RE LUEN CHEONG TAI INTERNATIONAL HOLDINGS LTD

HCCW 584/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 584 OF 2002

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REASONS FOR DECISION

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1. I have before me an ex parte application on notice by the provisional liquidators of Luen Cheong Tai International Holdings Limited ("the Company") made under sections 221(1) and (3) of the Companies Ordinance, Cap. 32. The provisional liquidators seek an order that Mr Lo Yung Chun do grant to the provisional liquidators immediate and unfettered access to the premises at No. 70A Ki Lun Tsuen, Sheung Shui, New Territories ("the Sheung Shui premises") for the purpose of the provisional liquidators removing therefrom any assets, books and records of the Company and its subsidiaries. I also have before me an application by two directors of the Company, Mr Chan Man Chuen and Mr Vong Pak Cheong, against the provisional liquidators. The application was made by a summons dated 26 September 2002 which has not been filed at the time of the hearing. The directors seek an order against the provisional liquidators in relation to the documents and materials removed by the provisional liquidators on 5 to 9 September 2002 from Suite Nos. 2109-2111, 21st floor, CMG Asia Tower, The Gateway, No. 15 Canton Road, Tsimshatsui, Kowloon ("the Gateway Office"). The provisional liquidators are required to provide the solicitors for the directors with a list of the documents and materials they removed from the Gateway Office within three days and to forthwith deliver any documents or materials which do not belong to the Company or its subsidiaries to the directors.

2. The background to the above applications may be given as follows.

3. On 5 September 2002, I made an order appointing the provisional liquidators on the application of a creditor of the Company. By paragraphs 1 and 2 of the order, the provisional liquidators are empowered to secure, take possession of and copy all books, records, documents of the Company or such subsidiaries, associated companies, joint-ventures or other entities in which the Company holds an interest. By paragraph 16 of the order, the provisional liquidators are empowered to effect entry, if necessary by force, to any premises of the Company or any site office where the provisional liquidators have reason to believe that there are assets, property, books and records of the Company.

4. On 5 September 2002, the provisional liquidators and their solicitors attended the Gateway Office, which was the principal place of business of the Company in Hong Kong, to take possession of the books and records. By then, almost all of the documents belonging to the Company and its subsidiaries had been removed. There were left in the Gateway Office only about 5 to 6 carton boxes of documents. These were removed by the provisional liquidators and they form the subject matter of the directors' present application. The provisional liquidators were told by the employees of the Company that the Company had moved its office to 9 floor, Nos. 52 to 58 Jaffe Road, Wanchai, Hong Kong ("the Wanchai Office").

5. In the morning of 6 September 2002, the provisional liquidators met the directors at the Wanchai Office and questioned the directors as to the whereabouts of the books and records of the Company. They were told by Mr Vong that they would be provided with access to the books and records in the afternoon.

6. In the afternoon of that day, Mr Vong arranged to meet the provisional liquidators at the Sheung Shui premises, where the books and records are stored. Despite repeated demands by the provisional liquidators, Mr Vong prevented the provisional liquidators from removing the books and records from the Sheung Shui premises. Mr Vong informed the provisional liquidators that he would have no objection to the provisional liquidators arranging for security guards to be stationed outside the Sheung Shui premises to prevent removal by any one of the books and records. He said he would need to seek legal advice regarding the removal of the books and records by the provisional liquidators.

7. On 7 September 2002, the provisional liquidators made demands to the directors verbally and in writing for delivery up of the books and records. They received a letter from the solicitors for the directors, Messrs Alvan Liu & Partners, the same day asking for a copy of the court order dated 5 September 2002. This was faxed to the directors' solicitors.

8. On 9 September 2002, the solicitors for the provisional liquidators wrote to the directors' solicitors giving them an ultimatum that unless an immediate confirmation was received that the directors would fully co-operate with the provisional liquidators and produce to them all the books and records at once, the provisional liquidators would apply for urgent relief from the court and hold the directors personally responsible for the provisional liquidators' costs in this regard. A response was received from the directors' solicitors that day stating, inter alia, that the Company's books and records are not in good order and in view of the "massive volume of documents", the directors would need some time to sort out the documents so that a list of the documents could be prepared as a record of the documents to be delivered up to the provisional liquidators. Further, as the directors would have to prepare a statement of affairs, they would like to make photocopies of the relevant documents before the documents were to be delivered up to the provisional liquidators.

9. In view of that response from the solicitors for the directors, the provisional liquidators made an ex parte application to me on 9 September 2002. I made an order that Mr Chan and Mr Vong do produce to the provisional liquidators immediately all books, records, accounts, documents and other papers (including computer records) of the Company in their possession, custody or power. I also provided in the order that Mr Chan and Mr Vong would have liberty to apply to the court to discharge the order on giving 24 hours' notice in writing to the provisional liquidators or the solicitors for the provisional liquidators.

10. On 10 and 13 September 2002, part of the books and records were delivered to the provisional liquidators under cover of a letter dated 10 September 2002. These books and records must have come from a source other than the Sheung Shui premises, because the provisional liquidators have posted security guards to keep the premises under watch since 6 September 2002. I have received no explanation from the directors where these documents had been stored.

11. On 10 September 2002, the directors' solicitors sent a letter to the provisional liquidators' solicitors stating that the Sheung Shui premises are not owned or controlled by the Company and that the Company would have to make appropriate arrangement for delivery up of the documents. Further correspondence was exchanged on 10, 12 and 13 September 2002 and the provisional liquidators had meetings with the directors on 11 and 12 September 2002. The directors insisted that they should prepare a list of documents before they would deliver up the documents to the provisional liquidators. It would appear that nothing was done in that regard because the directors did not enter the Sheung Shui premises ever since the premises were under the watch of the security guards.

12. On 13 September 2002, the provisional liquidators sought an urgent appointment for an ex parte application. I gave directions that the application was to be made ex parte on notice and that it was to be heard on 16 September 2002.

13. The directors appeared by counsel at the hearing on 16 September 2002. As mutual undertakings to the court were given by the provisional liquidators and the directors, I did not make an order sought by the provisional liquidators that they should have power to effect entry, if necessary by force, to the Sheung Shui premises for the purpose of removing the books and records into their possession. The directors gave an undertaking through counsel to provide joint access to the Sheung Shui premises within 48 hours to enable the provisional liquidators to collect and remove to their offices the books and records referred to in paragraphs 1 and 2 of my order dated 5 September 2002. The provisional liquidators gave an undertaking through counsel that upon being granted access to the Sheung Shui premises in terms of the directors' undertaking, they would do the following:

(1) remove the documents to the offices of the provisional liquidators;

(2) list or index the documents within seven days of the removal and to provide the directors' solicitors with a copy of the same;

(3) within three days of provision of the list or index,

(i) deliver any documents or materials which belong to Luen Cheong Tai Construction Company Limited (in liquidation) to the order of the Official Receiver; and

(ii) deliver any documents or materials which do not fall within the order of 5 September 2002 (save for those identified in paragraph (3)(i) above) to the order of Mr Lo Yung Chun, identified by the directors as the person who had given them access to the Sheung Shui premises.

14. To date, the directors have failed to comply with their undertaking to provide joint access to the Sheung Shui premises.

15. On 18 September 2002, the directors' solicitors wrote to the provisional liquidators' solicitors stating that the Sheung Shui premises are vacant and according to their instructions, the only person who has a key to the premises is Mr Lo Yung Chun. It was further stated that after the hearing on 16 September 2002, Mr Vong had telephoned Mr Lo and learned that Mr Lo was in China to deal with some estate matters of his deceased father and he would stay there until after the Mid-Autumn Festival. On 19 September 2002, the solicitors for the directors wrote to the solicitors for the provisional liquidators stating that Mr Vong has explained to Mr Lo the undertaking given by the directors to the court on 16 September 2002 and that Mr Lo was very upset about the arrangement because the belongings of his family stored inside the Sheung Shui premises "are being affected by the court order".

16. A letter typed in Chinese dated 20 September 2002 was sent by Mr Lo to the High Court and the provisional liquidators by post from Hong Kong and by fax from a fax number in Hong Kong. The envelope of the letter gave the Sheung Shui premises as the return address to which a reply should be sent. As stated earlier, the premises have been left vacant and it is clearly not the address at which Mr Lo can be reached effectively. In his letter, Mr Lo stated that he was given to understand by Mr Vong that the High Court has made an order allowing the provisional liquidators to enter the Sheung Shui premises and remove all the documents and belongings, regardless of to whom they belong, including the personal belongings of Mr Lo or his relatives, and that the provisional liquidators would be permitted to retain these documents and belongings for ten days before they would be returned. Mr Lo objected to this and asked the court to discharge such an order.

17. Mr Lo's letter was written the day before the Mid-Autumn Festival, and as I have mentioned, his letter was posted and faxed from Hong Kong.

18. On 24 September 2002, I caused to be sent a letter in Chinese to Mr Lo stating that if it is his intention to make any application to the court and he is not represented by a solicitor, he must provide his usual residential or working address and a telephone number so that the court staff may contact him effectively. He was also informed that if he has any application to make to the court, he should contact the court clerk for an appointment and attend court personally or by a solicitor at the appointed time for the hearing. Further, Mr Lo was asked to contact the directors' solicitors as soon as possible for the solicitors to explain to him in clear terms the undertaking that was given by the directors to the court on 16 September 2002, as his understanding in this respect is incorrect. The letter of the court was sent to the Sheung Shui premises and faxed to the fax number at which Mr Lo's letter was transmitted. It was copied to the provisional liquidators' solicitors and the directors' solicitors. The provisional liquidators' solicitors had also written to Mr Lo on 23 September 2002 asking him to re-consider his position and to allow them to enter the Sheung Shui premises to remove the documents, so as to avoid another application by the provisional liquidators to the court to gain entry to those premises.

19. On 25 September 2002, the provisional liquidators' solicitors sought an urgent appointment to gain entry to the Sheung Shui premises. I gave directions that the application should be made ex parte on notice and fixed the hearing date to 27 September 2002. The solicitors for the provisional liquidators sent a copy of the ex parte summons with their supporting affirmation to Mr Lo at the Sheung Shui premises and faxed these documents to the fax number at which Mr Lo transmitted his letter. The documents were also served on the directors' solicitors. Mr Lo has not attended the hearing. The directors attended by their solicitors.

20. I am satisfied from the account given in the letter of the directors' solicitors to the liquidators' solicitors dated 25 September 2002 that Mr Lo has been made aware of the contents of the letter of the court to him dated 24 September 2002. It was also confirmed to me by the directors' solicitors that they have communicated to Mr Lo the contents of the letter of the court when Mr Lo telephoned and spoke to Mr Alvan Liu of the directors' solicitors on 25 September 2002. I was also told that Mr Liu had, pursuant to the letter of the court, explained to Mr Lo the terms of the undertaking given by the directors on 16 September 2002. Mr Lo had also told Mr Liu on 25 September 2002 that he would be seeking legal advice. I understand from the directors' solicitors that on 26 September 2002 they have requested Mr Vong to provide them with the telephone number and address of Mr Lo but Mr Vong did not provide this information to his solicitors.

21. I am satisfied I have jurisdiction under section 221 of Cap. 32 to order Mr Lo to give access of the Sheung Shui premises to the provisional liquidators for the purpose of removing therefrom the books and records of the Company and its subsidiaries. I am also satisfied that Mr Lo has been made sufficiently aware of the actual terms of the undertaking given by the directors to the court on 16 September 2002, as the undertaking has been explained to him by Mr Liu on 25 September 2002. Further, I am satisfied that Mr Lo has been made sufficiently aware of his right to apply to court if he thinks it necessary to safeguard his rights and interest in the Sheung Shui premises, what he should do to make such an application, and the need to provide an address and telephone number at which he could be contacted readily. Mr Lo has chosen not to take any of these measures. Mr Vong, who is aware of the contact details of Mr Lo, has chosen not to provide such information to his solicitors so that Mr Lo may be effectively contacted and served with any order that the court may make regarding access to the Sheung Shui premises.

22. It has been more than three weeks since the appointment of the provisional liquidators and their attempts to obtain possession of the books and records of the Company have been thwarted. I do not regard the reasons given by the directors for removing the books and records to the Sheung Shui premises and their insistence on compiling a list of documents and making photocopies (I understand there are no facilities for photocopying in the Sheung Shui premises) as valid reasons for not co-operating with the provisional liquidators in the delivery up of the books and records. In the circumstances, I think it is justified to make the order sought by the provisional liquidators and to allow them to effect entry to the Sheung Shui premises, if necessary by force, for the purpose of taking the books and records into their possession. I have made an order in these terms regarding the application by the provisional liquidators:

(1) Upon the undertaking of the provisional liquidators

(a) to reinstate the locks at the Sheung Shui premises; and

(b) to abide by the undertaking given by them to the court on 16 September 2002 as recorded in the court order regarding any documents or materials collected by them under this order (save that the documents or materials which do not fall within the order of 5 September 2002 are to be delivered to the order of Mr Chan and Mr Vong instead of Mr Lo),

Mr Lo Yung Chun do grant to the provisional liquidators immediate and unfettered access to the Sheung Shui premises for the purpose of the provisional liquidators removing therefrom any assets, books and records as referred to in paragraphs 1 and 2 of the order dated 5 September 2002;

(2) prior to granting access to the Sheung Shui premises in accordance with paragraph (1), Mr Lo shall not

(a) remove the books and records from the Sheung Shui premises;

(b) give up procession, custody or control of the books and records to any person other than the provisional liquidators; or

(c) alter, copy or destroy the books and records;

(3) should the provisional liquidators, for any reason, not gain access to the Sheung Shui premises in accordance with paragraph (1) above within 24 hours from the time of the order, the provisional liquidators shall have power to effect entry, if necessary by force, to the premises for the purpose of taking the books and records into their possession.

23. I have also ordered that the costs of and incidental to this application be paid jointly and severally by the directors, Mr Chan and Mr Vong, as I take the view that they have not provided valid reasons for failing to deliver up the books and records when they were first demanded by the provisional liquidators, nor have they given effective assistance to the provisional liquidators to obtain the books and records after 16 September 2002.

24. As for the application of the directors regarding the documents and materials removed by the provisional liquidators earlier from the Gateway Office, I was informed by the solicitors for the provisional liquidators that they have provided a list of the documents and materials removed to the directors' solicitors just prior to the hearing. As the provisional liquidators' solicitors are willing to give an undertaking along similar lines as in paragraph (3) of their undertaking to the court on 16 September 2002, that documents would be delivered to the order of the directors if they do not fall within the order dated 5 September 2002, I do not think it necessary to make an order for delivery up of documents as sought by the directors. In the exercise of my discretion, I make no order as to costs on the directors' application.

Representation:

Mr Campbell Korff, of Messrs Clifford Chance, for the provisional liquidators.

Mr Joseph Fan, of Messrs Alvan Liu & Partners, for Mr Chan Man Chuen and Mr Vong Pak Cheong.

Mr Lo Yung Chun, absent.

HCCW 584/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 584 OF 2002

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REASONS FOR DECISION

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1. On 5 September 2002, I made an order to appoint provisional liquidators for Luen Cheong Tai International Holdings Limited ("the Company") on the application of its creditor, the Bank of China (Hong Kong) Limited ("BOC"), and indicated that the reasons for my decision would be given later. The application arose in this manner.

The background

2. The Company was incorporated in the Cayman Islands and registered as an oversea company under Part XI of the Companies Ordinance, Cap. 32, with its principal place of business in Hong Kong. The shares of the Company have been listed on the Hong Kong Stock Exchange since 1999. It carries on business as a holding and investment company. It does not carry out any actual trading and investment activities itself. Its shares in its subsidiaries are its only assets. The Company, through its wholly owned subsidiary, Luen Cheong Tai (BVI) Limited, controls 23 subsidiaries and associated companies (collectively, "the Group"), whose businesses include investment holdings, timber trading and construction.

3. On 1 March 2002, a creditor presented a petition to wind up Luen Cheong Tai Construction Company Limited ("LCT Construction"), a wholly owned and a major subsidiary of the Company. A winding up order was made against LCT Construction on 15 July 2002 and the Official Receiver was appointed as provisional liquidator.

4. On 3 June 2002, a petition to wind up the Company was presented by a creditor, Showa Leasing Company Limited ("the petitioner"). The petition came before a Master on 21 August 2002 and because of the opposition of the Company, it was adjourned to a Judge on 26 August 2002. On 26 August 2002, I acceded to the request of the Company to adjourn the petition for two weeks to 9 September 2002, as the Company had only received a proposal for debt restructuring from a potential investor on 23 August 2002 ("the Company's proposal") and would like to submit this for the consideration of its creditors. I was told by Mr William Wong, who appeared for the Company on the petition and in the application of BOC to appoint provisional liquidators, that if the Company's proposal did not have the support of its creditors, the Company would not be able to resist the petition.

5. On 21 August 2002, BOC made an application ex parte on notice for an order that provisional liquidators be appointed for the Company. The Company duly appeared and indicated to me at the hearing that it would like an opportunity to file evidence in opposition. I therefore adjourned the application to an early date to be fixed and gave directions for evidence to be filed within a short time. Evidence in opposition was filed by the Company with evidence in reply from BOC. I heard the adjourned application on 5 September 2002.

6. BOC is the largest creditor of the Company and its debt is not in dispute. The application to appoint provisional liquidators was made with the support of most of the financial creditors of the Company. Their claims, totalling HK$97,832,020.54, represent 88.5% of the Group's total bank debts of HK$110,530,000.00 as at 30 November 2001; 76.7% of the Company's total bank debts of HK$127,613,000.00 as at 31 May 2001 (on the assumption that all of the bank debts of the subsidiaries have been guaranteed by the Company); and 62% of the Company's total liabilities of HK$162,985,000.00 as at 31 May 2001.

7. Two broad grounds were put forward for the appointment of provisional liquidators. Firstly, it was submitted that this was necessary to protect the assets of the Company, having regard to the drastic deterioration of the financial position of the Company and in view of a number of suspicious circumstances that BOC had learned about and which would require investigation. Secondly, it was contended that provisional liquidators should be appointed to explore a corporate rescue and facilitate a viable debt restructuring proposal as BOC and the supporting financial creditors have lost faith in the ability and integrity of the management of the Company to undertake that exercise. By the time of the adjourned hearing of this application, BOC and the supporting financial creditors had considered the Company's proposal and the revised proposal dated 2 September 2002 ("the revised proposal") and did not find this acceptable at all, for the reasons that I will go into. Hence, it must be recognised that the Company would have few options in this situation, as it is plain that the statutory majority for creditors to approve a scheme of arrangement proposed by the Company under section 166 of Cap. 32 cannot be achieved.

8. The petitioner, which is one of the supporting financial creditors, indicated that in view of the perceived benefit to creditors if provisional liquidators should be appointed, it would not press for a winding up order at the adjourned hearing of the petition if this application were granted.

9. The Company's stance to the appointment of provisional liquidators was as follows. It was acknowledged by the Company that it has a liquidity problem and if the Group's financial creditors were to call in their facilities, the Group would not be able to make immediate and full payment. If the creditors would not press for a winding up so that a debt restructuring proposal could be explored, the Company would wish to conduct its own rescue proposal instead of having this undertaken by provisional liquidators. If, however, the financial creditors should insist on winding up the Company, then the Company would not resist the appointment of provisional liquidators as it would regard a winding up order as inevitable. In that instance, the Company would only oppose the choice of the persons to be appointed as proposed by BOC, on the ground that these persons do not appear to be independent and impartial.

10. Having heard submissions from Mr Wong and Mr Bartlett, who appeared for BOC, I am persuaded that it would be appropriate in the circumstances to appoint provisional liquidators on the two grounds put forward by BOC.

Protecting the assets of the Company

11. It was not alleged by BOC that there was misappropriation of assets of the Company. It was alleged that the board of directors had behaved irresponsibly with respect to the creditors' interests and that there were suspicious circumstances requiring investigation. Mr Bartlett has referred me to two Australian decisions, Riviana (Aust.) Pty. Ltd v Laospac Trading Pty. Ltd (1986) 10 ACLR 865 and Australian Securities Commission v Solomon (1996) 19 ACSR 73. It was submitted on the basis of these two decisions that suspicious circumstances, which may not amount to misappropriation of assets, may be sufficient reason to appoint provisional liquidators in an appropriate case to protect the interests of the creditors and shareholders, where, for instance, there is a need to preserve the status quo to ensure the least possible harm to all concerned pending the hearing of the petition, or there is a need for an independent investigation of the affairs of the company without delay.

12. I agree jeopardy to assets should not be limited to misappropriation of assets. As in the case of Riviana, this is not an application made ex parte in which the court would need to proceed very cautiously. Here, the Company has appeared and has filed evidence in opposition. In a contested application, the onus on the applicant is not as heavy as in an application made ex parte, "in the sense that the court takes into account the fact that the company is present, so that the company has an opportunity of putting before the court any relevant factors as to why a provisional liquidator should not be appointed", and "if the [applicant's] affidavits raise matters to which a court would expect there to be some answer and there is no answer provided then that in itself raises a matter of suspicion that it may well be in the public interest to put in a provisional liquidator", even though the suspicious circumstances may not amount to putting the company's assets in jeopardy (Riviana, per Young J). I must, however, emphasise, as the Federal Court of Australia had stated in Australian Securities Commission, that the power to appoint provisional liquidator is a broad one and the affairs of companies will vary greatly, so it will be inappropriate to limit the power by restricting its exercise to fixed categories or classes of circumstances or fact. Statements made in other cases should only be treated as guidance of broad principles, whether and how the principles should be applied in another fact situation would depend on all the relevant circumstances.

13. I turn to the evidence relied on by BOC in support of its contention that it would be appropriate to appoint provisional liquidators to protect the assets of the Company.

14. Much of the information relied on by BOC was elicited from the annual report of the Company for the financial year ended 31 May 2001. Under the listing rules of the Stock Exchange, the Company was required to release its annual results for that financial year by 30 September 2001 and its interim results for the six-month period ended 30 November 2001 by 28 February 2002. The 2001 annual report was released only on 12 June 2002, almost nine months late. The interim results were released on 10 July 2002, almost five months late. According to the announcements of the Company, the 2001 annual report was delayed due to the resignation of its auditor and the interim results were delayed because the annual results were delayed. Owing to these delays, the creditors have been deprived of timely financial information of the Group.

15. The auditor's report stated that the auditors are unable to form an opinion as to whether the accounts give a true and fair view of the state of affairs of the Group and of the Company as at 31 May 2001 or of the loss and cash flows of the Group and as to whether the accounts have been properly prepared in accordance with the disclosure requirements of the Companies Ordinance. This was due to various reasons, including the following:

(1) insufficient evidence on the value of the beneficial land use rights of a forest concession in Suriname, South America, acquired by a subsidiary of the Company on 31 August 2000 for a purchase price of HK$125 million and valued at HK$105,256,000.00 ("the Concession Rights");

(2) insufficient evidence of whether further provision is required for the diminution in value in the interests in subsidiaries;

(3) insufficient evidence on the accuracy of provision for tax;

(4) insufficient documentation to ascertain the receivable/payable on the Group's construction contracts;

(5) the appropriateness of going concern basis; and

(6) the recovery of the loans receivable in the sum of HK$78,397,000.00 ("the Loans Receivable") under the assignments to a company in Suriname as described below was doubtful.

16. As pointed out by BOC, a review of the 2001 annual report and the interim accounts as at 30 November 2001 shows that during the 18 months from 31 May 2000 to 30 November 2001, the financial position of the Company has deteriorated drastically in that:

(1) the cash position of the Company and/or the Group decreased from HK$42 million to HK$3 million;

(2) the retained earnings of the Company and/or the Group decreased from HK$91,182,000.00 to accumulated losses of HK$83,528,000.00;

(3) the net asset value of the Company and/or the Group decreased from HK$256 million to HK$118 million;

(4) the Company's and/or the Group's current liabilities increased by HK$26 million;

(5) amounts due from the Company and/or the Group to related companies in the Group increased by almost HK$22 million; and

(6) losses were HK$154,083,000.00 and HK$20,627,000.00 for the year ended 31 May 2001 and for the six months ended 30 November 2001 respectively.

17. The Company and/or the Group is the owner of machinery and equipment valued at approximately HK$52,410,000.00 of which HK$36,084,000.00 is held by way of financial lease. The Company entered into a lease agreement with Jilin Jitai Industrial Company Limited ("Jilin") in 1998 whereby the Company leased all, or a substantial proportion, of this machinery to Jilin. The two directors of the Company, Mr Chan Man Chuen and Mr Vong Pak Cheong, have a 45.9% interest in Jilin. Rental income in respect of the lease of machinery to Jilin for the financial years ended 1998, 1999 and 2000 were to be HK$8,710,000.00, HK$17 million and HK$17 million respectively. As at 31 May 2000, there were outstanding rental receivables owing from Jilin to the Company of approximately HK$25.3 million. There would appear to have been little payment by Jilin to the Company during the financial year of 2000 and no attempt by the Company to enforce any remedies to recover the machinery.

18. According to the 2001 annual report, on 1 May 2000, the Company assigned loans receivable of HK$47 million from a debtor, who was not identified, to a company incorporated in Suriname and engaged in the forestry business ("the assignee"). On 1 June 2000, the Company gave a further assignment to the assignee of the rent receivables from Jilin of HK$25.3 million referred to above. Pursuant to these assignments, the unidentified debtor and Jilin were released from their obligations to settle the Loans Receivable being HK$78,397,000.00 in total (made up of the two debts assigned and interest of HK$6,097,000.00). In consideration of what was assigned, the assignee undertook to either repay the Loans Receivable to the Company and/or the Group or supply timber stocks to the Company and/or the Group for five years. No security was provided by the assignee with respect to the assignments. What was provided was a letter of comfort by which the assignee agreed to transfer an equivalent amount of land use rights under certain forestry concessions in lieu of cash settlements to the Company and/or the Group. As at 12 June 2002, the assignee has failed to make any repayment of the Loans Receivable or provide any timber stocks to the Company and/or the Group. Further, it has yet to fulfil its obligations under the letter of comfort to transfer any land use rights under its forestry concessions to the Company. No provision for the Loans Receivables was made in the annual accounts for 2001. It would appear from the evidence filed by the Company that the operations in Suriname are at a "standstill". It was submitted on behalf of BOC that these transactions raise justifiable suspicions and should be immediately and independently investigated.

19. According to the interim accounts as at 30 November 2001, the consolidated assets of the Group were HK$359,769,000.00 and the consolidated liabilities of the Group were HK$241,703,000.00. If the net asset value of the Group is to be adjusted by taking into account the Concession Rights and the Loans Receivable which the auditors regarded as doubtful, the Group would have a net deficit of HK$54,500,000.00. I note from the unaudited consolidated balance sheet of the Group for the year ended 31 May 2002 that the net current liabilities stood at HK$121 million.

20. It was also pointed out by BOC that in the 2001 annual report, it was recorded that in April 2001, the Group acquired three internet companies with net asset values of HK$3.35 million at a cost of HK$64,070,000.00. The consideration paid consisted of an assignment of trade receivables of HK$59.7 million and new shares valued at HK$4.4 million. The principal assets of these companies were website development. As at 31 May 2001, just a month after the acquisition, the Group wrote off all the goodwill in relation to these websites at HK$60,720,000.00. This transaction again caused BOC to have concerns about the integrity and competence of the management of the Company.

21. Further, as late as 22 July 2002, the Company announced that the Group had acquired a 100% interest in Sky Glory Holdings Limited for HK$14 million and on 24 July 2002, it announced that one of the subsidiaries had agreed to purchase Fortuna Group Limited for HK$20.04 million. These acquisitions, made at a time when the Group was faced with considerable difficulties in meeting its debt obligations, caused BOC to have further doubts about the competence of the Company's management.

22. As I have mentioned above, all these matters are taken from the 2001 annual report, the interim accounts and various announcements of the Company, so the facts cannot be disputed. The only question is whether it is justifiable for BOC and the supporting financial creditors to infer suspicious circumstances and questionable conduct of the management. On behalf of the Company, it was submitted that these matters would at most show that the management had made bad business decisions. I do not agree, looking at the magnitude of the transactions and their cumulative effect.

Facilitating a rescue proposal

23. I turn to the other ground for which the appointment of provisional liquidators is sought.

24. Trading in the Company's shares was suspended on 5 June 2002, 15 and 24 July 2002 and as from 23 August 2002. The listed status of the Company is a valuable asset. It is recognised by all that if a restructuring without winding up could be brought about, this would be more beneficial to the creditors.

25. In or around August 2001, BOC had become concerned about the Company's ability to repay its debts and requested the Company to appoint Ernst & Young to conduct a limited scope financial review. Apart from engaging Ernst & Young to conduct the review, the Company also appointed them on 6 September 2001 to assist the Company and the Group in presenting a restructuring proposal to the financial creditors. A draft restructuring proposal was presented by Ernst & Young to the Company's management on 17 September 2001. The following day, the appointment of Ernst & Young to formulate a restructuring proposal was terminated due to "costs reasons". The limited scope financial review was issued by Ernst & Young in October 2001. Thereafter, and not until BOC had applied for the appointment of provisional liquidators on 21 August 2002, the Company's management have not put forward any global restructuring plan to its major creditors except for a repayment proposal to two of the financial creditors dated 2 January 2002, which proposal was not adhered to by the Company or the Group.

26. By the revised proposal of 2 September 2002, the potential investor, Ever Capital Development Limited ("Ever Capital"), would make a capital injection of HK$30 million, out of which HK$25 million would be used to repay financial creditors and HK$5 million would be employed as working capital, and a deferred cash repayment to financial and other creditors of HK$10 million over three years derived from rental income from Ever Capital's property in the mainland. If the proposal were accepted, this would result in a return of approximately 30% to the financial creditors on their debts. Further, according to the Company's unaudited consolidated management accounts for the year ended 31 May 2002 tabled at a meeting between the Company and some of the financial creditors on 3 September 2002, the Group has assets worth HK$337 million. On that basis, Ever Capital is proposing to acquire a controlling stake in a company with assets worth HK$337 million (without taking into account the listed status of the Company) for a consideration of HK$40 million. The financial creditors have requested the management of the Company to supply information on the financial standing of Ever Capital, a company incorporated in the British Virgin Islands, and its relationship, if any, to the Company's management. No information on this was provided.

27. For these reasons, BOC and the supporting financial creditors have rejected the revised proposal.

28. What is proposed by BOC and the supporting financial creditors is that provisional liquidators should be appointed to make an assessment of the financial position of the Company with a view to facilitating a restructuring of the Company and its subsidiaries, as they have lost faith in the management of the Company to put forward a viable proposal. It is hoped that the listed status of the Company may be realised in the absence of a winding up order as the financial and regulatory requirements of the Stock Exchange for such a relisting are less onerous than for a relisting by way of introduction where a company has been wound up. Hence, the listed status would be far more attractive to potential investors and could fetch a much higher value than in the situation after a winding up order is made, judging from the price generated for the listed status in Re Keview Technology (BVI) Ltd [2002] 2 HKLRD 290 at 296B. Thus, it is proposed that in the event that provisional liquidators are to be appointed, the petitioner would seek an adjournment of the petition at the hearing on 9 September 2002 for the provisional liquidators to explore restructuring proposals.

29. Is this a legitimate reason to seek the appointment of provisional liquidator? For a provisional liquidator to be appointed, an applicant is required to show a good prima facie case that a winding up order will be made. It may seem paradoxical that in this situation, the objective is not to wind up the company but to adjourn the petition so that a rescue proposal might be explored. In Keview, it was held by Yuen J (as she then was) that there is no jurisprudential objection in extending the powers of provisional liquidators appointed under section 193 of Cap. 32 to carry out a corporate rescue role. It seems to me a logical extension of Keview that if provisional liquidators may be empowered by the court to facilitate a restructuring proposal, this recognised function of the provisional liquidators could provide the rationale for appointing them in the first place.

30. The statutory provisions, namely section 193(3) of Cap. 32 and rule 28(1) of the Companies (Winding-up) Rules, are wide enough to accommodate such a ground for appointment. The English courts have recognised that the avoidance of a scramble by creditors for assets and the protection of assets pending the putting forward of a scheme of arrangement may be good reasons for the appointment of provisional liquidators in the case of insurance companies, where the administration order scheme is not available (see Keview, supra. at 293G to H; Re English & American Insurance Co. Ltd [1994] 1BCLC 649 at 650b to d; and Lightman and Moss, The Law of Receivers and Administrators of Companies, 3rd ed., para. 2-045). I was also referred by Mr Bartlett to an Australian decision, Cope Allman (Marrickville) Pty. Ltd v The Marrickville Businessman's Club Ltd (1983) 1 ACLC 1003, in which the court appointed a provisional liquidator for the purpose of ascertaining whether the company's business could be carried on effectively and possibly of ascertaining whether some arrangement or compromise could be reached with the creditors.

31. In Keview, it was held that it is not an abuse of the process for a petitioner to present a petition for the purpose of effecting a freeze on actions against the company, so that a scheme of arrangement can be worked out, adopting the dicta of Harman J in Re Esal (Commodities) Ltd [1985] BCLC 450 at 459 to 460. I respectfully agree. So long as it is intended by the applicant that a winding up order will be sought in the event that a scheme of arrangement cannot be achieved and that it is likely that a winding up order would be granted if it were sought, it does not appear to me there is any abuse of the process of the court.

32. For the above reasons, I accept this is also a proper ground for appointing provisional liquidators in this instance.

The choice of the provisional liquidators

33. BOC and the supporting financial creditors have proposed to appoint Mr Stephen Liu Yiu Keung and Mr Yeo Boon Ann of Ernst & Young as provisional liquidators. The Company has objected to these individuals on the ground that Ernst & Young had acted for the Company in formulating a draft restructuring proposal in September 2001 and that it had carried out a limited scope financial review which was issued in October 2001. It was submitted by Mr Wong that because of this past involvement of Ernst & Young, these individuals have put themselves into an apparent position of conflict.

34. I do not regard this as sufficient reason for not appointing these individuals. It has not been alleged or shown in the evidence filed by the Company that the information made available to Ernst & Young or the work they carried out in relation to their previous assignments were such that it would be improper for them to act as provisional liquidators. I also bear in mind that the review conducted by Ernst & Young was a limited scope financial review.

Orders

35. For the above reasons, I have made an order appointing Mr Liu and Mr Yeo the provisional liquidators of the Company in terms of the draft order submitted by BOC. I have ordered that the costs of the application including those of the Official Receiver be taxed and paid out of the assets of the Company in the first instance.

Representation:

Mr Jeremy Bartlett, instructed by Messrs Clifford Chance, for the Applicant

Mr William Wong, instructed by Messrs Chow, Griffiths & Chan, for the Company

Ms Phyllis McKenna, for the Official Receiver

Appeal by the Applicant to Court of Appeal. Appeal dismissed. Please refer to Appeal Judgment of CACV000378/2002.