RE MYRIAD GOLD CORPORATION

HCCW 340/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 340 OF 2002

____________

____________

AND

HCCW 345/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 345 OF 2002

____________

____________

AND

HCCW 346/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 346 OF 2002

____________

____________

AND

HCCW 691/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 691 OF 2004

____________

____________

Before: Hon. Kwan J. in Chambers

_____________

D E C I S I O N

_____________

1.  This is an appeal of the provisional liquidators from the decision of Registrar Chan on 7 July 2006 giving leave to the company concerned, Boldwin Construction Company Limited (“Boldwin”), to participate in the hearing for taxation of a bill of costs of the provisional liquidators dated 10 March 2006.  It is the provisional liquidators’ contention that the hearing for taxation should be held in the absence of Boldwin or its contributories.

2.  The provisional liquidators have also taken out summonses in related proceedings concerning 3 other companies – Myriad Gold Corporation (“MG”), Maintain Profits Limited (“MP”) and BF Construction Company Limited (“BF”), seeking an order that the taxation hearing of the debit notes of the provisional liquidators for each of these companies be determined by the court without the presence of the company concerned or its contributories.

3.  The main contention in the appeal and the summonses is whether the determination of the provisional liquidators’ costs should be heard ex parte.  Other matters I need deal with are the interim payment to be made to the provisional liquidators for their costs and the order of the Registrar requiring the provisional liquidators to bear the costs of the hearing on 7 July 2006 personally.

4.  I will give a brief background necessary for an understanding of this decision.

5.  Provisional liquidators were appointed for Boldwin, MG and MP on 31 October 2002.  The background leading to their appointment arose out of the matrimonial dispute between Madam Law Wai Duen and Dr Chan Shiu Chick, being the individuals beneficially interested in these companies.  Serious allegations of mismanagement were made by Madam Law against Dr Chan.  I found that a prima facie case of the allegations in the petition was made out and provisional liquidators were appointed.  The orders for the appointment of provisional liquidators for these 3 companies provided that:

“The basis of the remuneration of the Provisional Liquidators be calculated according to the standard hourly rates charged by the Official Receiver for the services of the Provisional Liquidators and other grades of staff and employed by them and be paid out of the Assets of the Company.”

6.  On 18 June 2004, on the application of the provisional liquidators of MG and MP, which held all the shares in BF, I made an order appointing provisional liquidators for BF.  The order for their appointment provided “the basis of the remuneration of the provisional liquidators be charged and paid out of the assets of [BF] subject to approval of the Court”.

7.  In March 2005, Dr Chan and Madam Law reached a settlement of their matrimonial dispute, a term of which was that Madam Law would consent to the dismissal of the winding-up petitions and the transfer of her interests in the 4 companies and related companies to Dr  Chan.

8.  The winding-up petitions of all 4 companies came before me on 8 February 2006.  I dismissed all the petitions, for the reasons given in the judgment of the same date.  I ordered the provisional liquidators to be discharged from their office in respect of each of the companies.  In paragraph 23 of my judgment, I stated that I would deal with the consequential orders to be made on the discharge of the provisional liquidators, after the provisional liquidators had considered the draft orders proposed by Dr Chan and Madam Law.

9.  On 10 March 2006, I made an order by consent in each of the proceedings.  By this order, the provisional liquidators were allowed to retain out of monies held by them the aggregate sum of $25 million, out of which would be paid the proper fees, costs and expenses of the provisional liquidators and agents engaged by them in accordance with the earlier orders.  It was provided in this order that “such fees, costs and expenses if not agreed by [the company concerned] are to be taxed and allowed by the Court”.

10.  No agreement was reached between the provisional liquidators and the companies regarding their fees, so the provisional liquidators submitted debit notes for taxation in respect of Boldwin in March 2006 and of the other 3 companies in August 2006.

11.  On 18 May 2006, the Registrar gave a direction that there be a hearing of the determination of the remuneration of the provisional liquidators of Boldwin with 2 hours reserved, and that Boldwin be served by the provisional liquidators with their report and a notice of hearing as well as the provisional liquidators’ bill.  The provisional liquidators objected to the latter part of this direction.  They sought a determination from the Registrar that the taxation hearing should be held ex parte.  This was determined by the Registrar as a preliminary issue on 7 July 2006.  As mentioned earlier, he held against the provisional liquidators.  Hence this appeal and the summonses issued by the provisional liquidators subsequently in relation to the other proceedings.

12.  Ms Mckenna for the Official Receiver is here today because the provisional liquidators’ solicitors took the view that the Official Receiver should attend the appeal, on account of the observations of Mayo JA in Re Peregrine Investments Holdings Limited [1999] 3 HKLRD 59 at 67G to 68A on the statutory functions of the Official Receiver under section 204 of the Companies Ordinance, Cap. 32 and rules 169, 171 and 172 of the Companies (Winding-up) Rules.  As pointed out by Ms Mckenna, the provisions referred to by Mayo JA do not apply to a company which is not being wound up by the court.  I agree with her that as no winding-up order was made on any of the petitions, the Official Receiver is not concerned with the determination of the provisional liquidators’ bills.

13.  Ms Mckenna has nevertheless made written submissions on the issue whether the determination of the provisional liquidators’ bill should be heard inter partes or ex parte.  She is in agreement with the stance of the provisional liquidators that the determination be heard ex parte.

14.  On 1 April 2004, I made a general direction under rule 6(a) of the Companies (Winding-up) Rules, that with effect from 3 May 2004, being the effective date upon which the Procedural Guide for Taxation and Determination of Bills in Liquidation Process (“the Procedural Guide”) will be implemented, applications for the determination of remuneration and disbursements of provisional liquidators, liquidators, special managers and receivers may be heard and determined by a master in chambers.

15.  The Procedural Guide, as its name suggests, gives guidance to practitioners on the preparation of documents to be lodged with the court for the determination of bills, and the steps to be followed after the necessary documents are lodged with the court.  The practical and pragmatic approach adopted in the Procedural Guide is designed to streamline the documents required to be submitted by provisional liquidators and liquidators for the assessment of their fees, to ensure that a sufficient amount of information is placed before the taxing master and that the court would not be overburdened with unnecessary materials.  So time sheets are not required to be produced to the court in the first place, in the interests of cost-effectiveness, and would only be called for if the master needs to query any point (paragraph 3.1).  As Mr Harris, SC pointed out, the documents and information required to be provided under the Procedural Guide would not be as detailed and comprehensive as those envisaged and discussed in Re Peregrine Investments Holdings Limited [1998] 2 HKLRD 670 at 684F to J.

16.  Paragraph 4.1 of the Procedural Guide reads:

“After the documents referred to in paragraph 3 have been lodged, the Listing Officer shall designate a hearing time for the taxation/determination of the bill lodged.  At the hearing, the master will hear representation and deal with the bill summarily if possible.  The representative attending the hearing is expected to be familiarized with the bill lodged for taxation/determination and be able to answer queries raised by the Court. If it is unlikely that the taxation/determination can be finished within the allotted time, the case will be adjourned to a date to be fixed with such estimated length of time as the master may consider appropriate.”

17.  It seems to be common ground that the procedure for the determination of provisional liquidators’ bills envisaged in the Procedural Guide is an ex parte procedure in the sense that only the provisional liquidator is present.  In most situations, and if a winding-up order is made on the petition, it is not expected that the company or any one else would take part in the determination of the provisional liquidators’ fees.  Nevertheless, the Procedural Guide is only for guidance, it is not law.  I would need to consider if cogent reasons are made out why the application should be heard ex parte, without the presence of the party that is to pay the costs to be assessed.  I agree with Mr Grossman, SC, for the companies, that one instinctively recoils at the notion that any one may be financially encumbered without the opportunity to be heard, as natural justice demands it.

18.  Mr Harris has put the case for the provisional liquidators in this way to justify an ex parte determination:

(1) The provisional liquidator is not a party to adversarial litigation.  The function of the provisional liquidator is to look after the assets of the company pending determination of the winding-up petition.  He is an officer of the court.  The remuneration of the provisional liquidator is only a matter between him and the court which appointed him.  The fact that assets are those of the company in itself should have no bearing on the procedure for assessing the provisional liquidator’s fees.  There is conceptual justification for determining the remuneration of the provisional liquidator in the absence of the company or its contributory.

(2) If an inter partes hearing is ordered in this instance, this would be a departure from the procedure followed in other cases, since the general direction came into force in May 2004.

(3) Even if a departure from the general practice were to be ordered, so that the companies may take some role in the determination of the provisional liquidators’ fees, this should be ordered only in an appropriate case.  The present case is not appropriate for these reasons.  Dr Chan and his solicitors have no knowledge of the nature of the work undertaken by the professional accountants as provisional liquidators, they would not be able to make useful comments on the reasonableness of the work done and to assist the Registrar in the determination of fees.  Further, Madam Law had made serious allegations of misconduct against Dr Chan and the court had found a prima facie case on those allegations when provisional liquidators were appointed.  The provisional liquidators had issued a writ in the name of BF against Dr Chan and another director in March 2005, although the writ was not served.  The provisional liquidators had made a report to the court in August 2005 on the misfeasance allegations against Dr Chan, they have declined to provide a copy of it to Dr Chan’s solicitors without a court order after an order was made for the discharge of provisional liquidators.  A substantial part of the debit note in respect of BF concerns investigations of misfeasance against Dr Chan.  It is highly unsatisfactory that he should be allowed to take part in the process to determine the fees of provisional liquidators who had investigated the allegations against him, as he cannot be expected to be anything other than obstructive and would contend that much of work done was unnecessary.

(4) To allow the determination to be conducted in an inter partes hearing will lead to costly, cumbersome and adversarial inter partes taxation.  This would be unfair to the provisional liquidators.  They were appointed on terms set out in the orders in the expectation that their fees would be assessed in accordance with the general practice and with the minimum of delay and inconvenience.  The provisional liquidators are concerned that the companies may wish to make the process of determination difficult for them to put pressure on them to discount their fees.

19.  Ms Mckenna supported the position of the provisional liquidators for these reasons:

(1) If the application for determination of provisional liquidators’ fees is heard inter partes, this may introduce an element of uncertainty into the process.  Professionals should not be dissuaded from acting as provisional liquidators by reason of the uncertainty of their remuneration.

(2) It is not appropriate for a contributory of a company to take part in the taxation process, where the conduct of the contributory is the subject of investigation by the provisional liquidator.

20.  I do not find the above reasons, separately or cumulatively, sufficient to justify an order that the application to determine the provisional liquidators’ fees should be held without the presence of the companies concerned or their contributories.

21.  I agree with the Registrar that the court reserves the power to direct any interested person to take part in the hearing for taxation, if the demands of justice require it.  This too is accepted by Mr Harris.  I do not readily see why the proper fees of provisional liquidators should be treated as a matter only between the provisional liquidators and the court, to the exclusion of the party who would be ordered to pay such fees and would have an apparent interest in the outcome of the determination.  In a typical situation, because the company is wound up by the court, the company cannot be expected to take part in the determination of the provisional liquidators’ fees.  I am not concerned with a typical situation.  The companies are not the subject of any winding-up order.  The provisional liquidators had been discharged from their office in respect of each of the companies.  The management and control of these companies have been re-vested in the board of directors.  Each of the companies, acting by the board of the directors, has asked for an opportunity to be heard before an order is made on the proper fees of the provisional liquidators that should be paid by the company concerned.  I see no objection in principle why they should not be heard.

22.  Furthermore, as Mr Grossman pointed out, Dr Chan and Madam Law are not the only parties interested in the companies.  At the time of the appointment of provisional liquidators for Boldwin, only 60% of the shares was owned beneficially by Dr Chan and Madam Law combined.  As for BF, there is an outstanding loan agreement between BF and a company not connected with Dr Chan or Madam Law called Bomina Limited, under which 30% of the profits of BF would go to Bomina Limited.

23.  In the orders by consent on 10 March 2006, it was expressly provided that fees are to be taxed and allowed by the court, if not agreed by the company concerned.  Mr Grossman submitted it is implicit in these orders that the taxation process should be inter partes, otherwise it would be pointless to provide for the agreement of fees by the companies.  I am inclined to agree with this.

24.  Mr Grossman also sought to rely on rule 170 of the Companies (Winding-up) Rules, which provides that:

“Where a bill of costs or charges in any winding up has been lodged with the taxing officer, he shall give notice of an appointment to tax the same, in a winding up by the court to the Official Receiver, and in every winding up to the liquidator, and to the person to or by whom the bill or charges is or are to be paid (as the case may be).”

25.  I do not think it correct that this rule applies to a situation where no order for winding up is made on the petition.  The language of the provision is clear.  The rule deals with companies in liquidation, it has no application to any of the companies that I am concerned with.

26.  As for the objection taken on the basis that Dr Chan was the subject of investigation by the provisional liquidators and it would be inappropriate to allow him to take part in the determination of fees, the allegations of wrongdoing have been withdrawn as Dr Chan and Madam Law have settled their disputes.  The confidentiality of the investigation work against Dr Chan should not be an issue here.  And if Dr Chan should object to the reasonableness of work done merely or primarily because he was the subject of investigation, no doubt the taxing master would disregard any objection he considers unhelpful or without substance.  Similarly, if the companies should ask the provisional liquidators to provide information which is oppressive or unnecessary for the exercise of the determination of fees, the taxing master would not entertain such requests.

27.  I am not persuaded that the companies would have no or no sufficient knowledge of the nature of the work undertaken by the provisional liquidators so that they are in no position to make any meaningful objection except to ask for a reduction of their fees in vague terms.  Whether the requests of the companies for documents and information in addition to those already provided in accordance with the Procedural Guide are wholly justified is another matter.  It does not seem from the correspondence I have looked at that the companies have considered properly the information already made available to them when queries to the bills are raised, for the first time it seems, in Mr Grossman’s submissions.  This would be a matter for the taxing master.

28.  The inter partes procedure would add to expenses and the time taken to complete the exercise.  This is inevitable.  I do not think it is intrinsically unfair to the provisional liquidators.  Nor do I think if an order for an inter partes hearing is made, this may deter professionals from acting as provisional liquidators in future.  A balance has to be struck between the interests of provisional liquidators and the party ordered to pay their costs.  In this situation, I think the balance comes down in favour of the paying party.

29.  For the above reasons, I dismiss the appeal against the decision of the Registrar that the application for the determination of the provisional liquidators’ fees regarding Boldwin should be in the presence of the company concerned.  I also refuse the application sought in respect of the other 3 companies that the fees of the provisional liquidators should be determined in an ex parte hearing.

30.  The next matter relates to the interim payment made to the provisional liquidators pending the determination of their fees.

31.  Regarding Boldwin, the Registrar ordered 70% of the amount in the debit note of the provisional liquidators be paid to them as interim fees.  There is now no appeal against this part of his order.

32.  For the other 3 companies, the provisional liquidators seek an order that they be paid 70% of the amount of the debit note rendered for each company.  There is no opposition regarding the interim payment of MG and MP which is for $74,087.79 each.

33.  The only objection taken is the amount of interim payment sought for BF, which is in the region of $7 million.  The provisional liquidators have declined to offer a guarantee to repay the amount overpaid if the interim payment should exceed the proper fees allowed after taxation.

34.  In the exercise of my discretion, I would not require a guarantee from the provisional liquidators, but I would reduce the percentage of interim payment from 70% to 50%, to lessen the possibility of the provisional liquidators being required to repay any amount in excess of the fees allowed on assessment.

35.  The last matter is the order of the Registrar that the provisional liquidators should pay the costs of the hearing before him personally.

36.  Mr Harris says this order is inappropriate for these reasons.

37.  Paragraph 6 of the order by consent on 10 March 2006 provided that the Company shall indemnify the provisional liquidators and keep them indemnified on demand from and against all losses, liabilities, proceedings, claims, damages, costs and expenses incurred by them in performing their powers and duties pursuant to the previous orders and the order of 10 March 2006 in a proper and reasonable manner, provided that the indemnity shall not apply to any losses, liabilities, proceedings, claims, damages, costs and expenses incurred by reason of the negligence of the provisional liquidators.

38.  This provision would seem to reflect the position at law that liquidators rarely incur personal liability for their costs.  Such an order would only be made if the court considers the liquidator personally blameworthy in some way so as to deprive him of the right of relief against the assets of the company (Palmer’s Company Law, paragraphs 15.696 and 15.696.1).  I do not think the present situation is a case of that kind.  So I will set aside paragraph 3 of the order of the Registrar on 7 July 2006.  To that limited extent, the appeal from the order of the Registrar dated 7 July 2006 is allowed.

39.  For the costs of the hearing before the Registrar and of the hearing before me, I order the provisional liquidators’ costs and the costs of the Official Receiver be paid out of the assets of the companies.

Mr Jonathan Harris, SC instructed by Messrs Stephenson, Harwood & Lo, for the former provisional liquidators of the Companies

Mr Clive Grossman, SC & Miss Chyvette Ip, instructed by Messrs Ng & Partners, for the Companies

Ms P. Mckenna, for the Official Receiver

HCCW 340/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 340 OF 2002

____________

____________

AND

HCCW 345/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 345 OF 2002

____________

____________

AND

HCCW 346/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 346 OF 2002

____________

____________

AND

HCCW 691/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 691 OF 2004

____________

____________

_____________

D E C I S I O N

_____________

The summonses

1.  I have before me 4 summonses for review of various decisions made by Registrar Chan on the taxation of costs of the solicitors engaged by provisional liquidators.  The summonses were made under Order 62 rule 35 of the Rules of the High Court.  The summonses may be divided into 2 groups.  The first group concerns Boldwin Construction Company Limited in HCCW No. 340 of 2002, I shall refer to this as “the Boldwin Review”.  The other group concerns Maintain Profits Limited in HCCW No. 345 of 2002, Myriad Gold Corporation in HCCW No. 346 of 2002 and B.F. Construction Company Limited in HCCW No. 691 of 2004, I shall refer to these collectively as “the BF Review”.

The Boldwin Review

2.  Four bills of Stephenson Harwood & Lo (“SHL”) were taxed by Registrar Chan on 7 December 2005, they were as follows:

(1)     bill No. 60373 for the period of 22 February 2004 to 26 March 2005;

(2)     bill No. 55814 for the period of 19 October 2003 to 21 February 2004;

(3)     bill No. 60190 for the period of 21 April 2004 to 19 March 2005;

(4)     bill No. 60189 for the period of 18 September 2004 to 19 March 2005.

3.  By a letter to the Registrar dated 21 December 2005, SHL applied to the Registrar for a review of taxation of these 4 bills under Order 62 rule 33.  The applicant is required by rule 33(3) to deliver objections in writing specifying by a list the items or parts of items the allowance or disallowance of which or the amount allowed in respect of which is objected to, stating concisely the nature and grounds of the objection.  This SHL sought to do in their letter of 21 December 2005.

4.  Regarding bill No. 60373, SHL objected to the hourly rates allowed for Mr Malcolm Kemp and Mr Jamie Stranger and time deductions for specific items.  For bill No. 55814, SHL objected to the hourly rates allowed for Mr Kemp and Mr Stranger.  For bill No. 60190, SHL objected to hourly rates allowed for Mr Kemp, Mr Stranger and Mr Jason Toms; in fact, no claim for Mr Kemp as a fee earner was made in this bill.  For bill No. 60189, SHL objected to hourly rates allowed for Mr Kemp, Mr Stranger and Mr Toms and time deduction for items concerning Mr Toms; in fact, no claim for Mr Kemp and Mr Stranger was made as fee earners in this bill.  Lastly, SHL claimed costs in applying for the review at HK$17,418.00.

5.  On 15 February 2006, the Registrar considered the letter of 21 December 2005 with the bundle prepared by SHL.  He found the documents placed before him helpful and dispensed with the attendance of the solicitors.  He gave judgment on 20 February 2006.

6.  SHL applied for review of the Registrar’s decision by a judge by summons dated 6 March 2006, this has come before me today.

The BF Review

7.  Five bills of SHL were taxed by the Registrar on 24 January 2006, they were as follows:

(1)     bill No. 56407A for the period of 19 October 2003 to 11 June 2004;

(2)     bill No. 59346 for the period of 21 November 2004 to 20 December 2004;

(3)     bill No. 58974 for the period of 24 October 2004 to 20 November 2004;

(4)     bill No. 58566A for the period of 26 September 2004 to 23 October 2004;

(5)     bill No. 58280A for the period of 12 June 2004 to 25 September 2004.

8.  By a letter dated 15 February 2006 to the Registrar, SHL applied for review of his taxation of the above 5 bills.  Regarding bill No. 56407A, SHL objected to hourly rates, but only the rate of Mr Stranger was specifically raised in objection.  Regarding bill No. 59346, bill No. 58974 and bill No. 58566A, it was stated that the comments regarding hourly rates for bill No. 56407A were repeated; it would appear that only the rate of Mr Stranger was objected to.  For bill No. 58280A, it was stated that the comments regarding hourly rates were repeated, in addition specific objection was raised to the rate of Mr Andrew Cotterell.  For each of the first 4 bills, SHL also objected to time deductions for specific items.

9.  On 17, 22 and 23 Febraruy 2006, the Registrar taxed further bills in these proceedings, among them were the following 5 bills:

(6)     bill No. 60923A for the period of 24 April 2005 to 21 May 2005;

(7)     bill No. 59754A for the period of 19 December 2004 to 22 January 2005;

(8)     bill No. 60375A for the of period 23 January 2005 to 26 March 2005;

(9)     bill No. 60568 for the period of 27 March 2005 to 23 April 2005;

(10)   bill No. 61433A for the period of 22 May 2005 to 25 June 2005.

10.  By their letter to the Registrar dated 7 March 2006, SHL applied for review of his taxation of the above 5 bills.  Regarding bill No. 60923A, bill No. 59754A, bill No. 60568, and bill No. 61433A, they objected to the hourly rates of Mr Kemp and Mr Stranger.  For bill No. 60375A, they objected to the hourly rates of Mr Kemp and Mr Stranger and time deductions for a specific item.

11.  As by the time applications for review were made in these proceedings, SHL have already sought to review the Registrar’s decision in the Boldwin petition and this is to be heard on 6 June 2006, the Registrar’s initial direction was to defer review in the other proceedings until there is a decision from a judge on the hearing on 6 June 2006.  SHL however requested the Registrar to deal with the review of the above 10 bills, as they have raised additional arguments regarding hourly rates in the other proceedings and it may be convenient for the judge hearing the Boldwin Review on 6 June 2006 to also deal with the additional arguments advanced if SHL should decide to seek review by a judge in respect of the other proceedings.  The Registrar acceded to the request and on 20 April 2006, he considered the review of the above 10 bills as regards the hourly rate objections only, and adjourned the review for time deduction objections until after the decision was given at the hearing on 6 June 2006.  Again, the attendance of SHL was dispensed with.  The Registrar gave his decision on 28 April 2006.

12.  SHL applied for review of his decision by 3 summonses issued on 25 May 2006.  They have also come before me today.

Review under Order 62 rule 35

13.  Under rule 35(4), unless the judge otherwise directs, no further evidence shall be received on hearing the application for review before him, and no ground of objection shall be raised which was not raised on the review by the taxing master.

14.  In the Boldwin Review, I will exercise my power under rule 35(4) and allow the evidence raised by SHL in the BF Review in respect of the fees of 3 other solicitors firm (referred to in paragraph 11 of the Registrar’s decision of 28 April 2006) to be received in this hearing.

15.  I have set out above the objection raised in respect of which of the fee earners in which of the bills in some detail.  By virtue of rule 35(4), I am not at liberty to consider the hourly rate of any other fee earner in any bill that is not the subject of objection in the letters of SHL dated 21 December 2005, 15 February 2006 and 7 March 2006.  I am therefore concerned only with hourly rates of 4 fee earners:  Mr Stranger, Mr Kemp, Mr Toms and Mr Cotterell.

The authorities cited

16.  Three English decisions were cited to the Registrar in the BF Review, as to this court.  They are Johnson & Others v Reed Corrugated Cases Limited [1992] 1 All ER 169; Stubbs v Board of Governors of the Royal National Orthopaedic Hospital, 21 December 1988, unreported, Hirst J; and Finley v Glaxo Laboratories Limited, 9 October 1989, unreported, Hobhouse J.

17.  In Johnson, Evans J at 173j cited with approval the decision of Kerr J in Leopold Lazarus Limited v Secretary of State for Trade and Industry (1976) SJ 268 in which Kerr J had this to say:

“The assessment of the appropriate rate per hour would be based on the Taxing Master’s knowledge and experience of the average solicitor or executive employed by the average firm in the area concerned.”

18.  Evans J went on to say at 173j to 174a as follows:

“This reference to the average solicitor and the average firm in question has been repeated and emphasized in all the later judgments and reviews to which I have been referred.  I have no reason to doubt that it represents the current practice throughout the whole country, nor that it is the proper basis in principle for the assessment of an hourly rate.”

19.  Although Johnson was not cited to the Registrar in the Boldwin Review, I have no reason to think that he is not aware of this “proper basis in principle for the assessment of an hourly rate”, as is evident from the approach of the Registrar in his earlier decision in Re Pro KTA Ltd, HCCW No. 71 of 1995, 1 September 2004.  Further, as he stated in his decision in the BF Review at paragraph 7, the “Hong Kong system is in its own way operating under this general concept”.

20.  The authorities cited in this context, whether they be English cases or local decisions, are useful as general guidance on matters of approach and principle and no more.  As Evans J pointed out at 178d to e:

31.  The difference in the two rates allowed by the Registrar for Mr Stranger would seem to be due to this.  For bills No. 55814, 56407A, 58566A and 58280A, the rates were fixed at $2,100.00 – these all related to work done before Mr Stranger was admitted as a solicitor in Hong Kong.  For bill No. 60190, according to the covering letter of the Registrar’s clerk dated 7 December 2005, it was stated that Mr Stranger’s rate was fixed at $2,000.00.  I think this is a clerical error as it is clear from the bill enclosed that the rate was in fact fixed at $2,100.00 as well.  For the other 5 bills, Mr Stranger’s rate was fixed at $2,300.00, these bills related to work done in the periods substantially after Mr Stranger’s admission as a Hong Kong solicitor.

32.  These rates were fixed by the Registrar when he first made the assessment, he did not alter them on review.

33.  I think it is right to draw a distinction in the rates fixed for the periods before and after Mr Stranger’s admission as a solicitor in Hong Kong.

34.  As for the criticism whether the rates fixed had sufficiently taken into account the overseas experience and the complicated nature of the work done by Mr Stranger, the Registrar said he had taken these factors into account but he took a “global approach” when he fixed the rates (paragraph 21 of his decision in the BF Review).

35.  I would also take a global approach.  I looked at work actually done by Mr Stranger, I am persuaded that slightly higher rates are justified in these proceedings, having regard to the complexity of the issues involved and the challenges to the provisional liquidators’ work raised by different parties.  For bills No. 55814, 56407A, 58566A, 58280A and 60190, I will fix Mr Stranger’s rate at $2,300.00.  For the other 5 bills, I would fix his hourly rate at $2,500.00.  I decline to fix his hourly rate as claimed, which is $2,904.00.

Mr Kemp’s hourly rate

36.  The Registrar fixed Mr Kemp’s hourly rate initially at $4,000.00 and increased it to $4,200.00 in the Boldwin Review.  He also applied the rate of $4,200.00 for Mr Kemp in the BF proceedings and he did not alter this on review.  Mr Kemp is a senior partner of SHL, he was qualified in the United Kingdom in 1980 and in Hong Kong in 1982.  Having regard to the work undertaken by Mr Kemp in the bills, I am not persuaded I should increase it to the rate claimed at $4,632.00.

Mr Toms’ hourly rate

37.  The Registrar fixed Mr Toms’ hourly rate at $3,200.00 in the Boldwin Review, the rate claimed is $3,504.00.  Mr Toms was qualified as a solicitor in the United Kingdom in 1995 and in Hong Kong in 1997.  The Registrar has had regard to his overseas experience (paragraph 13 of his decision in the Boldwin Review).  Having regard to the work undertaken by Mr Toms, I see no reason to differ from the Registrar.

Mr Cotterell’s hourly rate

38.  This was fixed by the Registrar at $2,800.00, the rate claimed is $4,260.00.  Mr Cotterell is a partner in SHL, he was qualified in the United Kingdom in 1992 and in Hong Kong in 1998.  The Registrar did not expressly deal with the hourly rate of Mr Cotterell in his decision in the BF Review.  It was submitted that comparison should be made to the rate he allowed for Mr Toms in the Boldwin Review.  I think there is justification in this complaint, I will increase Mr Cotterell’s hourly rate to $3,200.00.

39.  That deals with all the objections on the hourly rate in the Boldwin Review and the BF Review.  I now turn to the objections for time deductions for specific items in the Boldwin Review.

Bill No. 60373

Items 38, 39 and 44

40.  These items related to considering papers in the derivative proceedings, the shareholders dispute, the misfeasance allegations against a director, and the winding-up proceedings of Boldwin.  A total of 10 hours were spent by Mr Stranger.  The Registrar deducted 7 hours, on review he varied his assessment and the time allowed as reasonable was 5 hours.  He took into account that these topics are not unfamiliar to Mr Stranger, as I had dealt with these matters in some depth in the judgment I gave in October 2002 when I appointed provisional liquidators for Boldwin and the other companies.  It is unlikely that Mr Stranger was reading into the papers for the first time, although he might not have perused and considered the documents with as much attention as on this occasion when he was required to give a summary of the derivative action and related proceedings to the provisional liquidators.  I see no reason to differ from the Registrar’s assessment.

Item 41

41.  This related to considering the law in derivative proceedings in Hong Kong.  Three hours were spent by Mr Stranger, the Registrar reduced it to 1 hour, and did not alter it on review.  No attendance note was produced to show the books and authorities considered and the research made, but a description was given in the letter seeking review dated 21 December 2005.  It would appear that research was made into the common law, the legislative amendments on statutory derivative actions, and procedural aspects in derivative actions.  I would increase the time spent to 2 hours.

Items 54, 55, 56 and 59

42.  This related to considering papers and drafting documents, being a summons and supporting affidavit, for the provisional liquidator’s application to sell and abandon some of Boldwin’s assets.  Mr Stranger spent a total of 10 hours.  The Registrar assessed reasonable time at 4 hours, on review he altered his assessment and allowed 5 hours.  I have considered the nature of the work undertaken and the drafts produced, I see no reason to take a different view for this item.

Bill No. 60189

43.  Here, the Registrar made a deduction of 5 hours from the total time of Mr Toms of 38 hours 25 minutes.  As explained in the covering letter of his clerk dated 7 December 2005, the Registrar regarded it excessive for Mr Toms to use more than 10 hours to check documents and found the time spent for preparation of other documents regarding other claims also excessive.  He did not give a breakdown of how much he deducted for each individual item of work done by Mr Toms but took a global approach.  I see nothing wrong with that approach or the deduction of 5 hours from the total time spent.

Costs of the taxation review

44.  SHL claimed $17,418.00 as costs for time spent in applying for the review in the Boldwin Review.  The Registrar deducted the time spent for Mr Kemp and Mr Stranger and reduced the hourly rate of Mr Stranger and Mr Kemp.  I would not vary the time deductions for Mr Kemp and Mr Stranger.  For Mr Stranger’s hourly rate I would increase it to $2,500.00.  That is the only extent of variation that I make.

45.  I would hear Mr Stranger on any consequential order and direction I should make on this hearing.

HCCW 345, 346/2002 & 691/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS

NO. 345, 346 OF 2002 & 691 OF 2004

____________________

____________________

HCCW 340/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 340 OF 2002

____________

____________

HCCW 345/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 345 OF 2002

____________

____________

HCCW 346/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 346 OF 2002

____________

____________

HCCW 691/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 691 OF 2004

____________

____________

(Heard together)

______________

J U D G M E N T

______________

1.  There are listed before me 4 petitions for the winding up of 4 companies - Boldwin Construction Company Limited (“Boldwin”), Maintain Profits Limited (“MPL”), Myriad Gold Corporation (“MGC”) and BF Construction Company Limited (“BF”).

2.  These are companies owned wholly or substantially by Madam Law Wai Duen and Dr Chan Shiu Chick.  Only Boldwin and BF have been carrying on business as building contractor.  As a result of their matrimonial dispute, Madam Law presented or caused to be presented petitions to wind up Boldwin, MPL and MGC and applied for the appointment of provisional liquidators to these companies.  Junestar Investment Corporation (“Junestar”) is the petitioner in the petition against Boldwin.  Madam Law is the petitioner in the petitions against MPL and MGC.  An order was made on 31 October 2002 to appoint provisional liquidators for these 3 companies.

3.  The shares in BF are held by MPL and MGC.  On 11 June 2004, the provisional liquidators of MPL and MGC passed a special resolution as the contributories of BF that it should be wound up.  On 12 June 2004, the provisional liquidators presented a petition by MPL and MGC to wind up BF under section 177(1)(a) of the Companies Ordinance, Cap. 32 pursuant to the special resolution as well as on the just and equitable ground.  On 18 June 2004, the provisional liquidators of Boldwin, MPL and MGC were also appointed the provisional liquidators of BF.

4.  In the petition regarding Boldwin, apart from Dr Chan, 7 creditors have also given notice of intention to appear on the petition and to oppose it.  No evidence has been filed by any of them.  The provisional liquidators have provided a letter from a creditor, Gilman Industrial Limited, dated 2 February 2006 in which it stated that it would support the winding-up petition.  According to a schedule exhibited to the 6^th affirmation of Dr Chan, the debts owed to this creditor and 2 companies associated with it are in the region of $11 million, that is about 4% of indebtedness to sub-contractors and 2% of the total indebtedness of Boldwin, on Dr Chan’s calculation.

5.  For the petitions regarding MPL and MGC, only Dr Chan has given notice of intention to appear and to oppose.

6.  In the petition concerning BF, only Dr Chan and Madam Law have filed a notice of intention to appear.  On 9 December 2004, I exercised my discretion to hear Dr Chan and Madam Law in this petition as amici curiae, as Dr Chan and Madam Law hold all the shares of MPL and MGC and these companies in turn hold all the shares in BF.

7.  On 5 September 2005, Madam Law and Dr Chan entered into a deed of settlement to settle all their disputes and claims.  This deed of settlement has not been placed before the court.  What is known about it is that one of the conditions of settlement is that Madam Law, on behalf of herself and Junestar, has to give consent to the dismissal of the petitions against the 4 companies.

8.  On 18 January 2006, Dr Chan issued a summons in respect of each of the 4 winding-up proceedings seeking dismissal of the petition.

9.  The provisional liquidators have prepared 2 very detailed reports dated 19 January 2006, which were circulated to the creditors of Boldwin and BF before this hearing.  In these reports, the creditors were given an account of the affairs of these companies, the main tasks performed by the provisional liquidators, the misfeasance allegations against Dr Chan, the progress of arbitration proceedings, and the estimated return to creditors in a liquidation scenario.  The reports were to assist the creditors whether to support or oppose the winding-up petitions.  They were encouraged to express their views and were informed of the hearing today.

10.  Other than a representative of Gilman Industrial Limited, no creditor that is present in court today has addressed the court on its position regarding any of the petitions when extended the opportunity to do so.  The representative of Gilman Industrial Limited sought clarification of an assurance given by Mr Grossman, SC in respect of Boldwin, which I shall come to.

11.  As Madam Law has indicated clearly she would not proceed with the petitions she presented or caused to be presented against Boldwin, MPL and MGC, is there any reason why the court should not accede to Dr Chan’s application to dismiss these petitions?

12.  Mr Harris for the provisional liquidators has queried the locus of Dr Chan to apply for dismissal of the petition against BF.  But leaving aside locus, it is clearly within the power of this court to dismiss this petition if it is appropriate to do so.

13.  Other than Gilman Industrial Limited, which has given notice that it supports the petition against Boldwin, no other creditor has filed any notice of intention to appear and to support the petition or made any application to be substituted as petitioner on any of the petitions.

14.  Mr Harris submitted that Boldwin would appear to be insolvent to the extent of $37 million on Dr Chan’s estimate in his latest affirmation and for an insolvent company, the court must be vigilant to protect the interests of creditors and the public and would not allow a petition to be dismissed merely because of an agreement reached between the petitioner and the debtor company.  As for BF, Mr Harris asked the court to adjourn the petition so that the creditors could be clearly told by the provisional liquidators of the possibility of dismissal of the petitions as Madam Law has lent her support to dismissal.

15.  From the evidence filed by Dr Chan, he has been engaged in negotiation with the creditors separately and has come to some provisional agreement with some of them on their claims and/or obtained the consent or support to his application for dismissal of the petitions.  As provisional liquidators have been appointed for Boldwin and BF, Dr Chan has no authority to enter into any binding agreement for these companies with the creditors.  On the figures provided in his last affirmation, the latest position is that he has reached a provisional agreement with 75.59% of the creditors of Boldwin and 81.96% of the creditors of BF.  This calculation does not include the claims of the project employers, which are the subsidiaries of the Cheung Kong Group.  If the claims of Cheung Kong are included, the percentage of creditors that would support a dismissal of the petitions would be 88.07% for Boldwin and 91.51% for BF.

16.  Dr Chan also deposed that he has signed conditional agreements with the Cheung Kong Group yesterday.  The settlement agreement is that conditional upon the dismissal of all the winding-up petitions and the discharge of the provisional liquidators, the employers will pay the agreed sums of money to Boldwin and BF in settlement of all the claims and counterclaims between them.  Dr Chan is not allowed to disclose the settlement sums because of confidentiality provisions in the conditional agreements, but Mr Grossman has assured this court that the amounts to be received by Boldwin from the Cheung Kong Group under the settlement would be amply sufficient to wipe out the existing net indebtedness of Boldwin estimated at $37 million and restore the company to solvency.  I am prepared to accept this assurance from counsel.

17.  Miss Linda Chan for Madam Law submitted that unless and until it can be proved that Boldwin and BF are insolvent, the creditors have no interest in the winding up of these companies as their debts, if substantiated, would be paid in full.  The solvency of these companies is not certain because of the contingent nature of a significant portion of the liabilities and assets.  But according to the estimate provided by the provisional liquidators in their latest reports to the creditors in January 2006, the indication seems to be that these companies are solvent.  The estimated surplus in BF of $184.82 million includes the misfeasance claim against Dr Chan at $20 million and the estimated surplus in Boldwin of $55.86 million includes the misfeasance claim against Dr Chan at $45 million.  Mr Grossman pointed out that on the provisional liquidators’ estimate, even if nothing were recovered from the misfeasance claims, there should still be a surplus of assets for both companies.

18.  Miss Chan further submitted that the interests of creditors would not be prejudiced in the sense that it would always be open for them to petition for winding up if they are unable to get payment after the existing petitions are dismissed.  So far no creditor has applied to be substituted as petitioner.  I do not see any point in adjourning the petition of BF as it seems to me that the creditors, most of whom have been in negotiation with Dr Chan, should be aware of the position today and must be alive to the possibility of a dismissal of the petition.

19.  As for the misfeasance claims against Dr Chan, Mr Grossman has dealt with them in his written submissions.  It is relevant to take into account that many of the allegations would depend on the understanding between Madam Law and Dr Chan and Madam Law is in a position to ratify the acts complained of.  No other shareholder has made any complaints.  As a result of the conditional settlement agreement between them, Madam Law would no longer dispute the understanding between them as put forward by Dr Chan.  Dr Chan has also undertaken in his latest affirmation that if the petitions are dismissed, he will ensure that Boldwin and BF will comply with Cap. 32 and prepare audited annual reports.

20.  I take note that Madam Law and Dr Chan have come a long way to reach an overall settlement.  If a deed of settlement cannot be implemented because the petitions are not dismissed, the parties may have to continue with the present and other proceedings.  Substantial costs and time would be wasted.

21.  I am persuaded that it is appropriate in these circumstances to dismiss the petitions and to discharge the provisional liquidators from their office.

22.  I understand it has been agreed between Madam Law and Dr Chan that Junestar and Madam Law will not seek any costs order against the companies or against Dr Chan in these winding-up proceedings.

23.  I order the petition against each of the 4 companies to be dismissed, and I discharge the provisional liquidators from their office in respect of each of the companies.  I would deal with the consequential orders to be made on the discharge of the provisional liquidators on paper, after the provisional liquidators have considered the draft orders proposed by Dr Chan and Madam Law.

HCCW 340/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 340 OF 2002

____________

____________

(Heard together)

_____________

DECISION

_____________

Background to the applications

1. On 16 January 2003, I heard three summonses issued by the provisional liquidators in HCCW Nos. 340, 345 and 346 of 2002. Essentially, they are applications seeking directions from the court on the powers of the provisional liquidators and on provisions for their remuneration. On 25 June 2003, I made an order by consent in respect of the summons issued in HCCW No. 340 of 2002, so this decision is concerned only with the two summonses, which seek identical directions, in HCCW Nos. 345 and 346 of 2002.

2. It is necessary to set out the background which gave rise to these applications.

3. HCCW No. 345 of 2002 is a petition for the winding up of Maintain Profits Limited ("Maintain Profits"). HCCW No. 346 of 2002 is a petition for the winding up of Myriad Gold Corporation ("Myriad Gold"). Both petitions are presented by Madam Law Wai Duen Nina ("LWD") as a contributory and creditor on just and equitable grounds. They are opposed by the other contributory, Mr Chan Shiu Chick ("CSC"), who was married to LWD. LWD and CSC each hold one of the two issued shares in these two companies and they are the only directors, so there is complete deadlock on the board of directors of these companies. The two companies do not have any business of their own; their sole assets consist of the entire shareholding in B F Construction Company Limited ("BF"). The allegations of misconduct and misfeasance against CSC in the petitions to justify the winding up of Maintain Profits and Myriad Gold are in respect of the operations and management of BF. CSC was and is the managing director of BF and had the day-to-day management of its business. The board of directors of BF is likewise in complete deadlock.

4. On 31 October 2002, I made an order ("the Appointment Order") upon the application of LWD that Mr Charles Chan Wai Dune and Mr James Wardell be appointed joint and several provisional liquidators of Maintain Profits and Myriad Gold, having formed the view that the appointment is appropriate for preserving the status quo and ensuring that the assets of these companies should remain properly administered pending the determination of the petitions. The Appointment Order in each case limits the powers of the provisional liquidators to the acts as provided therein and the material parts of each of the orders, which are in identical terms, read as follows:

(1) In paragraph 2(1) of each of the orders, the provisional liquidators are empowered to "take possession of, collect, give valid receipts for and protect all books, records, documents, properties, things in action and other assets of the Company [that is, Maintain Profits or Myriad Gold] within or outside the jurisdiction of the this Court." This is followed by a definition provision that the foregoing assets referred to are collectively called "Assets", that is to say, assets of Maintain Profits or Myriad Gold, whenever that term is used in the order.

(2) Paragraph 2(4) gives power to the provisional liquidators to "bring or defend any action or other proceedings in the name and on behalf of [Maintain Profits or Myriad Gold] or [BF] as may be considered by the Provisional Liquidators to be necessary for the protection of the Assets".

(3) Paragraph 2(9) gives power to the provisional liquidators "to exercise all rights which [Maintain Profits or Myriad Gold] may have in relation to any subsidiary, including BF, as may be necessary to obtain control or management of any such subsidiary including the appointment or removal of all or any directors of any such subsidiary and to take all such steps as may be necessary to protect the interests of [Maintain Profits or Myriad Gold] in BF and any joint venture or associated companies".

(4) Paragraph 2(10) provides that the provisional liquidators are to have power to "exercise the rights to which a registered holder of any shares or other securities registered in the name of [Maintain Profits or Myriad Gold] is entitled including but without prejudice to the generality of the foregoing power the right to attend meetings and to exercise any votes pertaining to such shares or shares or other securities and to direct nominees of [Maintain Profits or Myriad Gold] in whose names shares or other securities beneficially owned by [Maintain Profits or Myriad Gold] are registered to exercise all or any such rights as the Provisional Liquidators shall direct".

(5) Paragraph 3 provides that "the basis of the remuneration of the Provisional Liquidators be calculated according to the standard hourly rates charged by the Official Receiver for the services of the Provisional Liquidators and other grades of staff employed by them and be paid out of the Assets."

5. Difficulty was soon encountered by the provisional liquidators when they took steps to safeguard the bank accounts of BF. There was some urgency about this as one of the bank accounts opened by BF, which contained substantial deposits, could be operated by CSC solely and his operation of this account was one of the complaints of misconduct in the petitions. Between 31 October 2002 and 5 November 2002, the provisional liquidators held meetings with the two camps of directors of BF, to try to get them to reach consensus to pass certain resolutions of the directors to close the bank accounts of BF and transfer the proceeds to a new bank account which would be operated by two signatories, one of them being any one of the provisional liquidators, so that the provisional liquidators would have control over the bank accounts of BF. The provisional liquidators also notified LWD and CSC that if the directors did not pass the proposed resolutions of the directors, the provisional liquidators would call a shareholders' meeting on 6 November 2002 in order to pass such resolutions as shareholders' resolutions.

6. In the end, as it was not possible to hold a board meeting to pass the proposed resolutions, the provisional liquidators of Maintain Profits and Myriad Gold, as the only shareholders of BF, passed certain shareholders' resolutions on 6 November 2002 ("the Shareholders' Resolutions") providing for the opening of three new bank accounts, the closure of the old bank accounts and in the event of failure to co-operate on the part of CSC or LWD, the establishment of a fourth bank account under the sole control of the provisional liquidators. The three new bank accounts to be set up, pursuant to the Shareholders' Resolutions, are as follows:

(1) an account for normal income operated by two signatories, one of them being any one of the provisional liquidators;

(2) an account designated as the sub-contractors' account, to which all future income from existing and future contracts would be paid, operated by two signatories, one of them being any one of the provisional liquidators; and

(3) an account operated solely by CSC, for the purpose of enabling him to continue to run the business of BF, to which an amount of HK$2,500,000.00 would be made available to cover the monthly expenditure of BF.

7. The provisional liquidators also resolved, by the Shareholders' Resolutions, that an engagement letter dated 6 November 2002 issued by them, for and on behalf of Maintain Profits and Myriad Gold, be approved and adopted. The engagement letter was addressed to the board of directors of BF. It was stated that the provisional liquidators are to carry out a financial monitoring of BF in order to preserve the assets of BF and the scope of their responsibilities was set out. Initially, the engagement letter had also provided that BF would agree to indemnify the provisional liquidators against all claims or liabilities which might be made or incurred resulting from the carrying out of the arrangements in the letter and that the remuneration of the provisional liquidators would be paid out of the assets of BF. However, as both CSC and LWD had indicated that they would not approve the indemnity or the fees arrangement, these provisions were omitted from the revised engagement letter.

8. On 8 November 2002, the provisional liquidators issued the two summonses that I am concerned with.

The applications

9. The following orders are sought in each of the summonses:

(1) the remuneration of the provisional liquidators be charged on a time-cost basis at the standard scale of fees as agreed from time to time between the Official Receiver and the Hong Kong Society of Accountants under the "Panel A" winding-up cases and be paid out of the assets of Maintain Profits or Myriad Gold, as the case may be;

(2) the provisional liquidators may exercise the powers of Maintain Profits and Myriad Gold as shareholders of BF by shareholders' resolution, to cause BF to indemnify the provisional liquidators against all claims or liabilities, charges or expenses, resulting from the carrying out of any action by or on behalf of the provisional liquidators and to provide for the remuneration of the provisional liquidators of Maintain Profits and Myriad Gold to be charged to BF and be paid out of the assets of BF;

(3) the provisional liquidators be at liberty to appoint solicitors and counsel to advise on the operation of BF, the operation of the bank accounts of BF and generally in relation to the provisional liquidators' powers and duties in relation to BF;

(4) the costs of solicitors appointed by the provisional liquidators be paid out of the assets of BF;

(5) the costs of the provisional liquidators of this application be paid out of the assets of BF;

(6) the Shareholders' Resolutions fall within the scope of the provisional liquidators' powers in the Appointment Order and the directors of BF should comply with those resolutions; and

(7) there be power to the provisional liquidators to present a petition to wind up BF and to apply for the appointment of provisional liquidators of BF.

10. The summonses were first heard on 11 November 2002 and adjourned for argument to 16 January 2003. An undertaking was provided by LWD and CSC and recorded in the order made on 11 November 2002 that on a without prejudice basis and pending the result of the summonses, each of LWD and CSC will pay Maintain Profits and Myriad Gold HK$500,000.00 towards the provisional liquidators' costs. This was because at that time, neither Maintain Profits nor Myriad Gold had held funds, other than sums which were less than HK$5,000.00, from which the provisional liquidators' costs and expenses for supervising the activities of BF could be paid.

11. On 13 November 2002, I made another order, on the ex parte application of the provisional liquidators, that pending the determination of the summonses and without prejudice to the position of the parties interested therein, all bank accounts of BF be closed and the money therein be transferred to new accounts in the name of BF to be set up at Liu Chong Hing Bank Limited in terms of the Shareholders' Resolutions, alternatively that new accounts be set up at such bank or banks as the provisional liquidators consider appropriate. The application was necessitated by a letter dated 12 November 2002 from the solicitors for the Liu Chong Hing Bank to the solicitors for the provisional liquidators stating that the bank felt unable to open a banking account for BF purely on the strength of the Shareholders' Resolutions. Eventually, after the order was made, the bank accounts of BF at the Bank of China were closed and the proceeds therein were transferred to the new bank accounts opened in the name of BF at the Liu Chong Hing Bank.

12. That, however, was not the end of the difficulty encountered in relation to the bank accounts of BF. BF also held an account at the Hang Seng Bank Limited and the provisional liquidators have not been able to procure a transfer of the proceeds in this account to the new accounts at the Liu Chong Hing Bank, on the strength of the Shareholders' Resolutions and the order made on 13 November 2002. By the letters of its solicitors dated 21 and 26 November 2002, Hang Seng Bank took the position that as BF is not in liquidation, the power of management including the power to close bank accounts, continues to be vested in the board of directors, not the shareholders, hence the Shareholders' Resolutions do not constitute valid instructions to the bank and that the bank cannot be bound by the order made on 13 November 2002 as it is not a party to the proceedings. Whilst LWD has agreed to provide a letter to Hang Seng Bank instructing it to close the accounts and transfer the proceeds as directed by the provisional liquidators, CSC has declined to do so.

The provisional liquidators' position

13. The purpose of the summonses is to seek the directions of the court as to what the provisional liquidators should do. As stated in the letter of the solicitors for the provisional liquidators to the respective solicitors for LWD and CSC dated 8 January 2003, and expanded in the submissions of Mr Bartlett, who appeared for the provisional liquidators, there would appear to be the following options:

(1) the provisional liquidators should present a petition to wind up BF on just and equitable grounds and apply for their appointment as provisional liquidators of BF (paragraph (7) of the summons referred to above). They would still need the co-operation of the directors in running the business, unless it should appear proper or necessary for the business to cease. This is the preferred option of the provisional liquidators as the most effective way to preserve the assets of BF, which is not at present before the court. It would be considerably simpler to preserve assets of BF if provisional liquidators were appointed for BF, instead of having resort to the shareholders' rights, which have proved cumbersome and susceptible to challenge. If leave were granted as sought under paragraph (7) of the summons, the provisional liquidators would still seek relief under paragraph (6) of the summons so as to confirm the legitimacy of their actions regarding the Shareholders' Resolutions;

(2) the provisional liquidators should remove the board of BF and replace this with the provisional liquidators or their nominees or appoint additional directors to the board to resolve the deadlock. These are not options favoured by the provisional liquidators. They have no intention to take over the management of BF at present, as taking control of the board of BF in circumstances in which its constitution is in dispute would expose the board members to potential liability. Further, the Official Receiver has in his letter dated 10 December 2002 declined to accept any appointment to the board of directors of any of the companies;

(3) the provisional liquidators should continue with their financial monitoring of BF by the exercise of shareholders' rights, but only in the event that the orders sought in paragraphs (2) to (6) of the summons, or part of the relief sought, were granted. The extent of their involvement in BF would depend on the extent of the relief granted; or

(4) the provisional liquidators should cease to act in BF in any capacity. This would be the option taken if the orders sought in paragraphs (2) to (6) of the summons were wholly refused.

14. LWD supports the proposal of the provisional liquidators to present a petition for the winding up of BF and apply for their appointment as provisional liquidators of BF. CSC's position is that the provisional liquidators should cease to act in BF in any capacity, for a variety of reasons.

Basis of remuneration for provisional liquidators

15. I will first deal with the relief sought in paragraph (1) of the summons, which seeks to alter the basis of the remuneration for the provisional liquidators. The mechanism as provided in paragraph 3 of the Appointment Order, that the basis of remuneration be calculated according to "the standard hourly rates charged by the Official Receiver for the services of the Provisional Liquidators and other grades of staff employed by them", has proved to be unworkable. This is because the grades of staff of the Official Receiver's Office are unique and completely different from those of accounting firms in the private sector. It would be virtually impossible for the provisional liquidators to apply the staff hourly rates of the Official Receiver in calculating their remuneration.

16. In the circumstances, I think it is right to make an order as sought in paragraph (1) of the summons, that the remuneration of the provisional liquidators be charged on a time-cost basis at the standard scale of fees as agreed from time to time between the Official Receiver and the Hong Kong Society of Accountants under the "Panel A" winding-up cases and be paid out of the assets of Maintain Profits or Myriad Gold, as the case may be.

If remuneration could be paid out of the assets of BF

17. According to paragraph 3 of the Appointment Order, the remuneration of the provisional liquidators is to be paid out of the "Assets" as defined, meaning the assets of Maintain Profits or Myriad Gold. This has proved to be problematic as neither company has sufficient funds of their own to pay for the fees and expenses of the provisional liquidators. In the absence of any security from LWD (and I am given to understand that the provisional liquidators were nominated by LWD on the basis that they agreed to accept appointment without seeking security), upon whose application the provisional liquidators were appointed, they could only look to the assets of BF for their costs. To this end, the provisional liquidators have proposed to pass a shareholders' resolution to provide for their remuneration as provisional liquidators of Maintain Profits and Myriad Gold to be charged to BF and be paid out of the assets of BF. They seek an order in paragraph (2) of the summons that they may exercise their power in this way.

18. Mr Chang, SC, who appeared for CSC, raised a number of objections to this.

19. The applicable principles were stated by Mr Chang in this way:

(1) if the company concerned (in this case Maintain Profits or Myriad Gold) has insufficient funds to pay the remuneration of provisional liquidators, that is a risk that the provisional liquidators have to take in accepting the appointment;

(2) if the provisional liquidators should accept the appointment without first obtaining sufficient security or deposit from the petitioner for their costs, expenses and remuneration, or in the absence of any agreement with the petitioner to make up any deficiency if the assets of the company should be insufficient to pay for their fees, they do so at their own peril; and

(3) if the petitioner is unable or unwilling to provide sufficient security it is open to the provisional liquidators to apply for a discharge of their appointment.

20. The authorities cited by Mr Chang in support of the above principles include Re UOC Corp [1997] 2 BCLC 569; Insolvency by Totty and Moss, Part E, para. E1-82; and Corporate Insolvency: Law and Practice by Milman and Durrant, 3rd ed., para. 2-53.

21. Mr Bartlett did not dispute the correctness of the principles stated above but submitted that they do not affect the shareholders' resolution proposed to be passed.

22. Mr Chang has also referred me to the following extract in Palmer's Corporate Insolvency, 1996 ed., para. 1.318.2, which reads as follows:

"If there are no assets the liquidator is not entitled to receive any remuneration and he is personally liable for legal expenses incurred in the liquidation; the legal expenses of the petition are the responsibility of those who instructed it. It is not competent to charge the expense of one liquidation against the assets ingathered in another liquidation, even where the first liquidation was undertaken with a view to securing a benefit for the creditors in the second one." (emphasis supplied)

23. The authority cited in the text in support of the above extract is the Scottish decision of Taylor (Liquidator of Neil Middleton and Co. Ltd), Petitioner (1976) SLT 82, in which the court refused the liquidator's proposal to charge the funds of a closely related company in liquidation with the expenses of the liquidation of the company in question and had this to say at 84:

"The general principle which then has to be observed is that a limited company is a distinct legal person. It may have close relations with other legal persons, but its separate identity remains. In my opinion, this principle continues to apply in a company's liquidation, and it implies that the liquidator's office is held separately from any other such office, that the funds of a liquidation are the separate funds of the separate company in liquidation, and that the liquidator's intromissions can only be with these separate funds. In my opinion, it would be inconsistent with principle that there should be intromissions with the funds of one liquidation to provide remuneration for the liquidator acting in another liquidation.

It follows that if insufficient funds are ingathered, the liquidator may receive no remuneration at all ...

... Accordingly, neither in the case of the liquidator's remuneration nor the solicitor's expenses can judicial sanction be given for their payment from the funds of either of this liquidation, or, for the reasons above given, from the funds of any other liquidation." (emphasis supplied)

24. Mr Bartlett's answer to the above is that BF is not in liquidation and the Scottish decision was not concerned with a situation that all the shareholders of a company are in a position to pass a resolution to fund the expenses of liquidation of its parent company. He submitted that subject to the position of the creditors of BF, there is nothing inherently objectionable about the shareholders of BF passing a resolution to fund the costs of the provisional liquidators of its parent companies, Maintain Profits and Myriad Gold. It is a matter of first principles that a company would have power to do anything that its shareholders unanimously agree upon. Mr Bartlett has not been able to find any direct authority on the point.

25. As for the creditors of BF, Mr Bartlett submitted that they would not be adversely affected. He accepted that it would not be appropriate for the shareholders of an insolvent company to agree to fund the costs of liquidation of a related company, as that would be dealing with the assets without regard to the interests of its creditors. However, in the present situation, it would appear from the management accounts of BF as in July 2002 that it is able to pay its debts as they fall due. It would be beneficial to the creditors if the provisional liquidators should take up the financial monitoring of BF as set out in the engagement letter.

26. Mr Poon, SC, who appeared for LWD, seemed to have changed his stance somewhat in the course of submissions. At first, he submitted that it would be inappropriate for the assets of one company to be applied for the use of another company, and suggested that the only ways for the provisional liquidators to get themselves out of the predicament of not receiving payment for their services due to insufficient funds in Maintain Profits and Myriad Gold are either to petition for the winding up of BF and have themselves appointed as provisional liquidators of BF or to appoint themselves as directors of BF so as to be paid for their work done in relation to BF.

27. In his subsequent submissions, Mr Poon made the point that in order to preserve the assets of Maintain Profits and Myriad Gold in an effective way, it would be necessary for the provisional liquidators to keep an eye on the affairs of BF and preserve the assets of BF. Hence, although there is a distinction between protecting the interests of Maintain Profits and Myriad Gold in BF and protecting the assets of BF, a distinction which Mr Chang was at pains to emphasise, these acts are not mutually exclusive. Mr Poon submitted further that as the acts of the provisional liquidators in supervising the affairs of BF are done for the benefit of BF, there is nothing inherently objectionable for the remuneration of the provisional liquidators to be paid out of the funds of BF.

28. Under paragraph 2(9) of the Appointment Order, the provisional liquidators are empowered to exercise "all rights which [Maintain Profits or Myriad Gold] may have in relation to ... BF, as may be necessary to obtain control or management of [BF] ... and to take all such steps as may be necessary to protect the interests of [Maintain Profits or Myriad Gold] in BF ...". As I have mentioned earlier, Maintain Profits and Myriad Gold have no business or assets of their own, save for the entire shareholding in BF. Whilst the term "Assets" in the Appointment Order is defined to mean the assets of Maintain Profits or Myriad Gold, the provisional liquidators are expressly empowered to take such steps as necessary to protect the interests of these companies in BF. It is true that the interests of these companies in BF are not equivalent to the interest of BF itself, they are after all separate entities. However, I think Mr Poon is right in saying that in this instance the interests of the two parent companies do completely coincide with the interest of BF and if the provisional liquidators should act to preserve the assets of BF, they are in effect preserving the assets of the parent companies. I am persuaded that as a matter of first principles, there is nothing inherently objectionable for the provisional liquidators to exercise their power under paragraphs 2(9) and (10) of the Appointment Order, as shareholders of BF, to resolve that their remuneration for their work (which would be done almost entirely, if not entirely, in relation to BF) is to be paid out of the assets of BF, an apparently solvent company, at a time when no petition for winding up is presented against BF.

29. I have come to this view notwithstanding two other points taken by Mr Chang.

30. Firstly, he submitted that owing to the provisions of a loan agreement ("the Loan Agreement") dated 3 March 1999 made between Presidential Profits Limited ("President Profits") and Bomina Limited ("Bomina") as lenders and BF as borrower, the interests of Maintain Profits and Myriad Gold in BF must be of a very limited nature. Under the Loan Agreement, the lenders have agreed to provide to BF a revolving loan facility up to HK$350 million. In return, it was provided in clause 5.05 that only the lenders are entitled to share any "Retained Profits" (being the audited retained profits of BF after provision is made for a reserve agreed to by the lenders that is necessary for the ongoing operation of the business). In view of this, Mr Chang submitted that the maximum interests of Maintain Profits and Myriad Gold in BF would not exceed the sum of HK$1 million, being BF's paid-up capital. On this basis, the tangible interest of Maintain Profits and Myriad Gold would have been adequately protected by the payment of HK$500,000.00 each by LWD and CSC to these two companies towards the provisional liquidators' costs, pursuant to their undertakings given to the court on 11 November 2002.

31. The transactions in the Loan Agreement have yet to be scrutinised by the provisional liquidators. They are not in any position to accept at this stage that the operation of the Loan Agreement would limit the financial interest of Maintain Profits and Myriad Gold to a maximum interest of HK$1 million at any time. I am not prepared to hold at present that in the event of the winding up of BF, the interests of Maintain Profits and Myriad Gold as shareholders of BF must necessarily be limited to the extent as contended by Mr Chang. The winding up of BF would be an event of default under the Loan Agreement, giving the right to any of the lenders to declare the loan drawn down and all interest and other sums payable as immediately due, by virtue of clause 12.03. It is not entirely clear what effect this would have on clause 5.05 (which made reference to "Retained Profits" premised on there being ongoing operation of the business of BF). In the ordinary case, shareholders would have the right, on the winding up of the company, after the payment of the debts, to receive a proportionate part of the capital or otherwise to participate in the distribution of assets of the company. It is not entirely clear in this situation, whether and to what extent, this right of shareholders would have been affected by clause 5.05.

32. Secondly, Mr Chang submitted that in giving power to the provisional liquidators to take steps as may be necessary to protect the interests of Maintain Profits and Myriad Gold in BF, one must have regard to the settled principle that where a company suffers loss caused by the breach of a duty owed to both the company and the shareholders, the shareholders are not allowed to pursue personal claims to recover or protect any diminution in the value of their shares, as such loss is merely reflective of the company's loss, in respect of which the company has its own cause of action, citing Johnson v Gore Wood & Co. [2001] 1 BCLC 313 at 365h to 366a. As I understand Mr Chang's submissions, this principle is prayed in aid to emphasise the distinction between protecting the interest of BF and protecting the interests of the shareholders of BF. I am unable to see any direct relevance of this principle to the question that I am concerned with, namely, where the interest of BF does appear to coincide with those of Maintain Profits and Myriad Gold, whether there is any objection in principle for the provisional liquidators to resolve that their remuneration may be paid out of the assets of BF.

If the provisional liquidators should be indemnified by BF

33. I turn to consider the other part of the shareholders' resolution proposed by the provisional liquidators, which relates to an indemnity to be given by BF to the provisional liquidators in respect of claims or liabilities, charges or expenses, resulting from the carrying out of any action by or on behalf of the provisional liquidators.

34. For the reasons given earlier, I see no objection in principle for an indemnity to be provided, it being part of the powers of the provisional liquidators to take such steps as may be necessary to protect the interests of Maintain Profits and Myriad Gold in BF, so long as it is made clear in the shareholders' resolution that the indemnity is in relation to action taken in respect of BF.

35. Subject to the above qualification as regards the proposed indemnity, and subject to the further qualification that the proposed indemnity and the proposed payment of remuneration of the provisional liquidators would cease to apply in the event that a petition is presented to wind up BF, I rule that the provisional liquidators may exercise their powers to pass the shareholders' resolution sought in paragraph (2) of the summons.

36. I also rule that the provisional liquidators may be at liberty to appoint solicitors and counsel to advise on the operation of BF and generally in relation to BF, as sought in paragraph (3) of the summons, and that such costs may be paid out of the assets of BF, as sought in paragraph (4) of the summons.

If the Shareholders' Resolutions may be declared valid

37. Under paragraph (6) of the summons, the provisional liquidators seek an order that the Shareholders' Resolutions of 6 November 2002 do fall within their powers in the Appointment Order and the directors of BF should comply with those resolutions.

38. Objection was taken by CSC to the Shareholders' Resolutions on the ground that there was irregularity in holding the extraordinary general meeting of BF on 6 November 2002 to pass the Shareholders' Resolutions in that the provisional liquidators had never properly requisitioned the board of directors of BF to convene any such general meeting in accordance with section 113 of Cap. 32 or Article 51 of the Articles of Association. The answer to this is two-fold. Firstly, as pointed out by Mr Poon, reliance may be placed on section 116B(1) of Cap. 32, which provides, inter alia, that anything which in the case of a company may be done by resolution of the company in general meeting may be done, without a meeting and without any previous notice being required, by resolution in writing signed by or on behalf of all the members of the company who at the date of the resolution would be entitled to attend and vote at such meeting. Secondly, as submitted by Mr Bartlett, reliance may also be placed on the Duomatic principle at common law ([1969] 2 Ch 365), in which the unanimous informal consent of all the shareholders in respect of a matter which a general meeting could carry into effect would be treated as binding as a resolution in general meeting.

39. I turn to consider if the Shareholders' Resolutions fall within the powers of the provisional liquidators in paragraphs 2(9) and (10) of the Appointment Order. For the reasons I have given earlier, the provisional liquidators are in effect preserving the assets of the parent companies when they act to preserve the assets of BF. In my view, the action in relation to BF contemplated by the Shareholders' Resolutions would fall within "such steps as may be necessary to protect the interests of [Maintain Profits or Myriad Gold] in BF" in paragraph 2(9).

40. I will make an order that the Shareholders' Resolutions do fall within the scope of the powers of the provisional liquidators in the Appointment Order. I do not think it appropriate to order further that the directors of BF should comply with the Shareholders' Resolutions as sought in paragraph (6) of the summons, as BF is not before the court and not all of its directors have been served with the summons.

If the provisional liquidators should have power to wind up BF

41. Under paragraph (7) of the summons, the provisional liquidators seek an order that they be given the powers to present a petition to wind up BF and to apply for their appointment as provisional liquidators of BF.

42. When LWD applied for provisional liquidators to be appointed for Maintain Profits and Myriad Gold, it was sought in the draft order that the provisional liquidators should have power to present a petition to wind up BF, as one of the action that may be considered necessary for the protection of the assets of BF. I had deleted this power when I made the Appointment Order, taking the view that it was not necessary for the provisional liquidators to have such power at that time.

43. This power is sought by the provisional liquidators for a number of reasons.

44. The board of directors of BF is likely to remain in deadlock indefinitely. For the provisional liquidators to resort to shareholders' rights to obtain control of BF, this has proved to be cumbersome and controversial. In my decision on 31 October 2002, I have found that there is a prima facie case of misconduct on the part of CSC in the affairs of BF, a complete deadlock of directors and loss of mutual trust and confidence. These matters would have justified the presentation of a petition to wind up BF on just and equitable grounds. No new business has been taken on by BF since the Appointment Order, and apparently since August 1999. If leave were granted for a petition to be presented and if the provisional liquidators were successfully appointed provisional liquidators of BF, they have no present intention of removing CSC from the management of BF or to stop him from participating in its affairs under their supervision.

45. When I made the Appointment Order, I had considered the risk that the appointment of provisional liquidators for Maintain Profits and Myriad Gold might trigger off a takeover of BF by Bomina under an Option Agreement dated 3 March 1999 ("the Option Agreement"). For the reasons given in paragraphs 153 to 160 of my decision, I was not persuaded that the risks of enforcement of the Option Agreement or the Loan Agreement should tip the balance. In the event that Bomina should wish to enforce its right under the Option Agreement to purchase all the shares in BF upon the presentation of a petition to wind up BF and the appointment of provisional liquidators for BF, the transfer of shares in BF or alterations in the status of the members of BF would be caught by section 182 of Cap. 32 and leave of the court would be required for the disposition. I do not think it would be inconsistent with the primary duty of the provisional liquidators to preserve an existing status quo with the least possible harm to all concerned if they are given the further powers to present a petition to wind up BF and to apply for their appointment as provisional liquidators of BF. I am concerned at this stage with whether the powers sought should be given to the provisional liquidators. The merits of an application to appoint provisional liquidators of BF, if and when a petition for winding up of BF is presented, would be a matter for a further hearing.

46. Mr Chang further submitted on the authorities cited earlier that it is not competent to charge the expense of one liquidation against the assets ingathered in another liquidation, even if the first liquidation is undertaken with a view to securing the benefit of those entitled to the assets in the second liquidation. Hence, all expenses in the liquidations of Maintain Profits, Myriad Gold and BF would have to be separate. I do not think this should pose a difficulty here. The position of the expenses of the provisional liquidators before the petition to wind up BF is presented would be dealt with pursuant to the shareholders' resolution proposed in paragraph (2) of the summons. As mentioned earlier, the work done by the provisional liquidators would be done almost entirely, if not entirely, in relation to BF. After the presentation of the petition to wind up BF, the expenses of the provisional liquidators of Maintain Profits and Myriad Gold, insofar as the work done is not in relation to BF, should not be paid out of the assets of BF, so there would be no contravention of the principle of no intromission with the funds of one liquidation to provide for the remuneration for the liquidator acting in another liquidation.

47. I will make an order giving the provisional liquidators the powers sought in paragraph (7) of the summons. This should not be construed as implicit approval for the exercise of the powers. The provisional liquidators would need to consider if it is appropriate, in all the circumstances, to exercise the additional powers given to them, as in the case of all other powers given in Appointment Order.

Orders

48. I make the following orders in each of the summonses in HCCW Nos. 345 and 346 of 2002:

(1) there be an order in terms as sought in paragraphs (1), (3), (4) and (7) of the summons;

(2) the provisional liquidators may exercise the powers of Maintain Profits and Myriad Gold as shareholders of BF by shareholders' resolution, to cause BF to indemnify the joint and several provisional liquidators of Maintain Profits and Myriad Gold and to provide for the remuneration of the provisional liquidators in the terms as stated in paragraph (2) of the summons provided that (a) the resolutions would cease to apply in the event that a petition to wind up BF is presented; and (b) the indemnity to be provided is only in respect of the carrying out of any action by or on behalf of the provisional liquidators in relation to BF; and

(3) the Shareholders' Resolutions dated 6 November 2002 and signed by the provisional liquidators in relation to BF fall within the scope of the provisional liquidators' powers contained in the Appointment Order dated 31 October 2002.

49. I make an order nisi in respect of each of the applications that the provisional liquidators' costs of the initial hearing on 11 November 2002, which were reserved, and their costs of the application be paid out of the funds of Maintain Profits or Myriad Gold, as the case may be, received by the provisional liquidators pursuant to the undertakings given by LWD and CSC on 11 November 2002.

Representation:

Mr Jeremy Bartlett, instructed by Messrs Stephenson Harwood & Lo, for the provisional liquidators of Boldwin Construction Company Ltd, Maintain Profits Ltd and Myriad Gold Corporation

Mr Winston Poon, SC and Miss Linda Chan, instructed by Messrs Baker & McKenzie, for the respective petitioners in HCCW Nos. 340, 345 and 346 of 2002

Mr Denis Chang, SC, Mr Samuel Chan and Miss Isabella Chu, instructed by Messrs Ng & Partner, for Mr Chan Shiu Chick in HCCW No. 340 of 2002 and for the same as the opposing contributory in HCCW No. 345 and 346 of 2002

HCCW 340, 345 & 346/2002 & HCA 1036/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 340 OF 2002

____________

____________

(Heard Together)

______________

D E C I S I O N

______________

The applications

1. There are a total of four summonses before me. Three of them, issued on 16 May 2002, are for the appointment of provisional liquidators in HCCW Nos. 340, 345 and 346 of 2002, under section 193 of the Companies Ordinance, Cap. 32. The fourth summons, issued on 6 June 2002, is for a worldwide Mareva injunction against Mr Chan Shiu Chick ("CSC"), the 2nd defendant in HCA No. 1036 of 2002.

2. In HCCW No. 340 of 2002, the petition was presented on 2 April 2002 by a contributory and creditor, Junestar Investment Corporation ("Junestar"), to wind up Boldwin Construction Company Limited ("Boldwin") on just and equitable grounds. It is the petitioner's case in these proceedings that Madam Law Wai Duen Nina ("LWD") is the registered and beneficial owner of all the shares in Junestar. LWD was married to CSC in 1964. CSC has petitioned for divorce in May 2001 on the ground of LWD's desertion since 27 May 1999. At the time of the hearing of the present applications, it would appear that the marriage has not been dissolved. CSC has brought proceedings in HCA No. 2623 of 2001 against LWD in June 2001, seeking declarations that he is the beneficial owner of 1,199 shares in Boldwin through his ownership of the all the issued shares in Junestar. In the winding-up proceedings and in HCA No. 1036 of 2002, he has asserted that LWD held all of the shares in Junestar on trust for him, alternatively 50% of the shares in Junestar on trust for him. CSC claims that his beneficial ownership of 1,200 shares in Boldwin, alternatively 1,199 shares in Boldwin, gives him the locus standi to appear on the petition including the application for appointment of provisional liquidators. Notwithstanding the dispute as to the beneficial ownership of 1,200 shares in Boldwin, Junestar does not oppose the appearance of CSC on the ground that as all the complaints in the petition were directed against him, he is entitled to defend himself against the allegations.

3. Of the seven creditors who have given notice of intention to appear on the petition in HCCW No. 340 of 2002 and to oppose it, none of them has filed evidence to oppose the application for the appointment of provisional liquidators. Although an affirmation was filed on behalf of Boldwin on 8 July 2002 to oppose the petition and the application to appoint provisional liquidators, Boldwin did not appear at the present summons.

4. The petition in HCCW No. 345 of 2002 was presented on 2 April 2002 by LWD as a contributory and creditor to wind up Maintain Profits Limited ("Maintain Profits") on just and equitable grounds. On the same day, LWD presented a petition in HCCW No. 346 of 2002 as a contributory and creditor to wind up Myriad Gold Corporation ("Myriad Gold"), also on just and equitable grounds. LWD and CSC are the only shareholders of Maintain Profits and Myriad, each holding one of the two issued shares in each company. The sole asset of Maintain Profits consists of 600,000 shares out of 1 million fully paid shares in B.F. Construction Company Limited ("BF"). The remaining 400,000 shares in BF are held by Myriad Gold as its sole asset. CSC appears in these two petitions as the opposing contributory. No other party has given intention to appear in these two petitions. As in the case of Junestar, there is dispute as to the beneficial ownership of the shares in Maintain Profits and Myriad Gold. CSC has sought declarations in HCA No. 2623 of 2001 that LWD holds one of the two issued shares in each of these companies on trust for him and the dispute in that action has not been resolved.

5. HCA No. 1036 of 2002, in which the application for a Mareva injunction is made, is a derivative action brought by Junestar against Boldwin and CSC seeking damages for breach of fiduciary duty owed by CSC to Boldwin as a director, various declarations, injunctions and other reliefs arising out of alleged wrongful acts done by CSC to Boldwin.

The companies

6. Boldwin was incorporated on 17 August 1976 under Cap. 32 as a private company. It has been carrying on business as a building contractor. When it was incorporated, two subscriber shares of HK$100.00 each were issued to LWD and CSC. They were the only directors of the company. In February 1977, Boldwin acquired the status of a registered building contractor under the Buildings Ordinance, Cap. 123 and LWD was the only authorised signatory to sign statutory forms and other prescribed documents under the Ordinance between February 1977 and November 1999. In the early days of its operations, Boldwin had carried out a number of construction projects for the Great Eagle group of companies, as LWD's father is the founder of the Great Eagle Group. It is not in dispute that at all material times, CSC had the day-to-day management of Boldwin as its managing director.

7. In November 1977, one of LWD's sisters, Madam Lo Hung Suen, and her husband, Mr Chan Wai Lim, were appointed as additional directors of Boldwin. They held their appointment until they resigned on 22 March 2002. Chan Wai Lim had business contacts in the Cheung Kong group of companies and introduced construction work to Boldwin from the Cheung Kong Group. Since about 1978, with the exception of two projects, all the construction projects undertaken by Boldwin as the main contractor were of the Cheung Kong Group.

8. On 1 December 1978, a total of 1,998 shares of Boldwin were issued and allotted to CSC, Lo Hung Suen and Chan Wai Lim, as a result of which its shareholding structure was changed as follows:

9. Junestar was incorporated on 14 January 1983 under the laws of the Republic of Panama as a company of limited liability with an authorised capital of US$10,000.00 divided into 100 shares of US$100.00 each, of which two shares were issued to the two subscribers. On 27 May 1983, the 100 shares in Junestar were issued in the form of bearer shares and a general power of attorney was given by Junestar in favour of LWD, CSC and another sister of LWD to act as general attorneys of Junestar. On 30 May 1983, the two subscriber shares in Junestar were assigned and transferred to LWD. From 30 May 1983 to 17 March 1999, all the issued shares in Junestar in the form of bearer shares were kept by LWD. On 18 March 1999, the 100 bearer shares in Junestar were converted into registered shares and were registered in the name of LWD. As mentioned earlier, LWD claims that she was and is the sole legal and beneficial owner of all the issued shares in Junestar, whereas CSC claims that LWD held all of the shares in Junestar, alternatively half of the shares, on trust for him. On 19 March 1999, LWD, her daughters Chan Nga Wai Ann and Chan Nga Mei Amy, were appointed as directors of Junestar. On 23 July 1999, LWD, CSC and LWD's sister ceased to be general attorneys of Junestar when their powers of attorney were revoked pursuant to a resolution passed by the directors of Junestar.

10. On 11 February 1985, CSC and LWD, in consideration of payment by Junestar of HK$119,900.00 and HK$100.00 respectively, transferred all of their shareholdings in Boldwin to Junestar and Junestar has since remained the holder of such 1,200 shares of Boldwin. It is the case of LWD that she had provided all the funds for payment by Junestar for the above transfer of shares. This is disputed by CSC.

11. On 26 September 1985, Chan Wai Lim and Lo Hung Suen transferred all of their shares in Boldwin to Rocky Limited ("Rocky") and Rocky has since remained the registered shareholder of the remaining 800 shares in Boldwin.

12. On 24 September 1997, BF was incorporated under Cap. 32 as a private company. It is also in the business of a building contractor. As in the case of Boldwin, all the building projects undertaken by BF as the main contractor are of the Cheung Kong Group. LWD and CSC were appointed as the only directors of BF. CSC occupied the position of managing director and had the day-to-day management of its business. Initially, 10 shares out of 10,000 shares in BF were issued, six were held by Andreas Investment Corporation ("Andreas"; a company incorporated in Liberia and acquired by LWD and CSC in 1987, its shares were held by them in equal proportions, and of which LWD, CSC, their two daughters Ann Chan and Amy Chan, are the only directors) and four were held by Gainfort Holdings Limited ("Gainfort"; a company incorporated in Hong Kong in 1993 with two issued shares, one held by Junestar and the other by Andreas).

13. On 15 October 1997, Maintain Profits was incorporated in the British Virgin Islands with an authorised capital of US$50,000.00 divided into 50,000 shares of US$1.00 each, of which only two shares have been issued and are registered in the names of LWD and CSC as to one share each. Myriad Gold was incorporated in the British Virgin Islands on 1 December 1997 with an authorised capital of US$50,000.00 divided into 50,000 shares of US$1.00 each, of which two shares have been issued and are registered in the names of LWD and CSC as to one share each.

14. On 2 March 1998, Andreas and Gainfort transferred their entire shareholdings in BF to Maintain Profits and Myriad Gold. On 3 March 1999, the authorised share capital of BF was increased from HK$10,000.00 to HK$1 million and on the same day, all of the shares of HK$1.00 each were issued, 600,000 shares to Maintain Profits and 400,000 shares to Myriad Gold.

15. There is effective deadlock on the board of directors of Maintain Profits and Myriad Gold as LWD and CSC are the only directors of these two companies.

16. The present directors of Boldwin are CSC, LWD, Mr Tang Chun Sing (appointed on 1 April 1999) and Mr Yu Ho Yuen (appointed on 8 July 1999). Mr Tang and Mr Yu are employees of Boldwin. It is alleged by LWD that they are accustomed to act in accordance with the wishes of CSC.

17. The present directors of BF are CSC, LWD, Ann Chan (appointed on 16 February 1998) and Mr Yip Hing Wah Henry (appointed on 1 April 1999). Mr Yip is an employee of BF and it is alleged by LWD that he is accustomed to act according to the instructions of CSC. Ann Chan left the family home with LWD and has apparently taken the side of LWD in the legal proceedings involving LWD and CSC.

18. It is not in dispute that in early 2000 Boldwin had completed all contracted building works, save and except for remedial works within the defects liability period in respect of the projects undertaken. The last tender Boldwin submitted was in July 2000. It has not entered into any new construction contract.

19. As for BF, it was the main contractor for three projects which have been substantially completed: STTL 446 in Area 108 Ma On Shan, New Territories; 661 to 665 King's Road, North Point, Hong Kong; and KIL 11056 Phase 2 Hung Hom, Kowloon. In addition, it has taken up a project at KIL 11056 Phase 4 Hung Hom, Kowloon (Hok Un Phase IVA & IVB), which is in the final phase of construction. All these are construction projects of the Cheung Kong Group.

The preliminary application to strike out part of the evidence

20. I propose first to deal with a preliminary application made by Mr Poon, SC on behalf of Junestar and LWD that certain parts of the evidence adduced by CSC in these applications should be struck out as they are in contravention of r. 121 of the Matrimonial Causes Rules, Cap. 179A, which reads as follows:

"121. Inspection etc. of documents retained in court

(1) A party to any matrimonial proceedings or his solicitor or the Secretary for Justice may have a search made for, and may inspect and bespeak a copy of, any document filed or lodged in the registry in those proceedings.

(2) Except as provided by r. 47A(3) and 95(3) and paragraph (1) of this rule, no document filed or lodged in the registry, other than a decree or order made in open court, shall be open to inspection by any person without leave of the court, and no copy of any such document, or of an extract from any such document, shall be taken by, or issued to, any person without such leave."

The word "court" in r. 121(2) is defined in r. 2(2) to mean "the District Court".

21. The evidence sought to be struck out relates to the evidence adduced or documents filed in the matrimonial proceedings between CSC and LWD (FCMC No. 4917 of 2001) and other documents that came into being as a result of the matrimonial proceedings, such as correspondence between solicitors, skeleton submissions of counsel, transcript of a hearing in chambers and are as follows:

(1) the 1st affirmation of CSC in HCCW No. 340 of 2002 filed on 4 July 2002 - paragraphs 22 to 24, 42, 59, 60 and 62;

(2) the following exhibits to the aforesaid affirmation of CSC: exhibits 12, 21, 41 to 52.

22. Mr Poon accepts that certain parts of the evidence filed on behalf of Junestar in HCA No. 1036 of 2002 are likewise in contravention of r. 121(2), being the 1st affirmation of LWD filed on 7 June 2002, paragraphs 12, 13 and 15 and the exhibits referred to in those paragraphs. He is content to have these parts of the evidence struck out.

23. Mr Poon has drawn my attention to the fact that in previous proceedings involving LWD and CSC (HCMP Nos. 702 and 703 of 2001, proceedings brought by LWD to seek access to the books and records of Boldwin and BF), he had raised a similar objection to the inclusion of documents filed in the matrimonial proceedings in the hearing bundle and it was directed by Cheung J (as he then was) that the documents in the matrimonial proceedings should be removed and the affidavit exhibiting such documents should be re-sworn.

24. It was pointed out by Mr Poon that in HCCW No. 340 of 2002, there are other parties who have given notice of intention to appear, such as the seven opposing creditors. The other contributory, Rocky, has indicated in a letter dated 11 July 2002 that it opposes the winding-up of Boldwin. There are other directors in Boldwin apart from LWD and CSC. Mr Poon submitted that as there are other parties involved or who may take part in the winding-up proceedings, it would not be appropriate for the documents or evidence in the matrimonial proceedings to be filed as evidence in these applications, and thereby open to inspection by other parties, particularly as this is in violation of r. 121(2) of the Matrimonial Causes Rules and no leave of the District Court has been sought.

25. Mr Chang, SC, who appeared for CSC, disputed that that was the effect of r. 121(2). He submitted that r. 121(2) relates only to the inspection of documents in matrimonial proceedings retained in the District Court and prohibits inspection by third parties without the leave of the District Court. This provision does not restrict the High Court in dealing with matters relevant to an application before it and that the High Court does have power to admit evidence which is relevant.

26. I do not agree with Mr Chang that r. 121(2) should be read or applied in such a restrictive manner. As there is provision prohibiting the inspection of documents in matrimonial proceedings by third parties without leave, I see no reason why the court should allow such documents to be exhibited in other proceedings where they would be available for inspection by other parties, unless the leave of the court seized with the matrimonial proceedings has been obtained.

27. On this basis, I would strike out those parts of the affidavit evidence in contravention of r. 121(2). I would also exercise my discretion to strike out certain parts of the evidence notwithstanding that they are not, strictly speaking, in violation of r. 121(2) as they are not documents filed or lodged in the registry in the matrimonial proceedings. Such parts of the evidence relate to the conduct of the matrimonial proceedings and are of peripheral relevance to the present applications. It is quite unnecessary for CSC to go to great lengths in what had happened in the matrimonial proceedings in order to make the point that the present applications were made by LWD for an ulterior purpose. What he has stated in paragraph 61 of his 1st affirmation in HCCW No. 340 of 2002 is quite sufficient for his purpose.

28. I order the following parts of the evidence to be struck out:

(1) the 1st affirmation of CSC in HCCW No. 340 of 2002 - paragraphs 22 to 24, 42, 59, 60 and 62;

(2) the following exhibits to the 1st affirmation of CSC in HCCW No. 340 of 2002 - exhibits 12, 21, 41 to 52; and

(3) the 1st affirmation of LWD in HCA No. 1036 of 2002 - the last sentence in paragraph 12, paragraphs 13 and 15.

The law on the appointment of provisional liquidator

29. I turn to the authorities relating to the principles upon which the court exercises its discretion to appoint a provisional liquidator. The relevant principles are not in dispute and may be stated as follows.

(1) The court has a wide and unfettered discretion under section 193 of Cap. 32 whether or not to appoint a provisional liquidator. It is not confined to the situations where there is jeopardy to the assets of the company or obvious insolvency or the company has admitted that there is no defence to the petition. How this general power is to be exercised would depend on the particular circumstances of each case (Re Union Accident Insurance Co. Ltd. [1972] 1 All E.R. 1105 at 1109e to h; Re Five Lakes Investment Co. Ltd. & Multiford Co. Ltd. [1985] HKLR 273 at 283F to I).

(2) As regards the exercise of this power, it would be relevant to consider two matters. The first is whether the petitioner has made out a good prima facie case for a winding-up order at the hearing of the petition. If so, the next matter that falls to be considered is whether it is right for a provisional liquidator to be appointed in all the circumstances (Re Union Accident Insurance, supra. at 1110a to c; Re Five Lakes Investment Co. Ltd., supra. at 283J to 284A).

(3) In order to establish a good prima facie case for a winding-up order, the petitioner must show, by believable evidence, facts which are not disproved at present stage and which, if eventually proved at the hearing of the petition, would entitle the petitioner to a winding-up order. To decide this question, the court looks at not merely the petitioner's evidence but also the evidence put in by those opposing the application. The court must then form a provisional view and decide, as the matter then stands, if there is a reasonable prospect that the petition might succeed. Unless the evidence put in by the opposing party is so "obviously cogent", any conflict of evidence should be left to be resolved at the hearing of the petition. Any views expressed by the court on the merits of the petition at this stage are provisional only, as the views are formed on the basis of affidavit evidence untested by cross-examination (Re Five Lakes Investment Co. Ltd., supra. at 284A, D to E; Re Yick Fung Estates Ltd. & Shui Hing Investment Co. Ltd. [1986] HKLR 240 at 252F to H).

(4) As to whether it is right for a provisional liquidator to be appointed in all the circumstances, this is to be decided on the basis of commercial realities, the degree of urgency and need established by the petitioner, and the balance of convenience according to the circumstances (Re Club Mediterranean Pty. Ltd. [1975] 11 SASR 481 at 484; Re Five Lakes Investment Co. Ltd., supra. at 284B).

30. It was contended by CSC that Junestar and LWD have not satisfied any of the two matters required to be considered. There is the absence of a good prima facie case that a winding-up order would be made on their petitions and it is not right for provisional liquidators to be appointed for any of the three companies.

The petitioner's case in each of the winding-up proceedings

31. It was submitted on behalf of CSC that the petitioner is confined to the heads of complaint set out in the petition and cannot rely on any new head not fairly covered by the petition (In re Fildes Bros. Ltd. [1970] 1 WLR 592 at 597G to 598D). The question therefore is whether on the pleaded case there is a good prima facie case for a winding-up order to be made for each of the companies on the just and equitable ground.

32. In respect of Boldwin and BF, it is alleged in the petitions that it was the basic understanding of both LWD and CSC, and certainly the expectation of LWD, that she would participate in the general management of these companies and be consulted on general policies and other major decisions, as Boldwin was formed as a result of her decision to establish a company to engage in the construction business to take advantage of her family background and business connections in real estate development, and BF was formed as a result of a decision made by her and CSC that a new company owned by them alone was to take over the business of Boldwin. In each of the petitions, it is alleged that CSC has acted in breach of his fiduciary duties as a director and the basic understanding and expectation of LWD and Junestar as aforesaid, causing LWD and Junestar to lose all trust and confidence in his probity, good faith and competence. It is further alleged that CSC has refused to allow LWD to take any effective part in the management of either Boldwin or BF, that the affairs of Boldwin and BF have been conducted and continue to be conducted by CSC in a manner oppressive and unfairly prejudicial to the interests of the petitioners, and that the mutual co-operation and participation which formed the underlying basis for the formation of all these companies have been replaced by suspicion and hostility. In the case of Maintain Profits and Myriad Gold, there is complete deadlock on the board of directors as LWD and CSC each holds one of the two shares in these companies and they are the only directors.

33. The contention was made on behalf of CSC that the petition to wind up Boldwin on just and equitable grounds (where no deadlock on the board of directors is alleged) is bound to fail and the argument is as follows:

(1) Junestar's complaints are in substance directed against CSC, who is only a director of Boldwin on Junestar's case as pleaded in the petition. On this pleaded case, since 1984, there was no longer any "quasi-partnership" between LWD and CSC after CSC had allegedly sold his entire shareholding in Boldwin to LWD by transferring his shares to an offshore corporate vehicle beneficially owned by LWD, namely Junestar.

(2) It has not been alleged in the petition that Boldwin is a "quasi-partnership" between Junestar and Rocky, the only shareholders of the company, or that there is any breakdown in mutual trust and confidence between Junestar and Rocky (or between their controlling shareholders), or that Rocky has excluded LWD and Junestar from participating in the management of Boldwin.

(3) In the absence of any plea of a partnership-type of relationship between the shareholders of Boldwin, upon which the company was formed, so as to give rise to mutual trust and confidence and equitable considerations, it was submitted that Junestar's petition to wind up Boldwin on the just and equitable ground is bound to fail.

34. I reject the above submission. The winding-up jurisdiction is not confined to such circumstances as have affected or would affect a person in his capacity as a shareholder (Ebrahimi v Westbourne Galleries [1973] AC 360 at 375A). As stated by Lord Wilberforce in that case, it would be impossible, and wholly undesirable, to define the circumstances in which equitable considerations of a personal character may arise between individuals, which may make it unjust or inequitable to insist on legal rights, or to exercise them in a particular way (at 379E). It is not necessary that the person against whom complaints are made as giving rise to a loss of confidence must be a shareholder. Nor is it necessary for there to be a partnership-like relationship between the shareholders to give rise to trust and confidence being reposed in the individual charged with the management of the company. I agree with Mr Poon that the three elements stated by Lord Wilberforce at 379F to G as giving rise to equitable considerations relate to just one type of company that has been conveniently labelled as "quasi-partnership". Lack of confidence in the conduct and management of a company's affairs as a ground for winding up is not confined to quasi-partnership. It may warrant a winding up in other cases if the lack of confidence is based upon sufficiently grave misconduct by those in control of the company and in particular if it foreshadows grave misconduct in the future (Re San Imperial Corporation Ltd. [1980] HKLR 649 at 653 to 654).

35. My attention was also drawn to the decision of Re Greater Beijing Region Expressways Ltd. (No.3) [2000] 3 HKC 608 at 621 to 623 in which Le Pichon J (as she then was) rejected a submission on an application to strike out a petition that there was no room for the operation of the equitable principles in Westbourne Galleries merely because independent third parties had become shareholders of the company. It was held that prima facie there is "no obvious legal impediment" to the equitable principles being applicable upon the admission of independent shareholders.

36. The petition to wind up Boldwin was put on two bases. Firstly, there is the allegation of loss of confidence in the conduct and management of the company's affairs due to grave misconduct of CSC. Secondly, there is the allegation of a partnership like relationship between LWD and CSC giving rise to mutual trust and confidence and expectation on the part of LWD to participate in the general management and be consulted on important matters, and that there was breakdown of trust and confidence and wrongful exclusion of LWD from any effective part in the management. On either basis, I am not satisfied that the petition to wind up Boldwin on just and equitable grounds is bound to fail.

The beneficial ownership of shares

37. As I have mentioned earlier, there is a dispute as to the beneficial ownership of the shares in Boldwin registered in the name of Junestar, and the one share in Maintain Profits and in Myriad Gold held by LWD, and this is the subject matter of HCA No. 2623 of 2001. It was submitted by Mr Poon that the dispute in the beneficial ownership of these shares is irrelevant to the applications for appointment of provisional liquidators. There is no dispute that all three petitions were presented in compliance with section 179(1) of Cap. 32 in that each petition was presented by a contributory and creditor.

38. CSC has filed evidence in these applications deposing to matters in support of his case that he is the beneficial owner of all or virtually all of Junestar's shares in Boldwin, alternatively 50% of these shares, and his contention that LWD holds one share each in Maintain Profits and Myriad Gold on his behalf. I do not propose to set out his evidence in this respect. On the documentary evidence, it is not in dispute that CSC's shares in Boldwin were sold to Junestar in February 1985 and that LWD is the registered shareholder of all the shares in Junestar. What CSC has alleged in his affirmations has yet to be tested in cross-examination. I am unable to accept at this stage that the evidence he has adduced is so "obviously cogent" as to render LWD's assertion that she is the beneficial owner of all the shares in dispute wholly unbelievable.

39. The dispute as to the beneficial ownership of the shares is to be resolved in HCA No. 2623 of 2001. For the purpose of the applications that I am concerned with, so long as I am not satisfied that the strength of LWD's allegation on beneficial ownership is weakened to such an extent that a prima facie case is not made out for a winding-up order, it would not be relevant here. Nor do I think it relevant in the present applications to have regard to the rule of practice that where there is a genuine dispute on the ownership of shares, that dispute should be resolved before the winding-up petition is heard although the court retains a discretion whether to allow that issue to be determined in the context of the petition.

Allegations of misconduct

40. I turn to the allegations of grave misconduct and misfeasance alleged against CSC. It is necessary to go into them in some detail as it is disputed by CSC that LWD has made out a good prima facie case for a winding-up order on the basis of these allegations. Also, the allegations of grave misconduct serve an additional purpose here in that LWD relies on them to justify the appointment of provisional liquidators and the granting of a Mareva injunction in that there is a need to displace CSC from his position of authority to deal with the assets of Boldwin and BF in view of his misfeasance and breaches of fiduciary duty to ensure that the status quo of the assets is preserved pending the resolution of the dispute.

41. It is the case of LWD that she was first alerted to CSC's misconduct in the management of Boldwin and BF in about late May 1999 when she learned through her daughter Ann that CSC had deposited into Boldwin's account a substantial number of banknotes totalling in excess of HK$35 million. This caused LWD to take steps to investigate the affairs of Boldwin and BF. Initially she wrote to CSC seeking information and explanation on various matters. Later, she instructed solicitors to write to CSC. When CSC replied by his solicitors refusing LWD's request to inspect the books and records, LWD brought proceedings against CSC in February 2001 in HCMP Nos. 702 and 703 of 2001 to assert her right to inspect the books and records as a director of Boldwin and BF. By the orders made by the Court of Appeal on 7 September 2001, LWD was allowed to inspect the books and records of both companies. The orders were amended on 17 September 2001 to enable the agents of LWD to take copies of the documents and accounts stored in computer disks. PricewaterhouseCoopers ("PwC") were engaged by LWD to assist her in reviewing the books and records of the companies and they set out their findings in a report dated 7 February 2002 ("the PwC report") and a supplemental report dated 4 March 2002 ("PwC's 1st supplemental report"). The writ in HCA No. 1036 of 2002 was issued on 15 March 2002 and the petitions for winding up were presented on 2 April 2002. The allegations of misconduct against CSC pleaded in the petitions and the Amended Statement of Claim in HCA No. 1036 of 2002 are based on the results of investigation in the reports of PwC.

42. I will deal with the allegations of misconduct against CSC in respect of Boldwin, followed by the allegations of misconduct concerning BF.

Allegations of misconduct as regards Boldwin

Alleged misappropriation of over HK$40 million

43. I will first set out the basic facts, which are not in dispute.

44. On 27 May 1999, CSC caused to be prepared and delivered to the Hang Seng Bank Limited ("Hang Seng") a document entitled "Extract from the minutes of the meeting of the Board of Directors of Boldwin Construction Co. Ltd.", which is to the effect that a meeting of the board of directors of Boldwin had been held on 27 May 1999 at its registered office and that it had been resolved by the directors that Hang Seng be requested to allow Boldwin to withdraw two fixed deposits in the respective sums of HK$20,015,342.47 and HK$20,075,890.90 before their dates of maturity and that CSC be authorised to sign the requests for the premature withdrawal and to accept the terms imposed by Hang Seng for such withdrawals. The extract from the minutes was signed by CSC purportedly as the chairman of the meeting and by Miss Choi Shun Lai Sally purportedly as the company secretary. No board meeting of Boldwin was held on 27 May 1999 and the company secretary of Boldwin at the time was G.E. Secretaries Limited, a subsidiary of Great Eagle Holdings Limited. Miss Choi was the financial controller of Boldwin.

45. On the same day, CSC also caused to be prepared and delivered to Hang Seng documents instructing Hang Seng to credit the proceeds of the two fixed deposits to the account of Andreas at Hang Seng.

46. In accordance with the above documents, Hang Seng terminated the two fixed deposits of Boldwin on 27 May 1999 before their dates of maturity and credited the aggregate sum of HK$40,091,233.37 to the bank account of Andreas.

47. Upon receipt of HK$40,091,233.37, Andreas on the same day by way of a cheque drawn on its account with Hang Seng and signed by CSC as its authorised signatory paid to Worldsec International Limited ("Worldsec"), a securities trading company at which CSC or companies controlled by CSC maintained securities trading accounts, the sum of HK$39,354,023.05, in settlement of sums owed to Worldsec by CSC or Silver Cumulus Holdings Limited ("Silver Cumulus"). Silver Cumulus is a shelf company incorporated in the British Virgin Islands; it was acquired by G.E. Secretaries Limited for CSC on 24 May 1999 and is solely controlled by him.

48. The sum of HK$40,091,233.37, which was paid to Andreas, was not recorded in the account of Andreas in the ledgers of Boldwin. Instead, this was entered and recorded in the books of account of Boldwin as payments made to Junestar in the form of debits to the account of Junestar with Boldwin.

49. It is alleged by LWD that at no time was CSC authorised by Boldwin or its board of directors to request the premature termination of the two fixed deposits or to give instructions to Hang Seng to transfer the proceeds to the account of Andreas. The premature termination of the fixed deposits and the diversion of the proceeds were made for an improper purpose, namely, to benefit CSC personally. It is further alleged that the debit entry in the current account of Junestar with Boldwin was in breach of CSC's duty as a director to keep proper books of account under section 121 of Cap. 32 and was done to conceal the misappropriation of funds. Mr Poon has submitted that this misappropriation of funds demonstrates the blatant disregard by CSC of the distinction between the assets of a company and those of his own, and this distinction, which is of supreme importance, must be observed and maintained between an incorporated company's legal entity and its actions, assets, rights and liabilities on the one hand, and the individual shareholders and their actions, assets, rights and liabilities on the other hand (Bank Voor Handel en Scheepvaart N.V. v Slatford [1953] 1 QB 248 at 269 to 271).

50. CSC's answer is that his handling of the financial affairs of Boldwin was in accordance with the long-standing practice accepted throughout the years by all concerned. In his Defence in HCA No. 1036 of 2002, he pleaded that LWD had by conduct assented to and authorised his practice to draw from Boldwin against the shareholder's account of Junestar for his personal use and investments. There was also an accepted practice, reached as a result of an "understanding" between CSC and Chan Wai Lim in about April 1994, that Junestar and Rocky would keep deposited in their respective accounts with Boldwin the very substantial amounts of dividends declared by Boldwin from 1994/95 onwards and the shareholders would be at liberty to draw on their respective accounts as long as they were in credit and provided that the drawings would not create any cash flow problem for Boldwin. LWD would appear not to have been involved in this "understanding" between CSC and Chan Wai Lim. Even if there were an "understanding" between CSC and Chan Wai Lim, it is not entirely clear on CSC's case as formulated how this could be regarded as constituting the consent of all the shareholders, namely, Junestar and Rocky, so as to invoke the principle in In re Duomatic Ltd. [1969] 2 Ch. 365 and the Australian decision of Swiss Screens (Australia) Pty. Ltd. v Burgess (1987) 11 ACLR 81 that the informal assent of all shareholders who have a right to attend and vote at a general meeting of the company would be as binding as a resolution in a general meeting. I should point out that it is LWD's case that the dividends declared were on lent to Boldwin by Junestar and Rocky as the shareholders were informed by CSC that Boldwin would need to borrow money from them as additional working capital and that the shareholder's loan from Junestar had been repaid to the extent of HK$30,004,983.95 in April 1998, leaving outstanding an amount of HK$80 million odd.

51. Particulars of LWD's knowledge of CSC's drawings and of Ann's knowledge as imputed to LWD (on the basis that she is the "confidante" of LWD) are pleaded in paragraphs 27 and 29 of the Defence. I do not propose to set out these particulars except to observe that the particulars of knowledge do not strike me as very cogent on the face of it, nor do they support an allegation that all previous drawings made by CSC from Boldwin against Junestar's account for his personal investments in securities as set out in Annexure 1 of the Defence were with LWD's knowledge and consent. I also note that the previous drawings made from Boldwin against Junestar's account as set out in Annexure 1, even if made with the knowledge and consent of LWD, were a long way from the magnitude of HK$40 million. Besides, even if LWD had consented to CSC withdrawing money from Boldwin for his personal investments, two of the directors cannot help themselves to the funds of the company in this manner, as this would be contrary to the principle that the assets of a company do not belong to its shareholders.

52. Further in answer to this, CSC has alleged that in the latter part of May 1999, he wanted to use Andreas to make a substantial purchase of shares as his personal investment in the value of HK$70 million to HK$100 million and that he had, on or about 24 May 1999, when the marital relationship was apparently falling apart, made known to LWD this proposed investment. As LWD stated she would prefer CSC to cause the investment to be carried out through a new foreign corporation and not Andreas, she instructed G.E. Secretaries Limited to acquire a company for CSC and this was Silver Cumulus. CSC then purchased HK$70 million worth of shares in the name of Silver Cumulus and HK$39,354,023.05 was required to settle the margin amount in the securities trading account of Silver Cumulus with Worldsec by 26 May 1999.

53. As a bank account could not be opened in the name of Silver Cumulus with the Kincheng Banking Corporation ("Kincheng") at the time, CSC deposited the money he had borrowed to settle in part the margin amount into the bank account of Boldwin with Kincheng. Banknotes of HK$6 million were thus deposited on 25 May 1999 and banknotes in two portions of HK$10 million and HK$9 million were deposited on 26 May 1999. As the borrowed funds were insufficient to settle the margin amount, in accordance with the "accepted practice", CSC instructed the staff of Boldwin to give instructions to Hang Seng to transfer to Andreas' account with Hang Seng the proceeds of two other fixed deposits held by Boldwin in the total sum of HK$40,099,311.87. Unknown to him, LWD had given instructions to Hang Seng on 26 May 2002, the day before she left the matrimonial home with Ann, to withdraw these two fixed deposits totalling HK$40,099,311.87 and to transfer the funds to Junestar's account with Hang Seng (it is LWD's case that this withdrawal was a further repayment by Boldwin of part of the outstanding sum in respect of the shareholder's loan from Junestar). When CSC discovered on 27 May 1999 the proceeds of the other two fixed deposits had been transferred to Junestar instead of Andreas, and that Hang Seng would decline to honour the cheque he drew on Andreas' account in the sum of HK$39,354,023.05 in favour of Worldsec if Andreas was not put in funds within a short time, CSC instructed the staff of Boldwin to uplift the two fixed deposits in question in the total sum of HK$40,091,233.37 by premature withdrawal and to transfer the proceeds to Andreas. Again, this was done in accordance with the "accepted practice". Further, CSC had on or about 17 June 1999 deposited into Boldwin for the credit of Junestar's account the sum of HK$28 million from the moneys he had borrowed to fund his investment in shares.

54. Whether CSC's case of an accepted practice is made out is a matter to be resolved at the trial. If his allegation were accepted that there was a settled and accepted course of conduct agreed between Junestar and Rocky for each shareholder to draw money from Boldwin freely against the dividends each has kept deposited in its respective accounts of Boldwin, and that there was also a settled and accepted practice between CSC and LWD for CSC to draw money from Boldwin freely under Junestar's account for his personal benefit, it may be that LWD and Junestar cannot rely on CSC's withdrawals as grounds for complaint (In re Fildes Bros. Ltd., supra. at 596H to 597D; Ho Tung v Man On Insurance Co. Ltd. [1902] AC 232 at 236). At this stage, I do not regard the evidence of the settled and accepted practice as sufficiently cogent. Mr Poon has drawn my attention to the discrepancies regarding the alleged accepted practice between Junestar and Rocky as presently formulated and what CSC has deposed to in paragraph 33 of his 1st affirmation filed in HCMP No. 703 of 2001. It is not apparent why two fixed deposits of about HK$20 million each had to be uplifted on 27 May 1999 when CSC had at his disposal HK$25 million in banknotes being borrowed funds by 26 May 1999 and the amount of margin payment required was only HK$39 million. I also note that of the HK$40 million odd withdrawn on CSC's instructions for his personal benefit, only HK$28 million was repaid to Boldwin. My provisional view is that a prima facie case of misappropriation of assets has been made out.

Alleged wrongful payment of bonus salary to CSC and interest to Rocky

55. The basic facts, which are not in dispute, may be set out as follows.

56. In a document purporting to be the minutes of a meeting of the board of directors of Boldwin held at its registered office on 30 July 1999 ("the 1st minutes"), it was stated that LWD was present at the meeting, that the board of directors had resolved a bonus salary was to be awarded to CSC as the managing director of Boldwin since its founding in 1977, and that such bonus was to be calculated at the rate of 12.5% of the accumulated net audited profit of Boldwin as from the first fiscal year of Boldwin. The 1st minutes were signed by CSC purportedly as chairman of the meeting and were shown to LWD by Chan Wai Lim. No such meeting was in fact held, nor was LWD present at any such meeting. LWD objected to the 1st minutes in her letter to Chan Wai Lim on 6 August 1999.

57. In another document purporting to be the minutes of a meeting of the board of directors of Boldwin held at its registered office on 14 August 1999 ("the 2nd minutes"), it was stated that CSC, LWD, Chan Wai Lim and Lo Hung Suen were present at the meeting with CSC elected as the chairman and that the board of directors had resolved (1) that a bonus salary of HK$23,503,273.30 was to be awarded to CSC for his service as the managing director since the founding of Boldwin up to 1998 calculated at the rate of 12.5% of the net annual audited profit of Boldwin; and (2) that as from 15 June 1999, interest would be paid to all directors' accounts and shareholders' accounts with Boldwin at the rate of 8% per annum on the credit balance of such accounts. The 2nd minutes were signed by CSC purportedly as the chairman of the meeting. No meeting was in fact held on 14 August 1999, nor was LWD present at any such meeting. LWD objected to the 2nd minutes by her letters to CSC and the board of directors of Boldwin dated 16 and 19 August 1999 respectively.

58. In a third document purporting to be the minutes of a meeting of the board of directors of Boldwin held at its registered office on 14 August 1999 ("the 3rd minutes"), it was stated that LWD, CSC and Chan Wai Lim were present at the meeting with CSC elected as the chairman and that the board had passed resolutions identical to those set out in the 2nd minutes. The 3rd minutes were signed by CSC purportedly as the chairman and by both CSC and Chan Wai Lim purportedly as attendants of the meeting. No such meeting was in fact held.

59. As at 15 June 1999, being the date referred to in the resolution set out in the 2nd and 3rd minutes as from which interest was payable on the credit balance of directors' and shareholders' accounts, Boldwin owed Rocky HK$78,056,082.88 as shareholder's loan. I should mention that on 14 June 1999, LWD had caused a fixed deposit of Boldwin of about HK$49 million to be uplifted and HK$40 million of the proceeds to be transferred to Junestar's Hang Seng bank account, in further repayment of the shareholder's loan from Junestar to Boldwin, thereby reducing the outstanding balance on the loan to HK$1,495,704.18. By her letter of 23 June 1999, LWD informed the other directors of Boldwin of the repayments of the shareholder's loan of Junestar in the total sum of HK$80,099,311.87 and, at the same time, urged the board to forthwith repay the shareholder's loan of Rocky out of Boldwin's surplus funds not immediately required for the company's business. Between 10 August 1999 and 5 September 2000, a total of HK$49 million was repaid by Boldwin to Rocky.

60. By a cheque dated 19 August 1999 drawn on the account of Boldwin in Kincheng and signed by CSC, Boldwin paid to CSC HK$23,503,273.30 as bonus salary for managing director from 1976 to April 1998. Interest on Boldwin's indebtedness to Rocky calculated at 8% per annum in the sum of HK$6,962,145.83 was credited to an interest payable account in the books and records of Boldwin from 15 June 1999 to 31 March 2001, although no actual payment has been made.

61. Quite apart from the fact that no such meetings of the directors were held as stated in the 1st, 2nd and 3rd minutes, it is LWD's case that the resolution purportedly passed to pay bonus salary to CSC was unlawful as it was in breach of Article 49 of the Articles of Association of Boldwin which prescribes that bonus must be paid out of net profits and there was no net profit available for this purpose when the resolution was purportedly passed. It is stated in the 1st report of PwC that Boldwin had suffered heavy losses from 1998 to 2000 resulting in a fundamental uncertainty to prepare its accounts on a going concern basis, as it had recorded net accumulated losses of approximately HK$270 million by the end of 31 March 2000. The resolution to award bonus salary was in breach of Article 49 in another respect, as this article requires the approval of Boldwin in general meeting for the payment of any bonus, and no such general meeting was held. Both the resolutions to pay bonus salary and interest on the credit balance of directors' and shareholders' accounts were in contravention of Article 43 and section 162(1) of Cap. 32 in that neither CSC nor Chan Wai Lim, who was interested in one or the other of the resolutions, had disclosed to the board their respective interests at or before the passing of such resolutions. Further, even if a meeting of the board of directors were held between CSC and Chan Wai Lim as stated in the 3rd minutes, such meeting was inquorate and in breach of Article 37 in that Article 43 declares that any director who is interested in any contract, arrangement or dealing shall not vote and shall not be counted as part of a quorum when any such contract, arrangement or dealing is under consideration.

62. It is alleged by CSC that the payment of HK$23.5 million as bonus salary to himself was discussed between CSC, LWD and Chan Wai Lim on no less than two occasions after LWD had left the matrimonial home when they still attended regular family gatherings at the residence of LWD's parents and that all three had agreed in principle for CSC to be paid HK$1 million a year for each of the 23 years when he served as managing director. The 1st minutes were prepared by Miss Choi on the instructions of CSC in accordance with this agreement in principle. Subsequent to the 1st minutes, Chan Wai Lim raised with CSC that interest should be credited to the dividends which Rocky had kept deposited in its account with Boldwin. CSC therefore instructed Miss Choi to prepare the 2nd minutes, which recited that CSC, LWD, Chan Wai Lim and Lo Hung Suen were present at the directors' meeting. The 2nd minutes were discussed and agreed to by CSC, LWD and Chan Wai Lim when they met at another family gathering. They also agreed to sign a revised version of the minutes which would recite that only CSC, LWD and Chan Wai Lim were present. Hence, the 3rd minutes were prepared by Miss Choi. However, LWD refused to sign the 3rd minutes in breach of her agreement to do so.

63. It was submitted by Mr Poon that the alleged agreement of LWD to award bonus salary to CSC is plainly inconsistent with contemporaneous documents, namely, the letters written by LWD to Chan Wai Lim and CSC objecting to the 1st and 2nd minutes and these letters were not refuted by CSC at the time. Further, it has not been denied that the resolutions purportedly passed were in breach of various provisions in the Articles of Association. I note also that the allegation that LWD had agreed various things with CSC and Chan Wai Lim on several occasions at the family gatherings is at odds with paragraphs 62 and 63 of the 1st affirmation of CSC in HCMP No. 703 of 2001 in which he stated there was a "communication blockade" and that he was unable to talk to LWD on any of these occasions due to the intervention of Ann Chan.

64. On this allegation, my provisional view is that a prima facie case of misappropriation of assets of Boldwin has been made out by LWD and Junestar.

Alleged unlawful payments to CSC's brothers, securities trading companies and for the purchase and maintenance of a horse

65. It is not in dispute that between 1 April 1996 and 16 August 1999, CSC had used the funds of Boldwin to make various payments for his personal purpose unrelated to the interest of Boldwin. The total amounts involved were HK$14,842,576.16 and the facts are as follows.

66. Between 1 April 1996 and 16 August 1999, CSC had caused to be withdrawn from Boldwin a total amount of HK$501,500.00 in cash, of which HK$241,500.00 were paid to his two brothers and the balance of HK$260,000.00 were withdrawn by him for unknown purpose.

67. Between 13 July 1996 and 16 April 1999, CSC had caused the funds of Boldwin in the aggregate amount of HK$13,681,578.07 to be paid to various securities trading companies in settlement of sums owed to them by CSC or by companies solely under his control for his personal investments in securities.

68. Between 11 December 1998 and 13 January 1999, CSC caused Boldwin to pay a total sum of HK$659,498.09 for his purchase of a horse and its maintenance.

69. All the above payments were entered and recorded in the books of account of Boldwin as payments made to Junestar in the form of debits to its current account with Boldwin.

70. LWD claims that she only became aware of these payments as a result of the PwC report, they were made without authority and CSC was simply treating the assets of Boldwin as his own.

71. CSC's answer is that there was an accepted and settled practice between Junestar and Rocky for Junestar to withdraw money from Boldwin against the shareholder's account of Junestar, that there was also an accepted and settled practice between CSC and LWD for CSC to draw against Junestar's account with Boldwin for his personal use, and that all the above drawings were made in accordance with accepted practice. CSC further stated that the drawings were subsequently set off by re-deposits made by him to Boldwin for the credit of Junestar's account, the particulars of which are set out in Annexure 2 to his Defence in HCA No. 1036 of 2002. According to Annexure 2, of the total amount he had withdrawn to pay for his investments in securities being HK$13,681,578.07, CSC had re-deposited a total of HK$10,263,989.99 to set off such drawings. It is alleged that some of the drawings were clearly known to LWD, "on the face of the books and records of Boldwin", and also because LWD claims to be the sole proprietor of Bold Win Securities Company, being one of the securities trading companies through which CSC carried out his investments in securities (it is CSC's case that Bold Win Securities Company was jointly owned by CSC and LWD beneficially). It is further alleged that LWD had assented to and authorised all the drawings (there were quite a number of them) in that a cheque dated 30 October 1997 drawn on Boldwin for HK$600,000.00 in favour of a securities trading company was signed by LWD jointly with CSC, that the vouchers of three other payments to securities trading companies were checked and approved by Ann Chan who was CSC's personal assistant in Boldwin at the time and she had signed a cheque for one of these transactions jointly with Miss Choi, and that the vouchers of the payments made for the purchase and maintenance of a horse were checked and approved by Ann Chan.

72. I have dealt with CSC's case on accepted practice in the earlier parts of this decision and his allegations of knowledge on the part of LWD and Ann's knowledge to be imputed to LWD. Suffice it to say at this stage I am of the provisional view that a prima facie case of misappropriation of Boldwin's assets by CSC has been made out.

Alleged unlawful payments in respect of a property

73. The basic facts relating to this complaint, which are not disputed, are as follows.

74 . Between 27 June 1998 and 10 September 1998, CSC caused Boldwin to pay a total sum of HK$309,623.16 to various suppliers and contractors in respect of renovation work carried out to a property in Hong Lok Yuen, Tai Po, New Territories, which was owned by Krupton Limited, and the shares of which are held by the senior project manager of Damen Limited and his wife. Damen Limited is a member of the Cheung Kong Group and was the employer of Boldwin in the construction project at Tin Shui Wai. A substantial part of the payments made was for building a tennis court in the property.

75. It is alleged by LWD that CSC made the payments for the above renovation work with a view to offering an advantage to the project manager as an inducement or reward for favouring or facilitating Boldwin in doing business with the Cheung Kong Group.

76. It is denied by CSC that the payments were made for the alleged improper purpose. He claims that the project manager had requested Boldwin to convert the yard in his property into a golf practice area and to carry out some renovation works inside the house. CSC delegated the job to an employee of Boldwin who mistakenly arranged for the yard to be converted into a tennis court instead of a golf practice area and the cost of the works had far exceeded the amount the customer had intended to spend. As a result, Boldwin did not seek payment from the project manager of any of the costs it had paid to its sub-contractors.

77. It is not alleged by CSC that the project manager had rejected the finished work, assuming that the work was done by mistake. On a provisional basis, I am not prepared to say that a prima facie case of misconduct on the part of CSC has not been made out.

Interest-free loans to a sub-contractor

78. It is not in dispute that between 8 December 1993 and 6 July 2000, CSC caused Boldwin to lend to Chan Chi Kuen, a sub-contractor of Boldwin, interest-free loans without any security or agreed terms of repayment. Only one repayment of HK$212,800.00 was made during 1993/94. The balance outstanding from April 1997 to July 2000 was HK$797,000.00. The entire outstanding sum was repaid on 6 July 2000.

79. It is alleged by LWD that the loans were made without the knowledge or consent of the board of directors and that CSC had failed to act bona fide in the interest of Boldwin in granting the interest-free loans to this sub-contractor.

80. CSC claims that this sub-contractor was extremely valuable to Boldwin and they had a very successful business relationship since 1979. The loans were made to ease "minor cash flow problems" of the sub-contractor from time to time and they were made in the best interest of Boldwin in view of its business relationship with the sub-contractor.

81. This seems to me to be a relatively minor complaint, if established. I do not propose to take this into account for the purpose of the present applications.

Alleged misuse of Boldwin's bank account

82. It is not in dispute that over a period of eleven days between 25 May 1999 and 4 June 1999, CSC caused to be deposited into Boldwin's account at Kincheng a substantial number of banknotes not belonging to Boldwin in the total sum of HK$35,800,000.00. Each of the cash deposits was recorded in the books of account of Boldwin as a credit entry in the current account of CSC as a director. On 2 June and 14 June 1999, two cheques signed by CSC were drawn on Boldwin's account made payable to CSC, in the respective sums of HK$7,800,000.00 and HK$28 million, causing the entire amount deposited to be withdrawn. On 17 June 1999, CSC drew a cheque on his personal account at Kincheng in favour of Boldwin in the amount of HK$28 million. This was recorded in the books of account of Boldwin as a credit entry in the current account of Junestar.

83. On 8 June 1999, LWD issued a notice convening a meeting of the board of directors on 22 June 1999 for the purpose of considering CSC's use of Boldwin's bank account in the manner aforesaid. The meeting was aborted, as all the other directors did not attend. LWD also sought an explanation of the above transactions from CSC in her letters dated 23 June 1999, 5 July 1999 and 5 August 1999. No explanation was given by CSC.

84. CSC stated that the amount of HK$35,800,000.00 in banknotes were borrowed by him to make a substantial purchase of shares as his personal investment in late May 1999 in the value of HK$70 million to HK$100 million as mentioned earlier. The funds were deposited into Boldwin's bank account because a bank account could not be opened for Silver Cumulus. Further, as Silver Cumulus did not have an account in the ledgers of Boldwin, the amount deposited was credited to the director's account of CSC with Boldwin. It would appear that he first provided an explanation that the aforesaid deposits and withdrawals were for his investments in stocks only in paragraph 31 of his 1st affirmation in HCMP No. 703 of 2001 filed on 22 February 2001, in which he also alleged that LWD had been fully informed by him of the use of Boldwin's bank account in that manner.

85. It is highly unusual for such a large amount of money to be deposited in banknotes within such a short period of time. So far, CSC has made no mention of the ultimate source of these funds. It is not apparent why, instead of his personal bank account, Boldwin's bank account was used for the alleged purpose. He gave no explanation at the time despite LWD's repeated requests. His allegation that LWD was fully informed of his use of Boldwin's bank account does not tally with contemporaneous documents being the notice to convene a directors' meeting and the letters of LWD. I am inclined to think that a prima facie case of misconduct has been made out for this complaint.

Other misfeasant acts as alleged

86. These other misfeasant acts as alleged relate to CSC's management of the construction projects of Boldwin. In summary, it is alleged that in breach of his fiduciary duty, CSC had caused Boldwin to give substantial discounts to the employers in the net tender sum of the projects; that Boldwin was subject to substantial claims by the employers of liquidated and ascertained damages ("LADs"), substantial variations claims have remained uncertified, and final accounts in respect of projects have not been settled due to the mismanagement of the projects.

87. Regarding the giving of substantial discounts, it is accepted by Mr Poon that there is an error in paragraph 61 of the petition and in paragraph 40 of the Amended Statement of Claim in HCA No. 1036 of 2002 in that it is alleged that Boldwin gave to the employers substantial discounts to "the net contract sum". This should have been "the net tender sum", being the gross tender sum less the provisional sums for the works undertaken by the subcontractors and suppliers of Boldwin. Further, the total amount of discounts given for eight projects, in the sum of approximately HK$136,150,000.00, would have been equivalent to an effective percentage of 4.72% of the original tender sums, not 6.29% as pleaded.

88. It is not in dispute that CSC was the only person in Boldwin to deal with all commercial negotiations on financial matters throughout the tender stage, construction stage, and up to the final account stage, with both the employers and sub-contractors. Discounts were offered either at the time when a tender was submitted or after tender negotiations with the employers. It is recognised in the PwC report that due to the highly competitive nature of the construction industry, the giving of discounts to procure construction projects is "not unusual". What gave rise to concern, according to the PwC report, is the magnitude of the discounts offered, considering that the profit margins for main contractors are typically low.

89. CSC engaged his own experts in the construction industry to give a report dated 4 July 2002 ("the Molloy report") providing their comments to the relevant sections in the PwC report. PwC made a second supplemental report dated 15 July 2002 in response to such comments ("PwC's 2nd supplemental report"). The findings in the Molloy report as to the total amount of discounts offered by Boldwin are in line with those stated in the PwC report. I should also point out that in PwC's 2nd supplemental report, it is accepted that the giving of discounts by Boldwin does not "necessarily" reduce the profit margin of Boldwin as it had obtained cheap prices from its domestic sub-contractors to help it to procure the projects.

90. Has a prima facie case been made out that CSC was in breach of fiduciary duty in offering discounts in the total sum of about HK$136 million? There is insufficient evidence at this stage to support CSC's contention that without such substantial discounts, members of the Cheung Kong Group would not have awarded the contracts to Boldwin. On the basis of the magnitude of the discounts given, I am persuaded that a prima facie case has been made out for this complaint.

91. I turn to the substantial claims for LADs by the employers. This would need to be considered in conjunction with Boldwin's claims for extension of time ("EOT"). The case as pleaded in the petition and the Amended Statement of Claim is based on the findings in the PwC report. This report was prepared on the basis of the documents inspected by PwC between 13 and 25 September 2001. After September 2001, there had been EOT approvals and additional payment certifications, causing the potential liability of Boldwin to the employers for LADs to be reduced by some HK$277 million to about HK$169 million.

92. I will take the figures from the Molloy report as this was prepared with the benefit of subsequent information.

93. It is alleged by LWD and Junestar that the substantial potential liability of Boldwin to the employers for LADs was due to mismanagement of the projects in several respects being the failure to deliver most of the construction projects on time and by the date for practical completion, the failure to comply with time bar provisions in the main contract agreements in submitting claims for EOT, the failure to submit proper claims for EOT in that the claims submitted do not address the issues of entitlement and programme criticality adequately, the failure to identify causes of delay to allow LADs to be passed through to domestic or nominated sub-contractors. Further, it is alleged that Boldwin had failed to monitor properly the quality of the works of the sub-contractors in various projects in that a total sum of about HK$52,448,000.00 had been deducted by the employers, and that Boldwin had failed to finalise the accounts for a number of projects which have long been completed with the result that substantial payments for the works done remain outstanding. One of the criticisms in the PwC report is that basic project control tools in the form of computer software have not been used to update and monitor construction programmes in view of the size and complexity of the projects.

94. The author of the Molloy report has reached a different conclusion in that he does not consider that the procedures adopted by Boldwin had resulted in significant financial risk to its financial position. According to his findings, in order to maintain good business relationship with the Cheung Kong Group, CSC and his staff have not adopted a "claim conscious and contentious approach" in running the projects with the employers. That is why only a small team of quantity surveyors were employed in dealing with contractual and EOT matters. In some instances, EOT claims were submitted only after the employer's representative had confirmed the date of practical completion (not forthwith upon it becoming reasonably apparent that the progress of the works is delayed, as provided in some of the contracts) for two reasons. Firstly, CSC and the Cheung Kong had been adopting a "partnering approach" in carrying out the projects, so the employers had seldom imposed LADs against Boldwin notwithstanding there was delay, and the EOT claims submitted were not used to assert the contractual rights and entitlement of Boldwin but merely as a tool for commercial negotiation in reaching a fair settlement of the final accounts with the employers. Secondly, it is claimed that as EOT claims were used as a tool for negotiation, it was difficult to know how much EOT Boldwin would need to apply for until the employer's representative had confirmed the date of practical completion. The author of the Molloy report claims that this is the "normal approach" adopted by most developers and contractors in Hong Kong as major developers dislike claim conscious contractors. Further, events subsequent to the inspection of documents by PwC have shown that the employers have approved claims for EOT for most of the projects, notwithstanding they were not submitted within the contractual time limit.

95. As for the amount deducted by the employers for defective work of the sub-contractors in the sum of HK$52 million odd, this represented only 2% of the combined value of the projects involved. The author of the Molloy report does not consider the percentage deducted to be excessive or unusual. Besides, corresponding amounts have been withheld by Boldwin from payments due to the sub-contractors, so the effect on Boldwin's financial position would be minimal.

96. Regarding the delay in finalising accounts, the author of the Molloy report is of the view that there is very little the main contractor can do as it is for the employer's quantity surveyors to deal with variation valuations and to finalise accounts. Further, it is common for final accounts to remain outstanding two or three years after completion of the work.

97. I note that according to the Molloy report, since the commencement of the present proceedings, the attitude of the representatives of the Cheung Kong Group has become "more contractual" in that the claims for EOT have been scrutinised and some of the claims have been rejected. The author of the report recognises there is a need for "detailed and substantiated claims" to be produced if Boldwin's claims are to be preserved and for that reason, he recommends that key staff, including CSC, should be retained.

98. There is no dispute that the projects have not been administered by Boldwin strictly in accordance with the contractual provisions, as it is the gravamen of the Molloy report that things were done in an "informal and non-contractual manner" and it was sought to justify the "non-adversarial attitudes" adopted.

99. It seems to me that the practice of Boldwin to submit claims for EOT well after the contractual time bar and after the dates for practical completion is a risky practice. Further, the claims submitted do not appear to have contained adequate particulars, as recognised in the Molloy report. The claims for EOT have not been settled as yet. It is not known how the employers would resolve this, now that they appear to have become "more contractual". I am not expressing any views on the merits of the employers' claims against Boldwin for LADs. I am of the provisional view that there is a prima facie case CSC was in breach of his fiduciary duties in that the construction projects had not been administered in accordance with the contractual provisions.

The audited accounts

100. The complaint is that as the director responsible for the day-to-day affairs of Boldwin, CSC was in breach of sections 122(1), (1A) and (2) of Cap. 32 in that none of the audited financial statements of Boldwin comprising both profit and loss accounts and the balance sheets for the years ended 31 March 1997, 1998, 1999 and 2000 were laid at its annual general meetings during the statutory period as none of such annual general meetings were ever convened. The last annual general meeting of Boldwin was held on 30 December 1996.

101. After LWD was alerted to CSC's mismanagement of Boldwin in late May 1999 as alleged, she had requested for information on the audited accounts on several occasions when she was provided with the audited financial statements for the years ended 31 March 1999 and 2000. In the auditors' report to the annual accounts for these financial years, the auditors made a disclaimer of opinion as to whether the financial statements gave a true and fair view of the company's affairs due to the limited evidence made available to them concerning in particular the validity and correctness of the amount of LADs payable to the employers for the delay in completion of the construction projects undertaken. LWD requested for information and explanation in view of the auditors' qualifications. CSC did not answer or did not answer adequately the queries she raised on the audited accounts. Her attempts to seek such information at meetings of the board of directors were likewise unsuccessful, as the meetings were either aborted or adjourned by CSC.

102. In the draft audited accounts dated 5 March 2002 for the financial year ended March 2001, the auditors stated that they were unable to obtain information and explanation from the directors as to how they have satisfied themselves that Boldwin will be able to meet in full its financial obligations as they fall due in the foreseeable future and how they have satisfied themselves that it is appropriate to prepare the financial statements on a going concern basis. The auditors made a disclaimer of opinion as they had done for the previous years.

103. The above matters would appear not to have been disputed by CSC.

Denial of access to documents

104. This relates to the attempts of LWD to inspect the books and accounts of Boldwin and BF in 2000 and 2001, which were blocked by CSC and which led to the proceedings brought by LWD in HCMP No. 702 and 703 of 2001 February 2001. Eventually, it was ordered by the Court of Appeal on 7 September 2001 that CSC should forthwith provide to LWD and her agents all books and accounts of Boldwin and BF for inspection and for copies to be taken.

No annual general meetings or properly constituted board of directors

105. By section 111 of Cap. 32 and Article 22 of the Articles of Association of Boldwin, a general meeting is required to be held once every year as its annual general meeting and not than 15 months shall elapse after the holding of the last annual general meeting. As mentioned earlier, no annual general meeting of Boldwin has been held since 30 December 1996.

106. It is provided in Article 38 of the Articles of Association that the directors shall hold office for a term of one year and shall retire at the expiration of their terms of office. It is alleged in the petition that as no annual general meeting of Boldwin has been held since 30 December 1996, there is no properly constituted or elected board of directors of Boldwin since 31 December 1997, being the last day on which the 1997 annual general meeting should have been held. I was referred by Mr Poon to In re The Bodega Co. Ltd. [1904] 1 Ch. 276 and In re Consolidated Nickel Mines Ltd. [1914] 1 Ch. 883. It is further alleged that the appointments of Tang Chun Sing and Yu Ho Yuen as additional directors are unlawful and invalid in that they were allegedly appointed at two meetings of the board of directors purportedly held on 26 March 1999 and 7 July 1999 as set out in two minutes signed by CSC as the chairman of the meetings when no such meetings were held. Further, it was stated in the minutes that Tang and Yu were elected by the "subscribers" of Boldwin. By 1999, the subscribers of Boldwin, being LWD and CSC, had long ceased to hold any subscriber share or to be the registered holder of any share in Boldwin.

107. The complaint here is that there is no properly constituted board of directors for Boldwin, although there are de facto directors who have been discharging the functions of directors. The petitioner's position is that it would not be right to allow the de facto directors to continue, in view of conflicting decisions on the effect of an irregularity upon acts affecting shareholders, such as allotting shares, making valid calls, forfeiting shares or appointing directors (see Gore-Browne on Companies, 44th ed., Vol. 2, paragraph 26.5).

108. On behalf of CSC, Mr Chang submitted that the contention that there has been no properly constituted board is misconceived on a number of grounds.

109. Firstly, it was submitted that the provisions relating to rotation of directors, being regulations 73 to 76 of Table A in the First Schedule of Cap. 32, 1975 edition, were incorporated in the Articles of Association. Regulation 76 provides that,

"the company at the general meeting at which a director retires in manner aforesaid may fill up the vacated office by electing a person thereto and in default the retiring director shall be deemed to have been re-elected unless at such meeting it is resolved not to fill up such vacated office."

It was submitted that even if some of the directors of Boldwin should retire by 31 December 1997, the retiring directors were deemed to have been re-elected pursuant to regulation 76.

110. I have reservations if the provisions on rotation of directors, including regulation 76, were adopted in the Articles of Association of Boldwin, in view of Article 38. Even if regulation 76 had been incorporated in the Articles, this provision would not apply if no general meeting of the company were held at all, in breach of Article 22 and section 111 of Cap. 32 (see Buckley on the Companies Acts, 11th ed., p. 745).

111. Secondly, it was submitted that Article 38 would not apply to CSC as he is the managing director. Regulation 68 in Table A provides inter alia that,

"the directors may from time to time appoint one or more of their body to the office of managing director or manager for such term and at such remuneration ... as they may think fit, and a director so appointed shall not, while holding that office, be subject to retirement by rotation, or taken into account in determining the rotation of retirement of directors ...."

Assuming that regulation 68 was incorporated in the Articles, the difficulty here is that there is no evidence of CSC having been appointed as the managing director of Boldwin. The available evidence merely showed that he was the de facto managing director.

112. Thirdly, as regards the alleged irregularity in the appointment of Tang and Yu as additional directors or the irregularity in not holding annual general meetings, reliance was sought to be placed on regulation 88 in Table A which provides that,

"all acts done by any meeting of the directors or of a committee of directors, or by any person acting as a director, shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such director or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a director."

Further, Mr Chang submitted that the Duomaticprinciple referred to earlier (i.e. the informal consent of all the shareholders) could also be invoked.

113. In answer to this, Mr Poon referred to the decision of Morris v Kanssen [1946] AC 459 which held that the provisions equivalent to regulation 88 and section 157 of Cap. 32 were only designed to deal with the situation where there were slips or irregularities in appointment, not with a case with a total absence of appointment, as in the present case. In the latter situation, there was not a defect in the appointment, there was no act at all.

114. It may be that some of the acts done by the de facto directors would be regarded as valid if the Duomatic principle could be invoked. It is not necessary to decide this for present purpose. The point here is whether on the face of it, there is no properly constituted board of directors for Boldwin. I am satisfied that a prima facie case has been made out in this respect.

Allegations of misconduct as regards BF

Exclusion from management of BF and secret bank accounts

115. All the bank accounts in Boldwin and BF used to be operated by CSC and LWD signing singly. After the incidents in May 1999, and in August 1999, LWD requested CSC to convene meetings of the board of directors of Boldwin and BF to change the bank mandates to joint signatories. A meeting of the board of directors of BF was held on 2 September 1999 attended by LWD, CSC and Ann Chan in which it was resolved that all accounts of BF with the Hongkong & Shanghai Banking Corporation ("HSBC") and Hang Seng be operated with LWD and CSC signing jointly in addition to the company chop of BF.

116. Between October 2000 and February 2001, LWD was pressed by the employees of BF acting on CSC's instructions to co-sign a great number of cheques in excess of HK$80 million. LWD did so with reluctance as she regarded the documents or particulars provided to her in support of the payments were inadequate. She was however given to understand that the bank accounts of BF operated by her and CSC jointly were the only sources for BF to discharge its daily expenses and the amounts due to its sub-contractors. In November 2000, CSC refused to supply the monthly bank statements of BF to LWD.

117. A meeting of the directors of BF was purportedly held on 27 November 2000 and attended by CSC and Henry Yip. LWD has challenged the validity of the resolutions passed at this meeting on the ground that LWD and Ann Chan had objected to the short notice of the meeting. According to the minutes of this meeting, it was resolved by CSC and Yip that with effect from 29 November 2000, the mandates for the operation of the accounts of BF with HSBC and Hang Seng be changed to CSC and Yip as joint signatories in addition to the company chop of BF and a new account was to opened with these joint signatories. LWD and Ann Chan received a copy of the minutes on 30 November 2000.

118. Attempts at resolving the dispute on the aforesaid amendment of the mandates were not successful, as a meeting of the board of directors could not be held due to the deadlock among LWD, Ann Chan, CSC and Yip on the election of the chairman of the meeting. Thus, the meetings on 30 November 2000, 4 December 2000, 29 January 2001 and 7 February 2001 were all aborted.

119. It was only after the Court of Appeal had granted the orders for LWD and Ann Chan to inspect the documents of BF and when PwC carried out an inspection as their agent in September 2001 that it was discovered that according to the minutes of a meeting of the board of directors of BF purportedly held at its registered office on 1 September 1999, CSC and Yip had resolved that two bank accounts in the name of BF be opened with Kincheng, Shamshuipo sub-branch and that such accounts be operated by CSC solely with the company chop of BF ("the Kincheng accounts"). It was in the course of inspection of documents by PwC that CSC produced to them three documents addressed to LWD, Ann Chan and himself purporting to be notices dated 17 August 1999 issued by him for convening the meeting of directors allegedly held on 1 September 1999.

120. From 1 September 1999 to July 2001, CSC had, caused a total of HK$1,126,559,000.00 received by BF from the employers as interim progress payments to be paid into the Kincheng accounts operated solely by him, instead of paying the amounts into the accounts of BF at HSBC or Hang Seng which were operated with joint signatures. Substantial amounts have been withdrawn from the Kincheng accounts as in the account ledger of BF for January 2002, it was recorded that the monies standing to the credit of the Kincheng accounts stood at HK$156,183,740.00, a mere 13.86% of the total amounts deposited.

121. It is alleged by LWD that the opening and operation of the Kincheng accounts by CSC were acts done without the authority of the board of directors of BF, as neither LWD nor Ann Chan had received the notices for the meeting of 1 September 1999, nor were they aware of the resolutions purportedly passed at that meeting. It is further alleged that CSC is liable to account to BF for all sums deposited into and withdrawn from the Kincheng accounts of over HK$1 billion. LWD's solicitors had written to the Bank of China (Hong Kong) Limited ("BOC") as the successor in title of Kincheng on 20 December 2001 requesting BOC to refrain from acting in any way to facilitate CSC in operating the Kincheng accounts. The request was turned down by BOC on 28 December 2001 on the ground that the Kincheng accounts had been operating for some time and the bank had no notice of any illegality or irregularity concerning the opening or operating of the accounts until receipt of the letter of LWD's solicitors. BOC requested BF to give them proper authority or instruction or the necessary court order if LWD should require them not to act on the mandate that was given.

122. A meeting of directors convened by LWD on 4 January 2002 for this purpose was aborted because the four directors could not agree on the chairman for the meeting. CSC has continued to operate the Kincheng accounts.

123. CSC's answer to the above allegations is that he had given proper notice of the meeting on 1 September 1999 by faxing the notices dated 17 August 1999 to LWD and Ann Chan and that all the withdrawals from the Kincheng accounts had been recorded and documented.

124. On a provisional basis, I do not think CSC has adduced cogent evidence in answer to LWD's allegations here. I take into account the conduct of LWD from August 1999 when she repeatedly sought information on the financial affairs of Boldwin and BF. It does not seem likely she or Ann Chan would not attend the meeting of directors on 1 September 1999 if they had indeed received notice of the meeting by fax. Further, prior to September 2001, CSC had made no mention of the Kincheng accounts in any of the letters of his solicitors or in his affirmations filed in court. In paragraph 30 of his 1st affirmation filed in HCMP No. 703 of 2002, he complained of LWD's delay in co-signing cheques for BF and alleged that the company was in "great jeopardy" and the consequence of not making punctual payments to its sub-contractors because of LWD's delay would be "very disastrous". I am satisfied a prima facie case of misconduct of CSC has been made out.

Deadlock at board meetings

125. As mentioned above, between 30 November 2000 and 4 January 2002, five meetings of the directors were aborted because the four directors could not agree on the chairman of these meetings. The powers of management of BF cannot be vested in its shareholders exercisable in general meetings as Maintain Profits and Myriad Gold are owned and controlled equally by LWD and CSC.

126. CSC's answer to the deadlock is that this has not affected the ability of BF to deal effectively with its business operations as since the incorporation of BF, he has been vested with full power to manage the business of BF as its managing director "without reference to its Board of Directors, whether in form or in substance". Hence, until his position has been altered by a valid and effective resolution of the board of directors or of the shareholders in general meeting, he is entitled to continue to manage BF as its managing director.

127. I am of the provisional view that if there is complete deadlock and mutual trust and confidence is gone, a good prima facie case to wind up Maintain Profits and Myriad Gold on just and equitable grounds is made out.

No annual general meetings or properly constituted board of directors

128. Since its incorporation, no annual general meeting of BF has been held, in breach of section 111 of Cap. 32 and Article 23 of the Articles of Association. Further, it is alleged by LWD that in view of Article 8 there is no properly constituted board of directors of BF since 23 March 1999, being the last day on which the first ordinary or annual general meeting of BF should have been held.

129. The validity of the appointment of Yip on 1 April 1999 as an additional director is challenged by LWD on grounds similar to those advanced to attack the appointment of Tang and Yu as additional directors of Boldwin.

130. For the reasons I have given in the earlier parts of this decision, I am of the provisional view that LWD has made out a prima facie case that BF does not have a properly constituted board of directors.

Payment of legal fees unrelated to BF

131. Between 16 February 2001 and 31 January 2002, CSC caused to be withdrawn from the Kincheng accounts a total of HK$7,152,811.00 to pay for legal fees incurred on his behalf or on behalf of Yip in legal proceedings to which CSC or Yip or both were parties, including HCMP Nos. 702 and 703 of 2001 and the appellate proceedings, HCA No. 2623 of 2001, and the matrimonial proceedings against LWD being FCMC No. 4917 of 2001. In respect of the legal fees incurred for FCMC No. 4717 of 2001 in the sum of HK$862,866.00, CSC has repaid this amount to BF by a cheque dated 2 February 2002 drawn on his personal account.

132. It is the case of LWD that the payments of such legal fees with the funds of BF were improper as BF has not been a party to any of these proceedings, with the exception of HCMP No. 703 of 2001. As for HCMP No. 703 of 2001, BF was merely named as a nominal defendant; those proceedings were brought by LWD and Ann Chan against CSC and Henry Yip to compel them to permit inspection of the books and accounts of BF. BF was not represented in the proceedings.

133. CSC's answer is that as he and Yip were sued in HCMP No. 703 of 2001 as directors of BF, it is arguable that payment of their legal fees in the proceedings and the related appeal out of the funds of BF at about HK$6.1 million was justified.

134. My provisional view is that there is a prima facie case of misappropriation of assets in this respect.

The Dongguan property

135. According to the minutes of a meeting of directors allegedly held at the registered office of BF on 24 July 2000 and attended by CSC and Yip, it was resolved that BF was to purchase a property at Laguna Verona, Hwang Gang Lake, Dongguan, China ("the Dongguan property") at HK$926,800.00. The Dongguan property is a golf resort bungalow. The provisional agreement for sale and purchase was signed on 27 July 2000. Payment of the purchase price was made from the Kincheng accounts.

136. It is alleged by LWD that the resolution to purchase the Dongguan property was invalid, as neither she nor Ann Chan had received notice of the meeting of directors. Further, the Dongguan property was purchased for an improper purpose in that it was to benefit CSC personally.

137. I am of the provisional view that there is a prima facie case of misappropriation of assets on the part of CSC.

Other misfeasant acts as alleged

138. As in the case of Boldwin, it is alleged these other misfeasant acts as alleged relate to CSC's management of the construction projects undertaken by BF. The complaints are similar. It is alleged that CSC had given substantial discounts to the net tender sum of four projects in the total sum of HK$133,836,000.00. Further, BF is subject to substantial claims of LADs by the employers. The figure as pleaded in the petition is HK$420,398,000.00. The potential liability would appear to have been reduced to HK$317,060,731.00 as a result of EOT claims granted and additional certifications for variations made after September 2001. The relevant figures, taken from the Molloy report, are as follows:

139. For the reasons similar to those given in the earlier parts of this decision, I have reached the provisional view there is a prima facie case of breach of fiduciary duties on the part of CSC in the manner the construction projects of BF were administered.

The audited accounts

140. None of the audited financial statements of BF comprising both profit and loss accounts and balance sheets for the period between its date of incorporation and 31 March 2000 was laid at its annual general meetings during the statutory period required under sections 122(1), (1A) and (2) of Cap. 32 as no annual general meeting was convened since incorporation. Neither the audited accounts for the period ended 31 March 1999 nor those for the following financial year have been approved by the board of directors due to the deadlock. The draft audited accounts for the financial year ended 31 March 2001 have not yet been supplied to LWD. LWD's many attempts to seek explanation and information from CSC on the financial statements were not successful.

Denial of access to documents

141. CSC refused to allow LWD and Ann Chan to inspect the books and accounts of BF and this has led to HCMP No. 703 of 2001, which I have dealt with.

Balancing competing interests - Boldwin

142. I turn to consider if it would be appropriate in all the circumstances to appoint provisional liquidators for Boldwin. This involves balancing competing interests, as the appointment of provisional liquidators is a serious intrusion on the company and should not be taken lightly without adequate reasons.

143. The case for the appointment of provisional liquidators for Boldwin has been put as follows. Firstly, reliance was placed on the serious misconduct, lack of probity and lack of competence of CSC as alleged. It was submitted that he should be removed from his control of Boldwin to prevent further abuses of power. Secondly, there would appear to be deep mistrust between LWD and those in control of Boldwin. The company has apparently been functioning without a properly constituted board of directors for some time, although there are de facto directors. The audited accounts of the company have been heavily qualified by the auditors for several years. It is doubtful if the company has been managed in a proper manner. In these circumstances, it would be desirable for a third party independent from the controversy of the parties to take charge of the company to keep a fair balance between them pending the resolution of the dispute. Thirdly, it was submitted that in view of the foregoing matters, it is necessary to appoint provisional liquidators to preserve the status quo so as to ensure that the assets of the company should remain undiluted, undiverted and properly administered pending the determination of the petition, which is envisaged would take some time to be resolved, in view of the voluminous evidence filed to date and the acrimonious dispute between LWD and CSC in these proceedings and a number of other proceedings. Reliance is placed on the dicta of Harman J in Re a Company (No. 00596 of 1986) [1987] BCLC 133, which was concerned with the appointment of a receiver for the purpose of preserving the company's assets pending the hearing of a petition to wind up on the just and equitable ground or for the purchase of shares, and in which the judge approached the matter in the same manner as in a partnership dispute. The relevant dicta at 135g to 136i read as follows:

"In a partnership dispute, it is almost as of course for the court, where the partners have fallen out and there has to be a dissolution, to order the appointment of a receiver, on motion, at an early stage of the partnership action. That is done to hold the ring, to ensure that the partner or partners who happen to be in possession of the partnership trading assets do not obtain advantage, nor damage the partnership assets to the harm of the dissenting partner, nor siphon them away or otherwise maltreat the partnership affairs. It is done without any judgment of the rights or wrongs in the partnership action or any attempt to take a view as to why the partnership has broken up. It is simply designed to hold the ring and ensure that the status quo of the assets is preserved, that the value of the business is there, so that the whole thing may best be realised for the advantage of all partners in due course. That is particularly the case where there is a business with a going concern and a good-will."

144. The above submissions made on behalf of the petitioner would, on the face of it, appear to justify the appointment of provisional liquidators for Boldwin. I turn to consider whether there are any factors which would militate against this course.

145. Firstly, it was submitted on behalf of CSC that it would be in the interest of Boldwin that the existing directors, in particular CSC, should retain day-to-day management of Boldwin to handle the claims for LADs vis-à-vis the employers and the claims of the sub-contractors. I do not regard this as a matter of weight. Although the appointment of a provisional liquidator operates to transfer to him the powers of the directors who thereby cease to be the company's authorised agents, it does not mean that a provisional liquidator may not retain the services of any director or key staff to carry on the business of the company insofar as that may be necessary for the beneficial winding up of the company.

146. Secondly, it was contended that the assets of Boldwin are not in jeopardy and sufficient interim measures have been implemented to preserve the assets. As at 25 June 2002, Boldwin had a total bank balance of about HK$7 million and since 3 April 2002, the mandates of its accounts have required the joint signatures of CSC and LWD or the joint signatures of one from group A (i.e. CSC, LWD) and one from group B (i.e. Tang, Yu). The petitioner also has the protection of section 182 of Cap. 32 in that any dispositions since the commencement of the winding up would require a validation order. Given the amount of cash balance in the accounts of Boldwin, that Boldwin is not actively trading and the only outstanding matters are the ongoing disputes with the employers and the sub-contractors, it was submitted that to appoint provisional liquidators would be a disproportionate remedy in view of the expenses involved.

147. I agree with Mr Poon here that one should not only be looking at the bank balances in considering the assets to preserve and whether the appointment of provisional liquidators would be a disproportionate remedy. According to the latest available financial statements of Boldwin, which are the draft audited accounts for the year ended March 2001, the current assets stood at HK$133 million, made up of bank balances and cash of HK$11.6 million, properties for sale of HK$1.6 million, trade debtors of HK$12.1 million, retention receivables of HK$78.9 million, other debtors of HK$2.6 million, temporary payments of HK$24.2 million and tax prepaid of HK$2.3 million. There were current liabilities to be discharged in the sum of HK$354.7 million. There would appear to be cash flow problems. The provisional liquidators would need to take possession of not just the bank balances but of other assets and to discharge such liabilities in the ordinary course of business of the company. I accept the petitioner's submission that there are doubts if the company has been managed in a proper manner in the interest of all concerned.

148. Thirdly, it was submitted that there has been undue and substantial delay of the petitioner in seeking the relief and that LWD has an ulterior purpose in bringing the petition. The claims relating to misappropriation of assets, wrongful payment of bonus salary, and misuse of Boldwin's bank account were known to LWD from May to August 1999. It was pointed out that an order for disclosure was made against LWD in the matrimonial proceedings on 25 March 2002 and the three winding-up petitions were presented on 2 April 2002. Further, CSC obtained a Mareva injunction against LWD on 15 May 2002 restraining her from disposing of assets to the extent of HK$110 million. The applications to appoint provisional liquidators were issued on 16 May 2002. It was alleged that the present applications were made to deflect CSC's pursuit of discovery in the matrimonial proceedings and to bring pressure on him so as to achieve a more favourable resolution of the dispute concerning ancillary relief in the matrimonial proceedings.

149. It is true that LWD was alerted to some of the misconduct complained of in the petition in 1999. However, one cannot ignore the attempts she made by herself and through her solicitors in obtaining information and explanation from CSC in 1999 to early 2001, which were largely unsuccessful. She then brought proceedings in HCMP Nos. 702 and 703 of 2001 in February 2001 to assert her right of access to the books and records. The petition for divorce was only filed by CSC in May 2001. The orders for inspection were made by the Court of Appeal in September 2001 and PwC inspected and reviewed the documents and reported their findings to LWD in their report in February 2002. The derivative action was brought by Junestar on 15 March 2002 and the three winding-up petitions were filed on 2 April 2002 with the summonses for the appointment of provisional liquidators issued on 16 May 2002. I do not think there was undue delay on the part of the petitioner. I decline to attach significance to the close sequence of the steps taken in the matrimonial proceedings and in the winding-up proceedings. The important thing to consider is not so much whether LWD has any ulterior motive in present the winding-up petitions but whether she has good prima facie grounds in doing so.

150. For the above reasons, I have come to the view that it would be appropriate in all the circumstances to appoint provisional liquidators for Boldwin.

Balancing competing interests - Maintain Profits and Myriad Gold

151. I turn to consider the position of these companies and BF. Similar submissions were made to justify the appointment of provisional liquidators for Maintain Profits and Myriad Gold. In addition, it was submitted that there is a complete deadlock at the meetings of the board of directors with the result that no business can be transacted at any board meetings. This is clearly an undesirable state of affairs. Unlike Boldwin, BF still remains active in the tender market and is seeking new construction projects, according to the PwC report.

152. The latest audited accounts of BF were for the year ended 31 March 2000. The draft audited accounts for the year ended 2001 are not available. In addition, CSC has produced the management account of BF being the balance sheet as at 31 July 2002 and the cash flow forecast from August 2002 to March 2003. According to the last audited accounts for 2000, current assets were HK$532 million and current liabilities were HK$534 million. According to the management account as at July 2002, current assets were HK$351 million including cash and bank balances of HK$188 million and current liabilities were HK$452 million. The net current liabilities were HK$101 million. Of the bank balances, as at 14 June 2002 HK$106 million were in the Kincheng accounts operated solely by CSC.

153. Mr Chang raised similar objections to the appointment of provisional liquidators for Maintain Profits and Myriad Gold as in the case of Boldwin. In addition, he submitted that it would not be right to appoint provisional liquidators for these companies as there is a real risk that such an appointment would trigger off a takeover of BF by the Cheung Kong Group under an Option Agreement and a Loan Agreement both dated 3 March 1999.

154. The Loan Agreement was made between Presidential Profits Limited ("President Profits", a company incorporated in the British Virgin Islands, the sole shareholder of which is Purple Heart Enterprises Limited ("Purple Heart"); LWD and CSC each held one of the two issued shares in Purple Heart) and Bomina Limited ("Bomina", a member of the Cheung Kong Group) as the lenders and BF as the borrower. By that agreement, the lenders agreed to grant to BF a revolving loan facility of up to HK$350 million. The facility to be granted by the lenders was at the percentage of 70% from Presidential Profits and 30% from Bomina. Under clause 5.05, a profit sharing arrangement is provided in that BF is required to deliver to the lenders its audited financial statements of each year and pay a premium to the lenders calculated with reference to its retained profits (70% of which would go to Presidential Profits and 30% to Bomina). By clause 12.03, any of the lenders may at any time after the happening of an event of default declare the loan and interest and other sums payable under the Loan Agreement have become immediately due and payable. The events of default include the presentation of a petition to wind up BF, Maintain Profits or Myriad Gold or the appointment of a liquidator, receiver or similar officer (clause 12.01(g)) and when CSC ceases to own directly or indirectly the entire issued share capital of Maintain Profits and Myriad Gold (clause 12.01(m)).

155. Mr Chang submitted that an event of default has clearly arisen under the Loan Agreement since 2 April 2002 when the petitions to wind up Maintain Profits and Myriad Gold were presented.

156. The Option Agreement was made between Maintain Profits, Myriad Gold, BF and Bomina and reference was made to the Loan Agreement. By clause 2 of that agreement, Maintain Profits and Myriad Gold granted to Bomina a call option entitling the latter to call upon and require Maintain Profits and Myriad Gold to sell the Option Shares, being the shares of BF representing 30% and under the circumstances specified in clause 5.3(a) thereof, 51% or such higher percentage of the issued share capital of BF as Bomina may elect. Where the call option is exercised in respect of 30% of the issued share capital of BF, the consideration shall be an amount equivalent to the par value of the shares; where the call option is exercised in the circumstances specified in clause 5.3(a), the consideration shall be calculated by a formula with reference to the net worth of BF (clause 4). The call option may be exercised at any time as long as the facility under the Loan Agreement is owing by BF (clauses 1 and 5.1). The event referred to in clause 5.3(a) giving Bomina the right to elect for a higher percentage of shares to acquire is where CSC, for any reason, shall be unable to act as or otherwise cease to be a director of BF or is otherwise disqualified to act as a director of BF.

157. It was submitted by Mr Chang that in the event provisional liquidators are appointed, clause 5.3(a) could be invoked by Bomina to purchase all the shares in BF. This is a risk I should take into account as one of the competing balancing factors. The risk would need to be assessed.

158. As regards the risk of Bomina enforcing the Loan Agreement because an event of default has risen, I ask what would be the damaging effect on BF. Bomina has not taken any action against BF for four months since the petitions to wind up Maintain Profits and Myriad Gold were presented in April 2002. The event of default has occurred, regardless of whether provisional liquidators are to be appointed. The loan payable under the facility granted, as appeared from the management account as at July 2002, is only HK$100,000.00. As for the premium payable to Bomina (being 30% of the retained profits), the figure is not given in the management account. I note from the audited accounts for the year ended March 2000 that the premium payable for the financial years ended 1999 and 2000 was in the aggregate sum of HK$14,189,919.00, of which 30% would be payable to Bomina. Even if Bomina should decide to demand immediate payment of 30% of the loan and the premium, I do not think this would have a serious damaging effect on BF.

159. What of the risk of Bomina exercising its right under the Option Agreement to acquire all the shares of BF? For one thing, the appointment of provisional liquidators for Maintain Profits and Myriad Gold does not necessarily give rise to the event provided for in clause 5.3(a). The directors of Maintain Profits and Myriad Gold will cease to act as such with the appointment of provisional liquidators, not so with the directors of BF, although LWD has sought in the draft order that the provisional liquidators should be given the power to appoint or remove directors of BF as may be necessary to obtain control or management of it for the protection of the interests of Maintain Profits and Myriad Gold in BF. That would be a matter to be considered by the provisional liquidators, if appointed, and no doubt the provisional liquidators would take the risk of acquisition by Bomina into account.

160. In all the circumstances, I am not persuaded that the risks of enforcement of the Loan Agreement and the Option Agreement should tip the balance. I am of the view that it would be appropriate in all the circumstances to appoint provisional liquidators for Maintain Profits and Myriad Gold.

If a Mareva injunction should be granted

161. Much of what I have said above would apply to the consideration of whether it is appropriate to grant a Mareva injunction in having regard to a good arguable case, the risk of dissipation of assets, the balance of convenience, and whether there is undue delay for the application. I am of the view that a Mareva injunction should be granted.

162. I need to consider the limit of the assets that CSC should be restrained from disposing of. Mr Poon has submitted a figure of HK$232,965,676.00 and this is made up as follows:

(1) Proprietary claims

The total amount as pleaded in the Amended Statement of Claim for the proprietary claims is HK$78,746,705.00, being paragraphs 14, 27, 29(1) to (3), and 36. LWD is prepared to give credit for the repayments by CSC and the re-deposits made to Boldwin to set off the drawings against the account of Junestar with Boldwin, with the exception of one re-deposit of HK$5 million on 30 March 1998, which is disputed, as there is evidence in the PwC report that subsequent to the re-deposit of HK$5,806,534.48 on 30 March 1998, HK$5,245,728.82 was drawn on Boldwin's account by a cheque signed by CSC payable to Andreas. The total sum for which credit is given is HK$33,263,989.00 and the net figure thus arrived at is HK$45,482,716.00.

(2) Special damages on other misfeasant acts

These relate to the substantial discounts to the net tender sum given by Boldwin to the employers in the total amount of HK$136,150,000.00 and the deductions made by the employers for the defective work of sub-contractors in the amount of HK$52,448,000.00, being paragraphs 41 and 50 respectively of the Amended Statement of Claim. The total amount under these heads of claim is HK$187,482,960.00.

163. I have no difficulty with imposing a limit of disposal of assets as per the amount of the net claim of the proprietary claims. However, I have difficulty at this stage as to the amount that Junestar would probably be entitled to recover from CSC as special damages on other misfeasant acts. As I have mentioned earlier, it is recognised in PwC's 2nd supplemental report that it is "not unusual" for discounts to be given in order to procure contracts from the employers, what gave rise to concern here is the substantial amount of discounts given, considering the typically low margin of profits for main contractors. Assuming that Junestar should succeed in its allegation that the discounts given are improper and in breach of CSC's fiduciary duty to Boldwin, it does not seem to me that the entire amount of discounts given should be awarded to Boldwin as damages, as allowance should be given to what may have been a proper level of discounts that could legitimately be given. There is no evidence on this at this stage. I do not think it right for an arbitrary figure or percentage to be taken in the absence of evidence.

164. As for the claim for defective work, I also have difficulty as to the amount that Junestar would probably be entitled to recover from Boldwin. At the moment, negotiations are ongoing between Boldwin, the employers and the sub-contractors. Assuming that Junestar should succeed in its allegation that CSC was in breach of fiduciary duty in failing to cause Boldwin to monitor properly the quality of the works of the sub-contractors, it is far from clear at this stage what would be the amount of deduction that Boldwin would need to bear eventually so that it should look to CSC for damages to cover its loss.

165. For the above reasons, I do not propose to take into account the claims for special damages on other misfeasant acts in fixing a limit of the assets that CSC should be restrained from disposing of pending the determination of the derivative action. Accordingly, the limit I would impose for this purpose is HK$45,482,716.00.

166. The other matter I need to consider is the question of an undertaking in damages to be given for the injunction to be granted. What is offered in the draft order is that this undertaking is to be given by Junestar. In her 2nd affirmation filed in HCA No. 1036 of 2002 on 15 July 2002, LWD has deposed that if required by the court, she is prepared to offer a personal undertaking in damages and she has also given an estimate of her personal assets on the basis of her equity interest in a number of companies and her interest as one of the joint tenants of the former matrimonial home. I think it would be appropriate in this instance to require a personal undertaking in damages from LWD as I have been given to understand that the amounts withdrawn from Boldwin in the total sum of about HK$110 million being dividends payable to Junestar have been transferred out from Junestar and this was why a Mareva injunction was made against LWD in the matrimonial proceedings. I am also satisfied that LWD's personal assets should be sufficient to cover reasonable damages she would have to pay in the event that the injunction to restrain disposition of assets of the limit of HK$45 million odd were wrongly made. I do not think it necessary to require LWD to fortify her undertaking in damages.

Orders

167. On the application to appoint provisional liquidators for Boldwin, I make an order that Mr Charles Chan Wai Dune and Mr James Wardell, both of CCIF Corporate Advisory Services Limited, certified public accountants, be appointed joint and several provisional liquidators of Boldwin until the hearing of the petition in HCCW No. 340 of 2002 or further order with their powers limited and restricted as provided in paragraph 2 of the summons with the deletion of sub-paragraph (8), which relates to the sale of assets. The power of the provisional liquidators may be extended to realise assets, if necessary. I decline to provide for this power in the first instance. I make an order in terms of paragraphs 3 and 4 of the summons.

168. On the application to appoint provisional liquidators for Maintain Profits and Myriad Gold, I make an order that the above named individuals be appointed joint and several provisional liquidators of these companies until the hearing of the petition in HCCW No. 345 and 346 of 2002 respectively or further order with their powers limited and restricted as provided in paragraph 2 of each of the summonses with the following amendments:

(1) Paragraph 2(4) is to read "To bring or defend any action or other proceedings in the name and on behalf of the Company or B.F. Construction Company Limited ("BF") as may be considered by the Provisional Liquidators to be necessary for the protection of the Assets". The reference to the presentation of a petition for the winding up of BF is to be deleted.

(2) Paragraph 2(8), which relates to the sale of assets, is to be deleted.

169. I also make an order in terms of paragraphs 3 and 4 of each of the summonses in HCCW No. 345 and 346 of 2002.

170. On the application for a Mareva injunction in HCA No. 1036 of 2002, I make an order in terms of the draft submitted with the following amendments:

(1) The limit of the assets up to which CSC is restrained from disposing of is altered to HK$45,482,716.00. All the references to the previous monetary limit are to be amended accordingly.

(2) Paragraph 1(2)(iv)(a) of the draft order should read "B.F. Construction Company Limited".

(3) Paragraph (2) under "Exceptions to this Order" is to read, "This Order does not prohibit the 2nd Defendant from dealing with or disposing of any of his assets in the ordinary and proper course of any business in which he has an interest".

(4) The undertaking in damages in paragraph (1) of Schedule 2 is to be given by Law Wai Duen, Nina instead of Junestar Investment Corporation.

171. As for the costs of the applications for the appointment of provisional liquidators, I make an order nisi as per each of the summonses that the costs of each application be in the cause of the respective petition with a certificate for two counsel. Regarding the costs of the application for a Mareva injunction, I also make an order nisi that the costs of the application be in the cause of the action in HCA No. 1036 of 2002 with a certificate for two counsel.

Representation:

Mr Winston Poon, SC, and Miss Linda Chan, instructed by Messrs Baker & McKenzie, for the respective Petitioners in HCCW Nos. 340, 345 and 346 of 2002 and for the Plaintiff in HCA No. 1036 of 2002.

Mr Denis Chang, SC, Miss Selina Lau, Mr Samuel Chan and Miss Isabella Chu, instructed by Messrs Ng & Partners, for Mr Chan Shiu Chick in HCCW No. 340 of 2002 and for the same as the opposing contributory in HCCW Nos. 345 and 346 of 2002 and as the 2nd Defendant in HCA No. 1036 of 2002.

The Official Receiver, attendance excused.