the "secret profit" ground, and lastly on the "questionable transactions" ground. I would first deal with the legal principles involved before I apply them to the applications I am concerned with.

17. As there is apparently no local decision on the scope of an examination and the production of documents under section 221 of Cap. 32, I have been referred by counsel to English and Australian cases. In these jurisdictions, legislation similar to our section 221 has been enacted. The wording of the foreign legislation is not identical. It has long been recognised that the power conferred under section 221 requiring a person to attend court to be privately examined and produce documents is an unusual and extraordinary power that is inquisitorial in nature and it must be carefully exercised. In considering whether the principles developed in the English and Australian cases should be applied in Hong Kong in respect of such an extraordinary power, it is important to bear in mind the differences in the legislation enacted in the three places.

The legislation in Hong Kong, England and Australia

18. Of the three places, the legislation in Hong Kong is the most restrictive. I set out the relevant provisions in section 221 of Cap. 32 as follows:

"(1) The court may, at any time after the appointment of a provisional liquidator or the making of a winding-up order, summon before it any officer of the company or person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs, or property of the company.

(2) The court may examine him on oath concerning the matters aforesaid, either by word of mouth or on written interrogatories, and may reduce his answers to writing and require him to sign them.

(3) The court may require him to produce any books and papers in his custody or power relating to the company, but, where he claims any lien on books or papers produced by him, the production shall be without prejudice to that lien, and the court shall have jurisdiction in the winding up to determine all questions relating to that lien."

19. The equivalent English legislation is section 236 of the Insolvency Act 1986 and the relevant provisions are as follows:

"(2) The court may, on the application of the office-holder, summon to appear before it -

(a) any officer of the company,

(b) any person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or

(c) any person whom the court thinks capable of giving information concerning the promotion, formation, business, dealings, affairs or property of the company.

(3) The court may require any such person as is mentioned in subsection (2)(a) to (c) to submit an affidavit to the court containing an account of his dealings with the company or to produce any books, papers or other records in his possession or under his control relating to the company or the matters mentioned in paragraph (c) of the subsection."

20. The Australian Corporations Law gives the widest power in this area and this is essential to understanding the relatively liberal approach adopted by the Australian courts in the scope of an examination allowed under the legislation. The relevant provisions in the Corporations Law may be given as follows:

"596B(1) The Court may summon a person for examination about a corporation's examinable affairs if: ...

(b) the Court is satisfied that the person:

(i) has taken part or been concerned in examinable affairs of the corporation and has been, or may have been, guilty of misconduct in relation to the corporation; or

(ii) may be able to give information about examinable affairs of the corporation."

"596D(1) A summons to a person under ... section 596B is to require the person to attend before the Court: ...

(b) to be examined on oath about the corporation's examinable affairs.

(2) A summons to a person under ... section 596B may require the person to produce at the examination specified books that:

(a) are in the person's possession; and

(b) relate to the corporation or to any of its examinable affairs."

21. The term "examinable affairs" is defined in section 9 of the Corporations Law as follows:

" 'examinable affairs", in relation to a corporation, means:

(a) the promotion, formation, management, administration or winding up of the corporation; or

(b) any other affairs of the corporation (including anything that is included in the corporation's affairs because of section 53); or

(c) the business affairs of a connected entity of the corporation, in so far as they are, or appear to be, relevant to the corporation or to anythisng that is included in the corporation's examinable affairs because of paragraph (a) or (b)."

22. One must then turn to section 53 which is a lengthy provision and the material part of it reads as follows:

"For the purposes of the definition of 'examinable affairs' in section 9..., the affairs of a body corporate include:

(a) the promotion, formation, membership, control, business, trading, transactions and dealings (whether alone or jointly with any other person or persons and including transactions and dealings as agent, bailee or trustee), property (whether held alone or jointly with any other person or persons and including property held as agent, bailee or trustee), liabilities (including liabilities owed jointly with any other person or persons and liabilities as trustee), profits and other income, receipts, losses, outgoings and expenditure of the body;"

23. The word "property" in section 53 is defined in section 9 to mean "any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real and personal property of any description and includes a thing in action".

The discretion of the court

24. It is not in dispute that where an order for examination is made under section 221 and in the course of the examination, which is presided over by a judge or a master, the court does have discretion whether to allow a question put to the person under examination. See section 62(1) of the Companies (Winding-up) Rules. This discretion to limit the ambit of the examination is recognised by the English and Australian courts, notwithstanding the difference in the wording of the legislation, to ensure fair play and to avoid oppression. As stated by Street J in Re Hugh J. Roberts Pty. Ltd [1970] 2 N.S.W.R. 582 at 585:

"It is not without significance that the Master or Deputy Master in Equity presides over the examinations. The type of examination which could be vexatious, oppressive or harassing will not be difficult to recognize. If counsel is appearing for the party being examined, he will no doubt take objection where necessary. And if the examinee is unrepresented, one can be confident that the Master himself would intervene were a situation to develop where the examination departed into a field which is abusive of the process of the court."

25. Similarly, in Re Castle New Homes Ltd [1979] 1 WLR 1075 at 1092, Slade J had this to say:

"The court generally trusts the liquidator to put only such questions as are necessary in the interests of the company: see Re North Australian Territory Co. (1890) 45 Ch D 87 at 91 per Cotton LJ. In this context it is further important to remember that the court in ordering an examination does not give carte blanche in relation to the questions which may be asked of the witness at the examination. If a particular line of enquiry is oppressive or if there are good reasons why particular questions should not be answered (for example, perhaps, if questions of privilege arise), it is the right and duty of the registrar presiding to limit the enquiry."

26. In the exercise of this discretion, the court must perform a balancing exercise between the competing public and private interests. There is the need to assist the liquidator to obtain information to carry out his duties in the liquidation with as little expense as possible and with as much expedition as possible. There is also the need to take into account the interests of the person being examined. In the words of Lord Slynn in British and Commonwealth plc (joint administrators) v. Spicer & Oppenheim [1993] AC 426 at 439 to 440,

"... it is plain that this is an extraordinary power and that the discretion must be exercised after a careful balancing of the factors involved: on the one hand the reasonable requirements of the administrator to carry out his task, on the other the need to avoid making an order which is wholly unreasonable, unnecessary or 'oppressive' to the person concerned. The latter was stressed by Bowen LJ in Re North Australia Territory Co. (1890) 45 Ch D 87 at 93:

'That is an inquisitorial power, which may work with great severity against third persons, and it seems to me to be obvious that such a section ought to be used with the greatest care, so as not unnecessarily to put in motion the machinery of justice when it is not wanted, or to put it in motion at a stage when it is not clear that it is wanted, and certainly not to put it in motion if unnecessary mischief is going to be done or hardship inflicted upon the third person who is called upon to appear and give information.'

Such an approach was stressed more recently by Brightman J in respect of oral examination in In re Bletchley Boat Co. Ltd [1974] 1 WLR 630.

The protection for the person called upon to produce documents lies, thus, not in a limitation by category of documents ('reconstituting the company's state of knowledge') but in the fact that the applicant must satisfy the court that, after balancing all the relevant factors, there is a proper case for such an order to be made. The proper case is one where the administrator reasonably requires to see the documents to carry out his functions and the production does not impose an unnecessary burden on the person required to produce them in the light of the administrator's requirements. An application is not necessarily unreasonable because it is inconvenient for the addressee of the application or causes him a lot of work or may make him vulnerable to future claims, or is addressed to a person who is not an officer or employee of or a contractor with the company in administration, but all these will be relevant factors, together with no doubt many others."

27. There is also useful guidance in the following dicta of Sir Nicolas Browne-Wilkinson in Cloverbay Ltd (joint administrators) v. Bank of Credit and Commerce International SA [1991] Ch 90 at 102:

"It is clear that in exercising the discretion the court has to balance the requirements of the liquidator against any possible oppression to the person to be examined. Such balancing depends on the relationship between the importance to the liquidator of obtaining the information on the one hand and the degree of oppression to the person sought to be examined on the other. If the information required is fundamental to any assessment of whether or not there is a cause of action and the degree of oppression is small (for example in the case of ordering premature discovery of documents) the balance will manifestly come down in favour of making the order. Conversely, if the liquidator is seeking merely to dot the i's and cross the t's of a fairly clear claim by examining the proposed defendant to discover his defence, the balance would come down against making the order. Of course, few cases will be so clear: it will be for the judge in each case to reach his own conclusion."

The production of documents

28. As I have mentioned earlier, the liquidators seek disclosure on affidavit and the production of documents in this application. I propose to deal with production of documents first.

29. It is pertinent to note that the power to examine on oath is provided in sections 221(1) and (2) and the power to require production of documents is provided in section 221(3) and that the two powers are not coextensive. The power to examine on oath extends to information "concerning the promotion, formation, trade, dealings, affairs, or property of the company." In contrast, the power to order an examinee to produce documents is in respect of "any books and papers in his custody or power relating to the company", not "concerning the matters aforesaid", as provided in subsection (2). Thus, in the order of Yuen J requiring the respondents to attend court to be examined, it was stipulated that they were to be examined respecting the affairs of WHP, particularly and without limiting the generality of the foregoing, the purported dealings of WHP with Evernew, Fancifull, Top Smile, GPH, Fenning and WHH. As for the order of Yuen J requiring the respondents to file a list of documents, this was in relation to documents in the custody or possession of the respondents "in anywise relating to WHP".

30. The Hong Kong legislation is different from the English and Australian legislation as regards the power to order production of documents in an examination of this kind. It is clearly provided in section 236(3) of the Insolvency Act that an examinee may be ordered to produce documents relating to the company or the matters mentioned in subsection (2)(c), i.e. concerning the promotion, formation, business, dealings, affairs or property of the company. Likewise, section 596D(2) of the Corporations Law provides that an examinee may be required to produce documents that "relate to the corporation or to any of its examinable affairs."

31. I turn to the documents that the liquidators seek from the 3rd and 4th respondents as set out in the schedule hereto. The documents sought relate to the bank accounts, management and audited accounts of the 3rd and 4th respondents or to any firm, business or company in which either respondent held an interest of 25% or more; the receipt of wages or emoluments of these respondents (other than from WHP, for which disclosure has been given); the share certificates held by these respondents; the real and personal property owned by them; the tax liability of these respondents; the outgoings and liabilities relating to the affairs of WHP and their own outgoings and liabilities. With the possible exception of the outgoings and liabilities "relating to the affairs of WHP", I am unable to see how any of the other documents sought would be within my power to order production of, even if I were to interpret liberally the words "relating to the company" in section 221(3).

The "powder and shot" ground

32. I turn to consider the first of the grounds for which the liquidators seek extensive disclosure of the personal assets and liabilities of the respondents in question over a six year period.

33. I was referred to the decision of the Federal Court of Australia in Grosvenor Hill (Queensland) Pty. Ltd v. Barber and Anr. (1994) 120 ALR 262, which applied the decision of the Supreme Court of South Australia in Gerah Imports Pty. Ltd v. The Duke Group Ltd (1994) 12 ACSR 513. The discovery sought was for the production of insurance policies for professional indemnity, taken out by the accountants to the company in one instance and by the valuers to the company in another instance. The liquidators sought production of the policies to help them to determine the likely possibility whether any judgment obtained against the potential defendants would be met.

34. It was held in these two cases that the "examinable affairs" of a company would include the company's choses in action, by virtue of how that phrase is defined in sections 9 and 53 of the Corporations Law and the definition of the word "property" in section 9. The potential claims against the accountants or valuers comprised a chose in action of the company and a potential asset in the winding up. Information about whether any judgment would be met by the potential defendants was about the company's property and thus fell within its "examinable affairs". Production of the policies was ordered in both instances as the documents "are relevant to matters to which the examination relates or will relate", as provided in section 597(9) of the Corporations Law. It should be noted that the information sought to evaluate the company's prospects of recovery was limited and readily available in the hands of the examinees.

35. Mr Shieh for the 4th respondent has not sought to argue that the information sought on the assets and liabilities of the individual is not within the ambit of section 221 but expressly reserves his position to argue this point if the matter should proceed further. He submitted that if it were within the court's power to order full financial disclosure, the application should be refused as a matter of discretion. As I have not heard submissions on this, I prefer to leave open the question whether the worth of a potential defendant may be regarded as "concerning the ... affairs, or property of the company" as provided in section 221(1), which has a narrower operation than "examinable affairs" in the Corporations Law in Australia. I shall assume in favour of the liquidators that I do have the power to order full financial disclosure of the respondents and consider whether I ought to do so in the exercise of my discretion.

36. In giving a broad and generous interpretation to "examinable affairs" in the Corporations Law to include the financial worth of a potential defendant, the Full Court in Grosvenor Hill was alive to the possibility that the provision might be used oppressively to the private interests of the examinee. At page 272 of the report, the Full Court referred to the "floodgates" argument that to adopt such a construction would permit the examination of all persons against whom the company had a claim as to their personal financial details, on the basis of ascertaining the examinee's ability to satisfy any judgment in the company's favour. Whilst the Full Court had concluded that the ambit of the power as construed would be sufficiently wide to enable such information to be sought from a potential defendant, the court emphasised that it is important to bear in mind the circumstances in which the power will be exercised and that "the court retains a discretion in appropriate cases to refuse to exercise the power or to make its exercise subject to stringent conditions."

37. I do not doubt that the concern of the liquidators as to whether any judgment against these respondents could be satisfied is realistic and practical, particularly as legal proceedings against the respondents are likely to be long and expensive. It must not be overlooked that the respondents are not judgment creditors, as the liquidators have sought to equate them to, nor are they contributories so that they would have come under an undoubted obligation to pay to the company the amount due by way of contribution, as in the cases mentioned in Grosvenor Hill, supra. at 268 where the Full Court referred to a power of long standing in which the courts have allowed "a third party or a banker to be examined as to the financial affairs of a contributory including requiring the production of banker's books relating to any account which the contributory had with the bank ... to ascertain the worth of the contributory as a matter incidental to making a decision to pursue the contributory for the amount due by way of contribution." This is not a case of ordering premature discovery as liability on the part of the respondents to the company has yet to be established.

38. Even without the production of documents relating to the financial worth of the respondents (which I have held is not within my power to order), I am inclined to think that the disclosure on affidavit sought in paragraphs 1 to 7 of the schedule is oppressive. Full financial disclosure is burdensome and intrusive to these respondents. Balancing the reasonable requirements of the liquidators and the relative importance of the information sought against the oppression to the respondents, I am of the view that the potential for oppression outweighs any perceived advantage to the liquidators. In the exercise of my discretion, I refuse to order disclosure on affidavit of paragraphs 1 to 7 of the schedule on the "powder and shot" ground.

The "secret profit" ground

39. In essence, what the liquidators seek to do is to find out whether these respondents had received any profit or commission from any entity, other than WHP, for transferring the assets and business interests of WHP to the wholly owned subsidiary of GPH and the EJV Company at apparently no consideration, as alleged by the liquidators. For that purpose, the liquidators wish to look at the bank accounts, audited and management accounts of the respondents and any firm or business or company in which they held an interest of 25% or more. I have ruled that it is not within my power under section 221(3) to order production of such documents, as they are not documents "relating to the company". As submissions were made by the respondents that production of these documents should not be allowed as the discovery sought is a fishing expedition, on the assumption that it would be within my power to order disclosure, I would also deal with this objection of the respondents.

40. There is a divergence in the English and Australian cases as to whether questions of a fishing nature should be allowed in an examination of this kind. To conduct a fishing expedition in this context is to begin an examination without any clear suspicions and to conduct an examination to determine if any matters or facts might emerge which may be of interest or assistance (see McPherson's Law on Company Liquidation, by Andrew Keay, 2001 ed., page 798). The respondents have urged me to follow the approach of the English courts, which have disallowed fishing questioning in an examination under a similar provision in the Bankruptcy Act 1914 (Re Maundy Gregory [1935] 1 Ch. 65 at 74) and in the context of the winding up of a company (Re James McHale Automobiles Ltd [1997] 1 BCLC 273 at 278). The liquidators have submitted that the more liberal approach of the Australian courts in allowing questions of a fishing nature should be followed (Re Hugh J. Roberts Pty. Ltd, supra. at 586; Re Rothwells Ltd (No. 2) (1989) 15 ACLR 168 at 182; Douglas-Brown v. Furzer (1994) 13 ACSR 184 at 191).

41. I am more inclined to follow the English approach because this is more in keeping with our legislation, which is more restrictive in language. In doing so, I wish to emphasise two points.

42. Firstly, as explained in two subsequent decisions concerned with the Bankruptcy Act 1914 section 25 (Re A Debtor (No. 472 of 1950) [1958] 1 WLR 283 and Re A Debtor (No. 12 of 1958) [1968] 1 WLR 788), it is provided that the court may summon before it "any person known or suspected to have in his possession any of the estate or effects belonging to the debtor, or supposed to be indebted to the debtor" and as the statutory provision speaks of "suspicion and supposition", it is not necessary to require proof or even a prima facie case to be made out to require the examinee to give information. The wording in section 221(1) is similar in this respect. Thus, as long as the liquidators can demonstrate some reasonable ground for suspicion, they should be permitted to conduct the examination and the enquiry would not be regarded as fishing.

43. Secondly, in disallowing fishing questions, it does not mean that a liquidator is not permitted to probe the circumstances relating to those on which the examination is centred, in the hope of determining whether there is another line of enquiry which should be pursued to ascertain the truth (McPherson's Law on Company Liquidation, op. cit., page 815; Re Spedley Securities Ltd (1990) 1 ACSR 726 at 741).

44. Applying the above principles to the present application, I am not satisfied that the enquiry sought by the liquidators is founded on reasonable suspicion. It is not without significance that the possibility that these respondents might have received secret profit or commission from the transferee was simply not canvassed in the thorough and extensive examination before me. This was put forward for the first time in the liquidators' written submissions for this application, after the conclusion of the examination. Mr Shieh submitted that the "secret profit" ground was put forward by the liquidators to salvage their application, because they were driven to come up with some explanation for seeking the disclosure. I do not need to go as far as that. Suffice it to say that the enquiry was purely speculative. I agree with the submissions of Mr Shieh that one must look at the commercial reality and ask who would be likely to be making payments to these respondents to induce them to transfer away the assets and business interests of WHP. If, as suggested by the liquidators, the transferee might have done so, this would be GPH and the entities associated with it, such as Fenning. The same individuals are involved in GPH and the associated entities, i.e. the 3rd and 4th respondents and Alex Wong Ching Ping. It would be unreal to suggest that these individuals might have paid a profit or commission to themselves in order to facilitate the transfer of WHP's assets to an entity owned by them.

45. For the above reasons, I refuse to order production of the documents in paragraphs 1 and 2 of the schedule on the ground that it is not within my power to do so. Alternatively, if it were within my power to do so, I decline to exercise my discretion to so order because the enquiry is of a fishing nature.

The "questionable transactions" ground

46. On the production of documents in paragraphs 1, 2 and 7 in the schedule, I have already ruled that it is not within my power to make this order because the documents sought, with the possible exception of outgoings and liabilities relating to the affairs of WHP, are not documents relating to the company.

47. I would still need to make a ruling whether disclosure on affidavit of the matters sought in paragraph 7 should be ordered. Further, as submissions had been made by the respondents that I should not exercise my discretion to order production of documents on the assumption that I had power to do so, I propose also to deal with the question whether I should exercise my discretion on that assumption. I would need to consider the position of the 3rd and 4th respondents separately, as they were required to explain different transactions regarding the payments made out of the bank accounts of WHP.

The 3rd respondent

48. I would deal with the "questionable transactions" affecting the 3rd respondent under the following heads.

(i) 2 cheques totalling HK$1 million drawn on 13 and 15 August 1996

49. These were two cash cheques drawn on WHP's account at the Kincheng Banking Corporation. In a general ledger account activity detail report of WHP compiled by Tsang Yung Edwin, who is the 1st respondent's employee and the accountant of WHH, it was stated that two sums of HK$600,000.00 and HK$400,000.00 were paid to the 3rd respondent on 13 and 15 August 1996. However, the cheque numbers were not given in that report. The bank statements of WHP showed that two cash cheques in these identical sums were paid out of the account on the same dates as stated in Tsang's report. The 2nd respondent had commissioned a report from Fan Mitchell & Company and the auditors stated in the balance sheet of their report that the 3rd respondent had owed WHP HK$1 million as at 6 September 1996, the basis for that would appear to be the report compiled by Tsang, as it could not be ascertained from the bank records of WHP that the total sum of HK$1 million was paid to the 3rd respondent.

50. The 3rd respondent was questioned by counsel for Pinemill and by Mr Kinnison whether he had received the two sums totalling HK$1 million. He denied that he owed WHP this sum as stated in the internal report of WHP and in the Fan Mitchell report. He could not remember if the two cash cheques were received by him and he stated that if he had received the money, he would have taken the money in cash to China to pay the contractors engaged in the construction work of the oil terminal and pier in Daya Bay. In the course of the 3rd respondent's examination, counsel had asked him on two occasions if he would be willing to write to his bank to ascertain if these sums had indeed been paid to him. This was objected to by Mr Remedios and I had declined on each occasion to order that the 3rd respondent should verify with his bank if the cash cheques had been paid into his account and provide the information after verification. This was before I had the benefit of considering the cases referred to by counsel in this application and I had disallowed the questioning on the basis that there was no prima facie case to support the allegation that the 3rd respondent had received the funds. Now that I have considered the authorities and as I accept that the liquidators would only need to demonstrate they have some reasonable ground of suspicion that the 3rd respondent had received the funds, I think I was in error in not allowing this line of questioning in the examination.

51. I would not order the 3rd respondent to produce his bank statements for the period in question for the liquidators to verify if he had received the money. What I would do is to order the 3rd respondent to provide an affidavit giving information whether the two cheques in question had been paid into any of his bank accounts, and, if so, the particulars of the withdrawal he had made in respect of the sum, after he has made due enquiry and verification with his bank or banks. The 3rd respondent is to provide this affidavit within 14 days hereof.

(ii) Cheque for HK$2 million drawn on 27 August 1996

52. This is also a cash cheque and it is admitted by the 3rd respondent that he had received the money as he had signed on the back of the cheque. He claimed that the money paid into his account was withdrawn and cash was taken to China to pay for the construction work. No receipts or vouchers were disclosed by the 3rd respondents of the sums he had allegedly paid to the contractors. He had agreed in this instance to write to his bank to verify if the sum had been paid into his account and if so whether it was withdrawn in the manner as he had claimed. That being the case, I decline to order any further disclosure in the exercise of my discretion. I would not have ordered production of the 3rd respondent's bank statements any way, as I do not think it is within my power to do so.

(iii) Various cheques payable to the 3rd respondent, Evernew and Lewell Properties Ltd

53. It is admitted by the 3rd respondent that the funds were received by the payees of these cheques. He has been questioned in his examination about each of them and given an explanation why the cheques were issued to these payees.

54. In respect of the cheques payable to the 3rd respondent, there was a cheque for HK$2.4 million on 4 October 1996 and his explanation is that this was the return on his investment or the dividends paid to him as a result of the operation of the business of WHP by the three investors on a trial basis. However, in an earlier answer he gave to a questionnaire served on him, he had stated that he had no recollection as to the purpose of the payment. The other cheques payable to the 3rd respondent, according to his answers in the examination, were to reimburse him for travelling, hotel and entertainment expenses. The total sum was HK$560,000.00. No receipts or vouchers were disclosed by the 3rd respondent of the expenses allegedly incurred by him for which he was reimbursed by WHP.

55. I do not think it is within my power to order disclosure of the bank statements of the 3rd respondent. In any event, I am not satisfied that any useful purpose would be served in ordering further disclosure as to how the HK$2.4 million was utilised by the 3rd respondent, who has admitted receipt of the money for his own benefit. As for the payments allegedly incurred on behalf of WHP, he had already answered on oath what they were and that all the receipts or vouchers had been handed over to WHP when he was reimbursed. I do not think any further disclosure of the liabilities relating to the affairs of WHP would be appropriate in the circumstances.

56. There were two cheques payable to Evernew, in the sum of HK$2.5 million (31 October 1996) and HK$42 million (20 November 1996). For the first amount, the 3rd respondent's answer in the examination was the same as the cheque payable to him in the sum of HK$2.4 million. I decline to order any further disclosure for the same reason. For the cheque of HK$42 million, it is clear from the bank records that this formed part of the round robin arrangement in four steps that I have described in the earlier part of this ruling, when a series of cheques in the total sum of HK$105 million, all drawn and cleared on 20 November 1996, were paid out of WHP's account and eventually a cheque in the sum of HK$105 million was paid into WHP's account the same day after a full circle. The 3rd respondent has answered on examination that this arrangement was done on the advice of the 5th respondent, the solicitors who prepared the shareholders' agreement. I am not satisfied that any further disclosure is reasonably required by the liquidators from the 3rd respondent regarding this cheque in the circumstances. I wish also to point out that the bank statements of Evernew would be covered in an order made by consent in which the 3rd respondent is to give discovery of various documents.

57. The cheques payable to Lewell Properties Ltd ("Lewell") were in the total sum of HK$634,083.14. The 3rd respondent said in his examination that these were reimbursement by WHP for the decoration expenses and rent incurred by GPH when the latter rented an office for the operation of the business of WHP on a trial basis. Lewell is owned by the 3rd respondent and his wife. According to the 3rd respondent, all the receipts were given by Lewell to WHP when it was reimbursed. I decline to exercise my discretion to order further disclosure on affidavit from the 3rd respondent for the same reason as regards the cheques payable to the 3rd respondent for reimbursement of expenses.

The 4th respondent

58. I would deal with the "questionable transactions" involving the 4th respondent under the following heads.

(i) Cheque payable to Top Smile

59. This was a cheque in the sum of HK$31.5 million drawn on the account of WHP on 20 November 1996 and formed part of the circular arrangement that I have described. For the same reason as regards the cheque issued to Evernew, I decline to order any further disclosure from the 4th respondent. Further, the 4th respondent has disclosed the bank statements of Top Smile in his latest list of documents.

(ii) Cheques payable to the 4th respondent

60. There were three cheques, one was for HK$3 million drawn on 9 September 1996 and the other two were in the total sum of HK$220,000.00 drawn on 31 October and 29 November 1996. The 4th respondent has filed an affirmation on 7 February 2002 in the course of this application disclosing his bank statements showing the deposits of these sums. He has given an explanation in his examination why these cheques were issued to him, the HK$3 million being the return of his investment and the other two sums were reimbursement of expenses incurred. I decline to order further disclosure from the 4th respondent for the same reason as regards similar cheques payable to the 3rd respondent.

(iii) Cheques payable to Fenning and GPH

61. There were six cheques payable to Fenning, one was for the sum of HK$28 million issued on 14 October 1996 and the other five were for the total sum of HK$15,441,452.76. Eight cheques were issued to GPH. I need to be concerned only with the five cheques for substantial payment in the sums of HK$10 million, HK$1.6 million, HK$213,411.40, HK$105,400.00 and HK$733,791.50. The 4th respondent was required to give further disclosure on the ground that he was the sole signatory in the group B signature and he had signed each of these cheques.

62. The 4th respondent was questioned about each of these payments in his examination and in essence his explanation was that the more substantial payments made to Fenning (being HK$28 million, HK$10,350,000.00 HK$520,000.00 and HK$4.5 million) were for letters of credit for the purchase of petroleum products. He has no recollection about the two smaller amounts in the sums of HK$18,392.76 and HK$53,060.00. As for the payments to GPH, he said that the five substantial payments were all for letters of credit issued for the same purpose.

63. I have no power to order the 4th respondent to produce the bank statements, audited and management accounts of Fenning and GPH as these are not documents "relating to the company". In the course of his examination, the 4th respondent has agreed to write to the bank that had issued the letter of credit for HK$28 million for further documents. I should also mention that the 3rd respondent has agreed to an order for specific discovery disclosing on affidavit the documents in his possession, custody or power including the corporate documentation and financial records of GPH and Fenning and documents relating to the shipment of gas oil in October 1996. Similarly, in a letter of the solicitors for the 4th respondent to the liquidators' solicitors dated 4th January 2002, it was stated that the 4th respondent was prepared to provide an affidavit dealing with all the documents in the draft order put forward by the liquidators without consenting to any formal order. In the circumstances, I decline to exercise my discretion to order further disclosure from the 4th respondent in this respect.

Summary

64. Save for one request under the "questionable transactions" involving the alleged receipt by the 3rd respondent of HK$1 million in August 1996, I decline to order any further disclosure or production of documents by the 3rd and 4th respondents. The costs of this application are reserved to the adjourned hearing in which I will hear all the parties involved in the examination of each of the respondents regarding the costs incurred in the examination and various applications arising therefrom for which two days have been reserved.

Representation:

Mr Ambrose Ho, SC and Mr Auyeung Kwan, instructed by Messrs Gary Mak, Dennis Wong & Chang, for the applicant

Mr Leo Remedios, instructed by Messrs Johnny K K Leung & Co., for the 3rd respondent

Mr Paul Shieh, instructed by Messrs Anthony Chiang & Partners, for the 4th respondent

Mr Andrew Kinnison, of Messrs Holman Fenwick & Willan, for the liquidators

Schedule

Terms of the draft order sought

IT IS ORDERED THAT, within 14 days of the date hereof, the [3rd/4th] Respondent do make and file an Affidavit, giving full information as to his assets and liabilities as at the date hereof, and of the following facts and matters, including production of all relevant documents in or exhibited to that Affidavit:-

1. For the period from [ ] to [ ], and as at the date hereof, details of all bank accounts in Hong Kong or elsewhere, held in his sole name or jointly with any other person, or of any firm or business or company of which he is or was a partner, sole proprietor or officer, and in which he held, during the aforesaid period, and/or as at today's date, an interest of 25% or more, or in which he held, during the aforesaid period, and/or as at today's date, 25% or more of the issued shares of any such firm or company, either legally or beneficially together with:-

a. Copies of all available passbooks and bank statements; and

b. Provision of a written authorisation to the liquidators to approach the relevant banks and obtain copies of the said passbooks and bank statements, insofar as the said passbooks and bank statements are not now in the possession of the [3rd/4th] Respondent (with confirmation in that authorisation that any costs or expenses which might be incurred or required by any bank will be paid by the [3rd/4th] Respondent or reimbursed by him to the liquidators).

(For the avoidance of doubt, references in this Order to a "bank" include any other financial institution, including, without limitation, a building society, and any reference in this Order to the singular includes the plural, the vice versa).

2. For the period from [ ] to [ ], and as at the date hereof, management and audited accounts of any firm or business or company of which the [3rd/4th] Respondent is or was a partner, sole proprietor, or officer, and in which he held, during the aforesaid period, and/or as at today's date, an interest of 25% or more, or in which he held, during the aforesaid period, and/or as at today's date, 25% or more of the issued shares of any such firm or company, either legally or beneficially.

3. Details of all wages or other emoluments or benefits paid to or for the use or benefit of the [3rd/4th] Respondent, with production of any wage or salary slips from his employer.

4. Details of all shares and stock certificates held in the name of the [3rd/4th] Respondent or on his behalf.

5. Save as already provided pursuant to paragraph 4 above, full details of all real and personal property with a value over HK$50,000, owned by the [3rd/4th] Respondent legally or beneficially, and either in his own name or with any other person, or any firm or business or company, together with:-

a. production of certified copies of the deeds or Land Registry entries in respect of any real property as aforesaid;

b. registration details of all vehicles owned by or in his name; and

c. full details of any sale of such real or personal property.

6. Details of all revenue bodies or authorities anywhere in the world to which the [3rd/4th] Respondent has submitted Tax Returns, or from which he has received an assessment, together with:-

a. Provision of copies of all available Tax Returns and assessments; and

b. Provision of a written authorisation to the liquidators to approach the Inland Revenue Department in Hong Kong, and to approach any other revenue body or authority elsewhere in the world, to obtain details and copies of all of the [3rd/4th] Respondent's personal Tax Returns and assessments in Hong Kong and elsewhere in the world, from that department and/or from any such body or authority (with confirmation in that authorisation that any costs or expenses which might be incurred or required by the Inland Revenue Department in Hong Kong, or by any other revenue body or authority elsewhere in the world, will be paid by the [3rd/4th] Respondent or reimbursed by him to the liquidators).

7. For the period from [ ] to [ ], details of all outgoings and liabilities relating to the affairs of WHP, and, as at the date hereof, details of their own outgoings and liabilities (exceeding HK$10,000), including production of copies of all documents evidencing the same, and production of copies of any Judgments or Court Orders which may have been entered against his name anywhere in the world.

HCCW 19/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP NO. 19 OF 1998

____________

____________

_______________

D E C I S I O N

_______________

1. This is an application made by Pinemill Company Limited, the applicant herein, and the liquidators of Weihong Petroleum Company Limited ("the Company") for an interlocutory injunction to restrain the 3rd respondent Mr Tong Chi Keung from leaving the jurisdiction until after the completion of a private examination ordered by Yuen J on 10 May 2000 under section 221 of the Companies Ordinance, Cap. 32.

2. The hearing of the examination commenced on 10 July 2001. The 3rd respondent did not appear. I made a warrant for his arrest on that day. That was discharged by me when the 3rd respondent was apprehended and brought to the court on 17 July. It is in those circumstances that the applicant and the liquidators applied for the injunction that I have mentioned.

3. There are two broad issues to be considered here. One is whether I have jurisdiction to grant the injunction sought; and if that is answered in the affirmative, whether I should exercise my discretion and grant the injunction.

4. On the jurisdiction issue, it was submitted by Mr Ambrose Ho, SC and Mr Kinnison that my jurisdiction is vested under section 21L of the High Court Ordinance, Cap. 4, which provides as follows:

"(1) The Court of First Instance may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the Court of First Instance to be just or convenient to do so.

(2) Any such order may be made either unconditionally or on such terms and conditions as the Court thinks just."

5. I was also referred to the case of Re Oriental Credit Limited [1988] Ch. 204, a decision of Harman J in which he held that the court does have jurisdiction in granting an injunction to restrain a director from leaving the jurisdiction in aid of an order that the director is to attend court for private examination, under section 561 of the Companies Act 1985, which is similar to our section 221. It was held that the injunction sought must necessarily be available to be made in aid of and ancillary to an order for examination, for it would be astonishing if the court could exercise a summary power to arrest a person for failing to attend and not have jurisdiction to restrain him from leaving the jurisdiction until the examination is concluded. It would appear from the report that an appeal was made to the Court of Appeal. Harman J's decision on the jurisdiction point must have been affirmed as the Court of Appeal had only reduced the amount of the bond ordered from ￡250,000 to ￡50,000.

6. Mr Benjamin Chain, who appeared on behalf of the 3rd respondent, has not argued that Re Oriental Credit Limited was wrongly decided on the point concerning jurisdiction. And I do not understand him to contend that the court would have no jurisdiction to grant an injunction sought under section 21L of the High Court Ordinance if there had been no other provision of relevance in Cap. 4.

7. Mr Chain's argument is that the jurisdiction to grant the injunction is founded only on section 21B in Cap. 4, not section 21L, because section 21B has provided for a comprehensive code. Hence, the powers of the court to grant an injunction under section 21L must have been circumscribed and cannot be invoked. I was referred by Mr Chain to the case of L.A.C. Louvet & Anr. v. M. S. Louvet [1990] 2 HKLR 596 at 602 D. I do not consider that judgment of the Court of Appeal to be of assistance, because the very point, namely that whether section 21L has been circumscribed by section 21B has not been considered by the court.

8. For my part I entertain doubts if section 21B, which provides for a prohibition order, is applicable, notwithstanding Mr Chain's submission that the present case would fall within 21B(1)(b)(ii) in that there is an order against the 3rd respondent, "requiring him to deliver any property or perform any other act".

9. It is unnecessary for me to resolve the point if section 21B is indeed applicable. For this application I am satisfied that I do have jurisdiction under section 21L, which is worded in very wide terms. In the absence of clear language in Cap. 4, I do not think the powers under that provision have been circumscribed as submitted.

10. I turn to consider whether I should exercise my discretion in this situation. The question I have to consider is whether there is a serious risk that the 3rd respondent may not turn up at the adjourned hearing of the private examination.

11. I have considered the affirmation he filed today and the submissions made on his behalf yesterday and today. The 3rd respondent has alleged that he did not receive the Notice of hearing sent by fax by his former solicitors to his office in Hong Kong on 28 October 2000, because the company that occupied the office, Grand Petroleum Holdings Limited, had vacated the premises in late September or early October 2000.

12. Assuming in his favour that he did not receive the fax on 28 October 2000, I would still need to consider the other matters in his affirmation to assess whether there is a risk that he may not turn up, and how serious that risk would be.

13. The 3rd respondent was aware of the investigation by the liquidators as early as 1998. He was aware of the application of Pinemill Company Limited for an order for examination. That application was made in 1999 and was opposed by the 3rd respondent initially, although he subsequently withdrew his opposition.

14. In July 1999 he filed an affirmation deposing that he had moved out of his residential address at No. 8 Repulse Bay Road since October 1997. He did not, however, give his new residential address in his affirmation. Instead, he provided a "correspondence address" being the address of Grand Petroleum Holdings Limited at Vicwood Plaza.

15. During all this time, it would appear from the 3rd respondent's affirmation in July 1999 and his latest affirmation, that he had spent over two-thirds of his time in China, and that he rarely attended the Hong Kong office.

16. When Grand Petroleum Holdings Limited vacated the premises at Vicwood Plaza, the 3rd respondent did not notify the solicitors who were then acting for him of this. It would appear from paragraph 12 of his recent affirmation that the 4th respondent had notified the same solicitors of the change of his office address as correspondence from 28 October 2000 onwards addressed to the 4th respondent had been sent to the 4th respondent's new address.

17. No explanation was given why his solicitors was not notified of the 3rd respondent's new office address in Hong Kong, when his company moved, as I have been told, to a new office at China Merchants Tower early this year.

18. The 3rd respondent's former solicitors had attempted to contact the 3rd respondent and his wife, by leaving messages on their pagers on no less than five occasions in April and May 2001. It was because the solicitors could not contact the 3rd respondent that they applied to cease to act for him in June 2001.

19. I have considered the explanation given by the 3rd respondent as to why he and his wife did not receive the messages left on their pagers. I do not think they are valid reasons. I am left with the distinct impression that the 3rd respondent had put himself in a position not to be reached when it suited his convenience. He had never, of his own initiative, made enquiries with his former solicitors of the hearing date or contacted his solicitors to give instructions to them, or made any enquiries with the 4th respondent whom he was meeting in connection with their company, Grand Petroleum Holdings Limited, as late as in April 2001. There was no explanation as to why the 3rd respondent and his wife had failed to check any one of the five messages left on their pagers when they were in Hong Kong.

20. The inference I draw is that there is a risk the 3rd respondent may not co-operate with the liquidators and attend for examination at the adjourned hearing. That risk would be increased substantially if he were allowed to leave the jurisdiction as he has every intention to do, because he has business to attend to in the mainland.

21. In my judgment, an injunction is warranted in this situation. The question I have to ask is whether conditions should be imposed, and that is where I come to the hardship that may be suffered by the 3rd respondent. I bear in mind that the hearing of the examination is to be adjourned to a date to be fixed. It is not known how early the new hearing dates would be, even if I were to direct that early dates be given. The 3rd respondent's business is conducted in China with offices in Shenzhen, Guangzhou and Beijing. I gather that he travels frequently in the mainland.

22. It seems to me that he would suffer hardship if he is not allowed to leave the jurisdiction to attend to his legitimate business in the meantime. In my view, the interests of justice would be served if the 3rd respondent is allowed to leave the jurisdiction on condition that he provide sufficient security for his attendance.

23. I do not propose to fix the amount of the security by reference to the amount of the judgment obtained by the applicant against the Company, or the loss of assets suffered by the Company. In my view, the objective of the security is to ensure the 3rd respondent's attendance.

24. The security that was offered by Mr Chain for the 3rd respondent is that the 3rd respondent's wife would give an undertaking to pay an amount up to HK$1.5 million in the event that the 3rd respondent does not appear. Mr Chain produced a copy of a land search of a shop in Mosque Street which is owned by the 3rd respondent's wife with a letter from the mortgagee bank to the effect that the outstanding loan balance as at 3 July 2001 was about HK$1.8 million. The property was bought in 1993 at about $HK6.1 million. I have been told by Mr Chain, although no valuation has been provided, that he is instructed that the value of the property at present would be about HK$3.5 million. The 3rd respondent's wife will further undertake not to dispose of or further encumber that property in the meantime.

25. It is trite that any security offered for this purpose must be sufficient security. I have no information regarding the financial situation of the 3rd respondent. I was told by Mr Chain that none would be provided to the court. I have no idea of the size of the business, or the nature of the business conducted by the 3rd respondent, except that he has offices in three cities in China, and an office in Hong Kong.

26. It is with a degree of reluctance that I fix the amount of security in this instance at HK$1.5 million. However, the method of providing the security would not be as proposed by Mr Chain, given the wholly inadequate information I have regarding the assets of the 3rd respondent and his wife.

27. As property prices in Hong Kong have fluctuated greatly in the past few years, providing the unencumbered equity of the wife's property as security is wholly unsatisfactory in my view. I propose to order that the security be provided, either by making a payment into court, or by providing a bank guarantee.

28. In the event that the 3rd respondent should fail to attend court, the amount of the security is to be forfeited to the Company. I should add that I do not propose to order any undertaking as to damages to be given by the applicant or the liquidators for the reasons that I have given in my ruling yesterday.

29. Given that there is a history of the 3rd respondent failing to contact his solicitors, and failing to provide a new address when he has moved, I would make an appropriate order in that regard.

30. The orders I make are as follows:

(1) An injunction is granted that the 3rd respondent be restrained from leaving the jurisdiction until after the completion of the private examination ordered by Yuen J on 10 May 2000.

(2) The injunction in paragraph (1) is to cease to have effect on the 3rd respondent making payment of HK$1.5 million into court, or providing a bank guarantee to the liquidators of a like amount as security for his attendance at the private examination.

(3) The security provided pursuant to paragraph (2) is liable to be forfeited to the Company in liquidation on failure of the 3rd respondent to attend court for examination.

(4) The 3rd respondent is to inform the solicitors for the applicant and the solicitors for the liquidators in writing if there should be any change of the information provided in paragraphs 4 and 5 of his affirmation made on 18 July 2001 within three days of any such change.

(5) In the event of any disagreement on the terms of the guarantee to be provided by the 3rd respondent, the parties be at liberty to apply to the court.

[Ruling on costs omitted.]

Representation:

Mr Ambrose Ho, SC and Mr Au Yeung Kwan, instructed by Messrs Gary Mak, Dennis Wong & Chang, for the Applicant

Mr Benjamin Chain, instructed by Messrs Johnny K K Leung & Co., for the 3rd Respondent

Mr Andrew Kinnison, of Messrs Holman Fenwick & Willan, for the liquidators

HCCW 19/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP NO. 19 OF 1998

____________

____________

_______________

R U L I N G

_______________

1. This is an application made on behalf of the 2nd respondent that three questions put to him on 13th July 2001 at 4.15 pm by the Senior Counsel for the applicant should not be allowed, on the ground that the answers given may be self-incriminating.

[The relevant questions and answers are omitted from the Ruling.]

2. It was submitted by Mrs Chan that the effect of the above questions and answers might render the 2nd respondent liable to some criminal charge, such as fraud. There was no elaboration as to precisely what criminal charge might be laid. The submission of the risk of criminal prosecution was made in vague and general terms.

3. If the privilege against self-incrimination is invoked, it must be borne in mind that the privilege is against the "exposure to jeopardy of criminal prosecution and is available only where there is a real danger of prosecution and conviction". See Pyneboard Proprietary Limited v Trade Practices Commission (1983) 45 ALR 609 at 621-2, per Murphy J.

4. I am quite unable to see any or any real danger of prosecution and conviction. On that basis alone, I would dismiss the 2nd respondent's application. As I envisage there may be further applications on the ground of privilege against self-incrimination, it may be appropriate to give my ruling on whether this privilege is available in a private examination under section 221 of the Companies Ordinance, Cap.32.

5. I would like to dispose of article 11(2)(g) of the Hong Kong Bill of Rights first. I was referred by Mr Kinnison for the liquidators to the case of Re Tse Chu-fai Ronald [1993] 2 HKLR 453. Jones J held in that case that article 11 has no relevance to the inspector's investigation under section 145 of the Companies Ordinance.

6. In my judgment, the same reasoning applies to the present situation in respect of an examination under section 221. No part of the examination is concerned with the determination of a criminal charge. The words in article 11(2)(g) are restricted to the rights of a person charged or convicted of a criminal charge.

7. I turn to consider the privilege against self-incrimination at common law. It seems to be common ground that this privilege has not been expressly abrogated by section 221 of Cap 32. However, this privilege could be removed impliedly if that is the clear intention of the legislation. It would be a matter of construction of the statute.

8. I think it is useful to start with the general purpose of section 221. This has been considered by Buckley J in In re Rolls Razor Limited [1968] 3 All ER 698 at 700, in dealing with section 268 of the Companies Act 1948, which is equivalent to our section 221. He has this to say in the judgment:

"The powers conferred by section 268 are powers directed to enabling the court to help a liquidator to discover the truth of the circumstances connected with the affairs of the company, information of trading, dealings, and so forth, in order that the liquidator may be able, as effectively as possible and, I think, with as little expense as possible and with as much expedition as possible, to complete his function as liquidator, to put the affairs of the company in order and to carry out the liquidation in all its various aspects, including, of course, the getting in of any assets of the company available in the liquidation."

9. This passage was approved by the English Court of Appeal in two cases. They are In re Esal (Commodities) Limited [1989] BCLC 59, at 64 and 69, and in In re British and Commonwealth Holdings Plc [1992] Ch 342. Two matters may be noted from this passage. Firstly, the purpose of the section is not just to recover assets, as submitted to me by Mrs Chan. Secondly, there is a public interest involved in ensuring that the liquidator should obtain information required for the discharge of his duties, and that such exercise may be achieved with "as little expense as possible and with as much expedition as possible".

10. I do not accept Mrs Chan's submission that a private examination has no public interest involved. Indeed, it has been stated in the Cork Report in paragraph 1734 that insolvency proceedings have "never been treated in English law as an exclusively private matter between a debtor and his creditors. The community itself has always been recognised as having important interests in them."

11. To answer the question, if the privilege against self-incrimination at common law has been abrogated by section 221, I would approach it in the way as Vinelott J has done in In re Levitt Limited [1992] Ch 457 at 472 E.

12. I ask firstly whether the examinee owes a duty to furnish the information sought and, secondly, whether there is any public interest in ensuring that the examination is carried out thoroughly and expeditiously. I have already answered the second question, and now I turn to the first. Section 221, unlike section 222(5) of the Companies Ordinance and section 29(3)(a) of the Bankruptcy Ordinance Cap 6, does not expressly provide that the examinee shall answer all questions that the court may put or allow to be put to him. However, the absence of such an express provision is not necessarily a pointer that the privilege against self-incrimination has been retained; see for example R v Scott, Dears & B 47 and Ex parte Schofield, 6 Ch D 230, in which the court had held that a debtor or bankrupt was obliged to answer questions in examination notwithstanding that his answers might incriminate him, and notwithstanding that the relevant section did not expressly impose on him a duty to answer questions.

13. In considering whether an examinee has a duty to answer questions in an examination under section 221, it would be relevant to take into account these matters.

14. Firstly, the examination is an inquisitorial procedure; see the dicta of Megarry J in In re Rolls Razor Limited (No. 2) [1970] 1 Ch 577, at 592 A to B:

"Accordingly, the legislature has provided this extraordinary process so as to enable the requisite information to be obtained. The examinees are not in any ordinary sense witnesses, and the ordinary standards of procedure do not apply. There is here an extraordinary and secret mode of obtaining information necessary for the proper conduct of the winding up. The process, borrowed from the law of bankruptcy, can only be described as being sui generis."

15. Secondly, an order for examination is often made in the situation where books and records of a company are not properly kept, and the circumstances justifying an examination may often involve a suspicion that the officers of a company have been involved in suspected wrongdoings. If a director is allowed to claim privilege against self-incrimination, the examination may be severely hampered, if not frustrated.

16. As stated by Mann LJ in Bishopsgate Investment Management Limited v Maxwell [1993] Ch 1, at 60 H to 61 B, in considering section 236 of the Insolvency Act 1986, which is equivalent to our section 221:

"The first duties of an office-holder who is a provisional liquidator are to trace and then to secure the assets of the company for the benefit of the creditors and (occasionally) the contributories. His ability to trace in a liquidation where assets are missing and the documentation does not explain their whereabouts, must be heavily dependent upon his ability to use sections 235 and 236. Those sections could be useless for their purpose if the privilege against self-incrimination is not abrogated. I use the word, 'could' because it will not always be so, but it is inherently likely to be so in the very cases where information from an examinee is most needed. The legislative purpose in those cases would be frustrated if the privilege is not to be treated as impliedly abrogated by the language employed. This is especially likely to be so where there is inadequate documentation because a failure to keep proper accounting records can itself be a criminal offence: section 222 of the Companies Act, as inserted by section 2 of the Companies Act 1989."

17. Similar reasoning was found in the judgment of Scott J in In re London United Investments Plc [1992] BCLC 91, at 113 g to h, in dealing with section 434 of the Companies Act 1985.

18. I should also say that there are safeguards in the Ordinance with the abrogation of the privilege against self-incrimination in a private examination. Firstly, rule 62(1) of the Companies Winding-up Rules provides that the Official Receiver or liquidator may put such question to the person examined as the court may allow. It has been recognised by the English Court of Appeal in In re London United Investments Plc [1992] Ch 578 at 600 F, that the court has power to refuse to compel a person to answer questions if they are oppressive, in the context of sections 434 and 436 of the Companies Act 1985.

19. The second safeguard is under rule 62(2) of the Companies Winding-up Rules. It is provided that the notes of deposition of a person examined under section 221 shall not be filed or be open to the inspection of any creditor, contributory or other person except the Official Receiver, liquidator or the provisional liquidator, unless the court shall so direct.

20. For the above reasons, I rule that the privilege against self-incrimination is not available to a person examined in an examination under section 221 of the Companies Ordinance.

Representation:

Mr Ambrose Ho, SC and Mr Au Yeung Kwan, instructed by Messrs Gary Mak, Dennis Wong & Chang, for the Applicant

Mrs Dora Chan, instructed by Messrs Raymond MK Wu & Co., for the 2nd Respondent

Mr Andrew Kinnison, of Messrs Holman Fenwick & Willan, for the liquidators

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP)

CWU No 19 of 98

----------------------

-----------------------------------

REASONS FOR DECISION

-----------------------------------

1. At the hearing on 10 May 2000, I gave directions for the examination of the Respondents under s.221 of the Companies Ordinance and I made an order that the costs of the application be to the Applicant. I said I would give written reasons for the decision on costs, liability for which had been disputed by the 2nd - 5th Respondents. The 1st Respondent had made no submission on the argument on costs.

2. The proceedings had begun in May 1999 with the issue by the Applicant of the Originating Summons. There were 2 appearances in Court before this hearing. By the time of this hearing, all the Respondents had accepted that examination should take place, but the Respondents (other than the 1st Respondent) say that the Application was premature and therefore the Applicant should not be entitled to be paid its costs.

3. In my view, the dispute as to costs really boils down to the question whether in the period of time between May 1999 when the application was issued and this hearing, the Respondents should have realized that examination was likely to be ordered, so that they should not have opposed the proceedings which had led to the Applicant's incurring of costs.

Background

4. The matter arises in this way. In August 1996, pursuant to various agreements, Pinemill ("the Creditor") delivered various shipments of gasoil to Weihong Petroleum Co Ltd ("the Company"). It would appear that the Company resold the gasoil on the Mainland and in Hong Kong and there is evidence that it did so at a profit.

5. By June 1997 however, the outstanding amount due from the Company to the Creditor was in excess of US$2.5m together with interest. A writ was issued for payment of that amount. The Creditor obtained judgment in default in July 1997.

6. In January 1998, the Creditor presented a petition to wind up the Company. The petition was unopposed and the Company was wound up in March 1998. The Creditor was the only creditor who filed a proof of debt.

The 2 Statements of Affairs

7. On 23 May 1998, a Statement of Affairs ("the 1st Statement of Affairs") was filed by Weihong Holdings Co Ltd ("WHC"), a director of the Company. The statement was prepared by the 1st Respondent, a director of WHC. The statement showed estimated net assets of $26,566,029.00.

8. On 29 June 1998, another Statement of Affairs ("the 2nd Statement of Affairs") was prepared and filed by the 2nd Respondent, a former director of the Company and also a former director of WHC. This Statement of Affairs showed estimated net assets of only $2,233,827, less than 10% of that shown in the 1st Statement of Affairs.

9. The discrepancy between the amounts of "cash at bank" was $18m. The actual balance in the Company's account was negligible.

Liquidators' investigations

10. On 30 June 1998, the day after the 2nd Statement of Affairs was filed, Mr Dermot Agnew and Mr Joseph Lo were appointed liquidators (the Official Receiver having previously dealt with the liquidation).

11. The books and records of the Company were missing, or at least were incomplete. Copies of the Company's bank statements showed however that from October to December 1996, substantial sums had passed through the Company's bank accounts, with large amounts having been paid to the Respondents or companies said to be controlled by them.

12. The 1st - 4th Respondents are all persons who had been involved in the Company, at one stage or another, whether as directors or as directors of corporate directors. The 5th Respondent is a firm of solicitors, who had received substantial payments from the Company's bank account, and who had also been involved in drafting certain documentation concerning a BVI company called Grand Petroleum Holdings Ltd., which will be referred to later.

13. In July 1998, the Liquidators issued a questionnaire to the 4th Respondent (who had been a director of the Company from 29 October 1996 to 20 November 1996). They also had interviews with the 2nd Respondent and the 1st Respondent in September and October 1998 respectively. A further questionnaire was issued to the 4th Respondent in November 1998.

Books and Records

14. As far as the books and records of the Company were concerned, there were discrepant versions of their current location. The 1st Respondent claimed that they were with the 3rd and 4th Respondents. In support of that version, a former financial controller of the Company who had assisted the 1st Respondent in preparing the 1st Statement of Affairs claimed that the books and records had been given to the 2nd - 4th Respondent. It was also said that they had been given to the 3rd Respondent's wife.

15. However, as early as April 1998, the 3rd and 4th Respondents had told the Official Receiver's office that they were not in possession of the Company's books or records. Further, in his interview with the Liquidators in September 1998, the 2nd Respondent also denied that he had the books and records. The 3rd Respondent's wife also denied having received them.

Company's business

16. As far as the Company's business was concerned, there was also a difference in the Respondents' versions. It would appear that there were two camps.

17. The 1st Respondent said that in October 1996, the 2nd - 4th Respondents took over the management of the Company and caused its business to be carried on by Grand Petroleum Holdings Ltd., the BVI company previously referred to. There is some documentation which may support that allegation but on this, as well as other factual issues, I should say no more at this stage given that there will be an examination.

18. The 2nd Respondent has denied the 1st Respondent's allegation and has in turn alleged that the Company's funds may have been misappropriated. This had prompted him to engage a firm of auditors to carry out a special audit of the Company for the period ending 30 September 1996. A draft report was prepared in November 1996. No final report has been issued pending payment of fees and clarification of outstanding issues.

Application

19. In November 1998, after a meeting between the Creditor and the Liquidators, the Liquidators sent a letter to the Creditor's solicitors in which they set out the above.

20. In December 1998, there was a meeting between the Liquidators' representatives and the Creditor's representatives at which the Creditor proposed to issue proceedings for examination of directors or persons in possession of information as to the affairs of the Company. The Liquidators' representatives are recorded as having "agreed that the said actions be taken by the creditor". I should note however that the Liquidators did not make a report to the Court until December 1999.

21. It was under these circumstances that in May 1999, the Creditor issued the present application under s.221 of the Companies Ordinance.

Costs arguments

22. There is no dispute that a creditor has locus to make an application under s.221. Nor is it now disputed that an order for examination ought to be made. What the 2nd - 5th Respondents say is that the Creditor had 'jumped the gun' in issuing the application in May 1999 when the Liquidators had not indicated that an examination was necessary and when further questionnaires had not been issued. A further questionnaire had been issued on 8 December 1999, which was answered by the Respondents between January and July 2000.

23. In my view, the Creditor was entitled to issue these proceedings when they did, and given the discrepant versions as to the location of the books and records and the Company's business as recounted above, the Respondents should have realized that examination was likely to be ordered.

24. As far as the answers given in the questionnaire issued in December 1999 were concerned, they only served to intensify the questions about this Company that were already apparent from the Liquidators' letter to the Creditor in November 1998, which letter had been exhibited in the Creditor's Affirmation in support of the application.

25. The Liquidators (and the Creditor) are none the wiser about the location of the books and records, despite the Liquidators having sent investigative agents to the Mainland to check out addresses in the answers provided this year. Further, substantial sums said to have been paid to the Company cannot be identified in the Company's bank accounts. Therefore, although the answers to the further questionnaire did provide some more information for the Liquidators, that process did not go far at all towards achieving the purpose of rendering an examination unnecessary.

26. As to the Respondents' submission that the Liquidators had not indicated that an examination was necessary, it is true that the Liquidators had not sent a report to the Court until after the previous hearings. It is also true that the 1st Affirmation of Mr Agnew only said that "full and frank answers to the questions ... would assist the Liquidators in their work" and that further investigative work might be necessary once the answers have been reviewed and considered.

27. However, that does not equate to the Creditor having taken out the application prematurely. Although the Creditor is the only creditor and has given the Liquidators an indemnity for their fees, the Liquidators are not the agents of the Creditor. A creditor cannot instruct liquidators to apply for an examination. Here, the Creditor's representatives had discussed the matter with the Liquidators's representatives before issuing the application - it was not as if the Creditor had issued the application without any consultation with the Liquidators who might have been able to provide information rendering the application unnecessary.

28. A creditor has his own locus and in the light of the matters set out above regarding the Company's books and records and its business prior to its cessation of trade, the Creditor here has shown a prima facie case for an examination so that the truth about the affairs of the Company can be ascertained. That prima facie case, shown in the documents supporting the application in May 1999, has not weakened notwithstanding the questionnaire and answers provided this year.

29. In the light of the above, in the exercise of my discretion, I ordered that the Applicant should have its costs. Given the factual disputes that have arisen, when the true facts are ascertained after examination it may well be that one or more respondents may wish to ask one or more of the others to contribute to their liability to these costs. That is a matter that will have to be left to after the examination.