RE OCEAN TIME DEVELOPMENT LTD AND OTHERS

HCCW 334/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 334 OF 2004

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J U D G M E N T

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1.  On 12 August 2003, Zhu Kuan (Hong Kong) Company Limited (“ZKHK”) went into compulsory liquidation.  Mr Cosimo Borelli and Mr Kelvin Flynn were appointed its liquidators.  Prior to its liquidation, ZKHK was a window company for the Zhuhai municipal government.  It had a number of direct and indirect subsidiaries.  One of its indirect subsidiaries was Ocean Time Development Limited (“Ocean Time”), which it held through a subsidiary known as Tinson International Limited (“Tinson”).  Ocean Time had one main asset, a piece of land in Lok Ma Chau, namely the Remaining Portion of Lot No. 750 in Demarcation District No. 99 (“the Lok Ma Chau Land”).  With a view to realising the assets that were ultimately owned by ZKHK, Messrs Borelli and Flynn took steps to have various of ZKHK’s subsidiaries (direct and indirect), including Tinson and Ocean Time, put into liquidation, with themselves appointed as the liquidators of such subsidiaries.  I shall refer to them in this judgment as “the Liquidators”.

2.  Ocean Time was not a wholly owned indirect subsidiary of ZKHK.  Its immediate parent company, Tinson, was owned as to 60% by ZKHK and as to 40% by Grand Gain Investment Limited (“Grand Gain”), a company whose main shareholder is Mr Lau Wong Fat (“Mr Lau”).  Tinson itself owned 98% of Ocean Time, the remaining 2% of Ocean Time’s shares being owned by a third party unrelated to ZKHK or Grand Gain.  Grand Gain and ZKHK (in liquidation) are members of the Committee of Inspection of Ocean Time.  Mr Lau is a prominent businessman with extensive interests and contacts in the New Territories, and it would appear that ZKHK and Grand Gain and their respective related companies had, prior to ZKHK’s liquidation, a fairly substantial history of cooperating with one another in relation to business opportunities.  The investment in Tinson and, through it, in Ocean Time and the Lok Ma Chau Land would appear to be an instance of such business cooperation.

3.  Apart from being a shareholder in Tinson, Grand Gain is also a creditor of Ocean Time, to the extent of HK$875,155 (although its proof of debt had been rejected by the Liquidators, it successfully appealed against such rejection and was admitted to proof in this amount – see my judgment dated 1 June 2006 in HCCW 334, 336 and 338 of 2004 and HCA 1463 of 2005 (unreported) at paragraphs 33 to 38).

4.  The Lok Ma Chau Land had a total area of just under 2.25 million square feet.  However, prior to ZKHK going into liquidation, the Government resumed part of the Lok Ma Chau Land (some 500,000 square feet odd) for which it paid compensation, leaving Ocean Time with a little under 1.75 million square feet of property.

5.  Following their appointment as liquidators of Ocean Time, the Liquidators took steps to sell the remaining part of the Lok Ma Chau Land.  According to the Liquidators, there was little interest from potential purchasers, and only one formal offer was received.  Following negotiations, the initial offer made was improved to HK$53 million, and the intending purchaser signed a provisional sale and purchase agreement for a sale at HK$53 million on 25 January 2005.  The Liquidators signed the provisional sale and purchase agreement some two days later, on 27 January 2005.  It appears that at just about this time, Mr Lau or Grand Gain had some interest in purchasing the land themselves, this being something which (according to the Liquidators) Mr Lau communicated to the estate agents handling the sale of the property on behalf of the Liquidators.  It also appears to be the case that in the month or two prior to this, Grand Gain had been making inquiries as to the progress of attempts to sell the property.

6.  Grand Gain complains that the sale was effected at considerably below the market value of the property, which is said to have been some HK$126 million, on the basis of a valuation provided by another firm of estate agents and valuers.  Initially, Grand Gain instituted proceedings against the liquidators personally, claiming damages for negligence and misrepresentation (this was HCA 1463 of 2005, which I struck out on 1 June 2005 as disclosing no reasonable cause of action – see my judgment referred to in paragraph 3 above).  In my judgment, which did not go into the underlying merits of the complaints, I expressed the view that if Grand Gain had a valid complaint, the proper vehicle for advancing it was by way of misfeasance proceedings against the Liquidators in the liquidation of Ocean Time, pursuant to section 276 of the Companies Ordinance (Cap. 32) and not by an action against the Liquidators.

7.  Grand Gain subsequently issued a summons in the liquidation of Ocean Time on 8 December 2006, seeking a declaration that the Liquidators had been guilty of misapplication of the property of Ocean Time, and of misfeasance in relation thereto in two respects.  First, by negligently causing Ocean Time to sell the remaining part of the Lok Ma Chau Land at what was said to be a gross undervalue, and without giving notice of the sale to Grand Gain or any other member of the Committee of Inspection; and second, by negligently and wrongfully paying out substantially all of the available assets of Ocean Time without paying any dividend on, or otherwise discharging, Ocean Time’s debt to Grand Gain.  The summons also sought consequential orders requiring the Liquidators to make good the loss caused to Ocean Time’s estate by their allegedly wrongful acts.

8.  This application arises in connection with that summons.  Following the issue of the summons, affidavit evidence was filed on behalf of Grand Gain and the Liquidators.  This included a considerable amount of valuation evidence from various firms of estate agents, valuers and surveyors.  However, Mr Lau’s affirmation in which he set out his evidence in reply on behalf of Grand Gain also included among its exhibits what purported to be an expert report (“the Report”) prepared by Mr Joseph Lo, an insolvency practitioner who is a partner of Messrs Deloitte Touche Tohmatsu, Hong Kong (“Mr Lo” and “Deloitte” respectively).

9.  In section 1.2 of the Report, Mr Lo describes its purpose in the following terms:-

“	[Deloitte] was engaged to:
	(a)	provide an expert opinion on the proper and appropriate procedures that a liquidator should take in disposing of a valuable property of a company in liquidation in order to properly discharge his duties;
	(b)	provide an expert assessment on the conduct of the Liquidators in relation to the sale of the Lok Ma Chau Land, in particular the procedures adopted by them in the sale, including but not limited to the rationale, and reasonableness for [sic] the appointment of two associated companies as the valuer and sole agent for the sale of the Lok Ma Chau Land and the sale of the Lok Ma Chau Land without consulting the [Committee of Inspection] of [Ocean Time] before agreeing the final sale terms.”

10.  In the body of his report, Mr Lo goes on to deal with such matters as the general duties of a liquidator (section 3.1), various aspects of what he describes as the “proper and appropriate steps in disposing of a peculiar asset of significant value” (section 3.2) which included the view that it was incumbent on the Liquidators to have consulted the Committee of Inspection before agreeing the final terms of the sale (section 3.2.5), followed by a detailed criticism of the manner in which the Liquidators marketed and sold the property (section 4), dealing with such matters as the Liquidators having (at least in Mr Lo’s view) disregarded enquiries and criticisms by Grand Gain, undertaken insufficient marketing activities, acted hastily in selling the property, the terms of the agreement for sale that was entered into, failure to obtain a second valuation or an updated valuation prior to the sale, using associated companies as valuer and sale agent, and failing to consult the former directors of Ocean Time to see if they might be able to assist in introducing potential purchasers or by providing information as to the characteristics of the property which might influence the price or terms of the sale.

11.  The inclusion of the Report as an exhibit to Mr Lau’s reply affirmation resulted in the Liquidators applying to have the Report excluded from the evidence to be adduced in the misfeasance proceedings.  The matter was first raised in a directions hearing on 29 June 2007, when I directed that this issue should be dealt with at a substantive hearing, in respect of which the Liquidators should give notice to Grand Gain of the grounds upon which they contended that the Report should be excluded.  This was that hearing.

12.  On 6 July 2007, the Liquidators filed a notice of the grounds of their application.  These were that:-

(1)	There was no recognised professional practice as to the matters which the Report dealt with, namely the procedures to be adopted by liquidators in disposing of a valuable property and an assessment of their conduct in relation to the sale of the Lok Ma Chau Land;
(2)	These matters were questions of fact and law which the court could best deal with without receiving what purported to be expert evidence;
(3)	The Report was no more than Mr Lo’s personal opinion of what he would have done in the Liquidators’ position;
(4)	The view that the Committee of Inspection should have been advised of the process and progress of the sale was wrong as a matter of law;
(5)	Mr Lo’s view that the Liquidators disregarded the Committee of Inspection was wrong as a matter of fact, or, alternatively, was irrelevant;
(6)	The particular criticisms of the manner in which the sale was conducted were outside Mr Lo’s area of expertise;
(7)	Those criticisms were matters which the court could consider without the need for assistance from an insolvency practitioner;
(8)	As the Liquidators were officers of the court, the court could well assess their conduct without the necessity of opinion evidence such as the Report;
(9)	The admission of the Report would result in the unnecessary incurring of possibly substantial costs;
(10)	Mr Lo’s opinion went to the ultimate issue in the proceedings, namely, whether the Liquidators had been negligent in respect of the sale of the Lok Ma Chau Land; and
(11)	The only issue on which the court might derive assistance from expert evidence was in relation to the value of the Lok Ma Chau Land, and whether it was sold at a “gross undervalue”, this not being something that was addressed by Mr Lo, nor within his area of expertise.

13.  At the hearing, the Liquidators were represented by Mr Carolan, and Grand Gain by Mr Chan SC and Mr Lee.  Both parties were in agreement as to the approach to be taken by the court, agreeing that if the court was of the clear view that the Report should not be admitted, then it could and should direct its exclusion at this stage.  There was also broad agreement as to the legal principles to be applied, it being agreed that these were set out in Barings Plc (in liquidation) v Coopers & Lybrand [2001] Lloyds LR (Banking) 85 (applied in Hong Kong in Annabell Lee v Lee Wing Kim (unreported, HCA 9522 of 1997, CFI, Chu J, 6 December 2001).  In the Barings case, Evans-Lombe J described the test to be adopted by the court as a two stage test, in the following terms (at paragraph 45 of the judgment):-

“

In my judgment the authorities which I have cited above establish the following propositions: expert evidence is admissible under section 3 of the Civil Evidence Act 1972 [equivalent to section 58 of the Evidence Ordinance (Cap. 8)] in any case where the court accepts that there exists a recognised expertise governed by recognised standards and rules of conduct capable of influencing the court’s decision on any of the issues which it has to decide and the witness to be called satisfies the court that he has a sufficient familiarity with and knowledge of the expertise in question to render his opinion potentially of value in resolving any of those issues.  Evidence meeting this test can still be excluded by the court if the court takes the view that calling it will not be helpful to the court in resolving any issue in the case justly.  Such evidence will not be helpful where the issue to be decided is one of law or is otherwise one on which the court is able to come to a fully informed decision without hearing such evidence.”

14.  Mr Carolan submitted that it was doubtful whether there is a recognised expertise in relation to the conduct of the office of a liquidator, although he accepted, I think, that in relation to certain aspects of that office, there might be room for it to be concluded that such a recognised expertise existed, such as, perhaps, in relation to such matters as the accounting expertise that might be required for the production of liquidators’ accounts.  He also submitted that to the extent that it might be said that there might be some elements of expertise in the carrying out by a liquidator of the functions of his office, in that most liquidators will be professional persons (usually with accounting or legal qualifications) and there is a body of law relating to the duties of liquidators and the standards to be expected of them, for the most part, an assessment of their conduct would involve questions of law, in that it would be necessary to apply the relevant standards established by the law to the conduct in question.  On this basis, he submitted that even if it were considered that there was a recognisable expertise of acting as a liquidator, opinion evidence in relation to the standards required would not be helpful to the court, as it would largely involve questions of law.  Finally, he submitted that having regard to the nature of the actions that were to be the subject of scrutiny in these proceedings – namely, the steps taken in relation to the sale of property – there could either be little in the way of recognised expertise in relation to this beyond the practice of any businessman engaged on the sale of a piece of property, or at best, that any such expertise would be the province of someone in the business of estate agency or property selling, rather than a professional liquidator and insolvency practitioner.

15.  Mr Chan, however, contended that in order for expert evidence to be admissible, it was not necessary for there to be a recognisable profession as such, and that it was sufficient if there were a recognisable body of expertise in relation to the matter in question.  He went on to suggest that it could not seriously be argued that no such body of expertise existed in relation to the actions of the Liquidators that would come under scrutiny in this case, since Mr Borelli himself, in the evidence filed in answer to the claims advanced by Grand Gain, had repeatedly referred to his firm’s, and his personal, experience of handling liquidations and restructurings of some complexity, these being matters in respect of which he professed to have real expertise.  He went on to submit that what Mr Lo had to say in the Report would be of obvious relevance to an assessment of the Liquidator’s conduct, and that certain points canvassed by Mr Lo, such as the question of whether or not the Committee of Inspection should have been consulted, were peculiarly matters that would arise in the context of an examination of a liquidator’s handling of the sale of property.  He therefore suggested that not only was there a recognisable body of expertise to which the court could usefully have regard, evidence in relation to it would probably be of assistance to the court in this case.

16.  I would accept Mr Chan’s submission that it is not necessary to have a recognisable profession in order for there to be a recognisable body of expertise in relation to the matter in question (see the Barings case at paragraphs 39 to 40).  I would also accept, as he suggested, that the ultimate objective is that the court should reach a fully informed decision, and that expert evidence which has a bearing on the issues and which is helpful to the court in coming to its decision should be received (see e.g. United Bank of Kuwait v Prudential Property Services Ltd (unreported, English Court of Appeal, 27.11.95) at p.3 of the transcript, and the Barings case at paragraphs 20, 44 and 45).  I would also be inclined to accept that, while there may be no profession of acting as liquidators, the conduct of that office is something that requires skill, experience and expertise, as is witnessed by the fact that most liquidators (at least those who carry out that office on a full-time or paid basis) are professional persons from, as I have observed, the accounting or legal professions.

17.  That said, however, it does seem to me that in respect of the matters which Mr Lo raises in the Report, there is, in relation to most of the points which he makes, no body of expertise that exists in relation to the office of liquidators.  As will be apparent from my summary of the Report, most of Mr Lo’s criticisms of the way in which the Liquidators acted in this case relate to the manner in which they went about the sale of the property.  While it might be that there is a certain amount of expertise involved in marketing and selling a property so as to obtain the best possible, or at least a good, price for it, I do not see that such expertise is such as would be peculiar to liquidators or insolvency practitioners.  In truth, the position would appear to be no different to that which would obtain in the case of any person transacting a sale of property in circumstances in which he may be under a duty to act in such a way as to obtain the best, or a reasonable, price for it – such persons might include trustees, executors or administrators, directors of companies or mortgagees, among others.  I do not think that there are particular aspects of the sale of property by a liquidator that give rise to a separate and identifiable body of expertise, such as would justify the admission in evidence of a report along the lines of the Report.

18.  While I would be prepared to accept that some evidence as to the best method of selling a property to best advantage might be admissible in the context of a case such as the present, I would not agree that such evidence would appropriately come from an insolvency practitioner such as Mr Lo.  Rather, it seems to me that such evidence might, at best, be adduced from a professional estate agent, such as one of the many valuers who are, it seems, poised to give evidence as to the value of the Lok Ma Chau Land for the purposes of these proceedings.

19.  Further, in relation to those aspects of the Report which might be thought to be peculiar to the situation of a sale of property by liquidators – in particular the need, if any, to consult the Committee of Inspection, it seems to me that this, even accepting for the sake of argument that it is a matter on which there may be a body of expertise, is really something which involves the application of the obligations or standards imposed on liquidators by statute or the general law to the facts of the particular case, so as to amount to what is really a question of law, on which the opinion of an experienced liquidator is not going to be of assistance to the court.

20.  So far as Mr Chan’s point relating to Mr Borelli’s own assertions of expertise and experience are concerned, I do not think that this takes matters any further.  Just as I would not regard Mr Lo’s views as being of any particular assistance on these matters, I would regard Mr Borelli’s experience as a liquidator (which I accept is extensive) in much the same way – that it does not follow from the fact that he is very experienced that what he has done in the present case is necessarily right or without blemish.

21.  For these reasons, therefore, I am satisfied that Mr Lo’s report is not admissible for the purposes for which it is intended.  I do not think that Mr Lo can be regarded as an expert in relation to the sale of property, and do not think that his evidence on these matters is at all likely to assist the court.  To the extent that the contentions which are canvassed in the Report are matters which Grand Gain desires to raise in the proceedings, they are already raised in Mr Lau’s affirmations, and are open to Grand Gain to advance, through Mr Lau or perhaps the valuation experts, or by way of submission as to the duties and obligations of liquidators as a matter of the general law applicable to them.

22.  These reasons (which are comprised in grounds (1), (2), (6), (7) and (8) of the notice of grounds for objection summarised in paragraph 12 above) are sufficient to dispose of this application.  For completeness, however, I shall deal briefly with the other grounds advanced by the Liquidators in the notice of grounds for objection to the admission of the Report (which Mr Carolan did not, in fairness to him, stress at the hearing).

23.  In relation to the suggestion in ground (3) that the Report represents only the personal opinion of Mr Lo, I would have accepted Mr Chan’s submission that this is probably just a matter of the way in which the report is worded, and that Mr Lo’s intention was to state his opinion as to the way in which a reasonably competent liquidator should have acted.

24.  As for the points made in grounds (4) and (5), these are matters which should be considered at the trial of the proceedings.  If I had considered that the Report should be admitted as evidence, these points, which go to the correctness of the views or facts stated in it, would not have been matters which I would have thought it appropriate to reach any conclusions on at this stage.

25.  As for ground (9), I do not think that the fact that costs and expense would be incurred in responding to and dealing with the Report would have constituted a basis for excluding it, had it otherwise been proper to admit it in evidence.

26.  As for ground (10), it is well established that it is possible for an expert to give opinion evidence as to the ultimate issue in the proceedings in an appropriate case, and I would not have been inclined to exclude the Report on this ground had I thought it otherwise admissible.

27.  In the circumstances, however, I am satisfied that it would be appropriate for me to exclude the Report from the evidence in these proceedings, and I therefore decline leave to Grand Gain to adduce it.  I shall leave it to the parties to formulate an appropriate form of order to give effect to this ruling.

28.  So far as costs are concerned, as the Liquidators have been successful in their application, and no significant time was spent on the grounds other than those which have proved successful, I think that the costs should simply follow the event, and I shall therefore make an order nisi that Grand Gain is to pay the Liquidators’ costs of this application, to be taxed on the party and party basis if not agreed.

HCCW 334/2004

HCCW 336/2004

HCCW 338/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 334 OF 2004

COMPANIES (WINDING-UP) NO. 336 OF 2004

COMPANIES (WINDING-UP) NO. 384 OF 2004

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AND

HCA 1463/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1463 OF 2005

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RULING ON COSTS

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Introduction

1.  On 1 June 2006, I handed down judgment in relation to applications by Grand Gain Investment Limited (“GGI”) in the liquidations of each of Tinson International Limited (“Tinson”), Goldgood Properties Limited (“Goldgood”) and Ocean Time Development Limited (“Ocean Time”) seeking leave to apply out of time to reverse the decision of the liquidators of those companies, Mr Borelli and Mr Flynn (“the liquidators”) to reject GGI’s proof of debt filed in each of the liquidations.  Those applications were decided substantially in favour of GGI, and I made a costs order nisi that the liquidators should pay to GGI 90% of GGI’s costs of the appeals, to be taxed on the party and party basis.

2.  In the same judgment, I also dealt with an application by the liquidators to strike out the claim made against them by GGI in HCA 1463 of 2005 in relation to the manner in which the liquidators (as liquidators of Ocean Time) had dealt with the sale of certain property owned by Ocean Time, which had (it was alleged) caused loss to GGI as a creditor of Ocean Time.  That application was also successful, and in relation to it, I made a costs order nisi that GGI should pay the liquidators their costs of the striking out application and of the action, also to be taxed on the party and party basis.

3.  Both GGI and the liquidators have sought to vary the costs orders nisi made.

Costs of appeals against rejection of proofs of debt

4.  In relation to GGI’s appeals against the rejection of its proofs of debt, GGI seeks a variation of the costs order so as to certify the matter as having been fit for the attendance of two counsel, GGI having been represented before me by Mr Edward Chan S.C. and Mr Godfrey Lam.  The liquidators also seek a variation of this costs order, so as to provide that the costs payable by them should be paid out of the assets of the companies concerned.

5.  So far as GGI’s application is concerned, the liquidators have taken a neutral position.  Having regard to the fact that the amounts involved were very substantial, that the matter was of importance to GGI, and that the points involved were not free from difficulty, I think that it would be appropriate to vary the costs order nisi so as to certify the matter as having been fit for the attendance of two counsel.

6.  As for the liquidators’ application, GGI does not make any submissions as to this.  Having regard to the facts that the matter was not free of difficulty, and that the liquidators, although mistaken, did not act unreasonably or improperly, I do not see any basis for saying that it would be unjust that their costs should be met out of the assets of the companies concerned, in circumstances in which they were attempting to carry out their duties as liquidators of those companies.  In such cases, it is appropriate to permit the liquidators to recoup themselves out of the assets of the companies concerned (see e.g. De-Etco International Limited v Desirable Enterprise Company Limited [1993] 1 HKC 251).  I shall therefore also vary this costs order nisi so as to provide that GGI’s costs are to be paid by the liquidators, and that the liquidators may do so out of the assets of the companies concerned.  This will have the effect of enabling the liquidators to meet the costs order from the companies’ assets insofar as they are sufficient for the purpose, but leave them liable for any shortfall.  It would seem from the fact that the liquidators have made this application that there are sufficient assets in the companies to meet the liability to costs, but if there are not, there is no reason why GGI should have to be out of pocket as a result.

7.  So far as the costs of the applications to vary this costs order nisi are concerned, as neither of the applications was opposed, it seems to me that each party should bear the costs of its own application, and I shall therefore make no order as to costs.

Costs of striking out application

8.  The liquidators seek to vary the costs order nisi in respect of the striking out application so as to require GGI to pay their costs of that application, and of the action, on an indemnity basis.  As alternatives, they ask for the order to be varied so as to provide either that the difference between the liquidators party and party costs and their actual costs be paid out of the assets of Ocean Time, or at least that it should be made clear that the costs order is without prejudice to their entitlement to seek, at an appropriate future time, reimbursement of that difference from the assets of Ocean Time.

9.  The liquidators rely on the decisions of Le Pichon J (as she then was) in Hill v O’Driscoll [1998] 2 HKLRD 994, and of Kwan J in Re Wing Fai Construction Company Limited (unreported, HCCW 735 of 2002, 23 September 2004).  Both of these were cases in which the proceedings were brought against liquidators personally, outside of the relevant winding up proceedings.

10.  In Hill v O’Driscoll, an Originating Summons was issued against provisional liquidators personally, but was eventually withdrawn.  The provisional liquidators contended that the proceedings were misconceived and also had been procedurally wrong, in that they should have been brought, if at all, in the winding up proceedings and not by separate proceedings.  In acceding to their application for costs to be awarded on the indemnity basis, Le Pichon J said (at p.1000):-

“Procedural errors would not normally attract an award of costs on an indemnity basis.  Where the procedural mistake is such that a normal costs order would leave the provisional liquidators personally out of pocket, the error assumes a significance which it would not otherwise possess.”

Le Pichon J went on to say that in that case, the losing party had acted in a highhanded manner and had imposed unreasonable deadlines, and that an award of indemnity costs was also justified because the losing party knew that the company did not have sufficient assets out of which the provisional liquidators could recoup their costs.

11.  In the Wing Fai case, a notice of motion to commit a liquidator for contempt of court was dismissed on the basis that there was no case to answer.  Kwan J held (at paragraph 20 of her judgment) that, if necessary, the liquidator would be entitled to recover any shortfall in his costs out of the estate of the company, as he was sued as an incident of his role as its liquidator.  However, she went on to say (at paragraphs 21 to 29) that it was unfair in the circumstances that the shortfall should be borne by the creditors of the company, and that this justified the making of an order for indemnity costs, bearing in mind the principles on which such an order should be made, which Kwan J summarised as follows:-

“22.   ... It is clear that the circumstances in which an indemnity award might properly be made are not confined to the circumstances such as those described in [Overseas Trust Bank Limited v Coopers & Lybrand (a firm) [1991] 1 HKLR 177].

 23.   The discretion of the court is not to be fettered or circumscribed beyond the requirement that taxation on an indemnity basis must be “appropriate” ([Choy Yee Chun v Bond Star Development Limited [1997] HKLRD 1327] at 1335C to E). ... notwithstanding that the court’s discretion is not so confined, there must still be “special and unusual features” (Choy Yee Chun at 1334G) to warrant an award of costs on an indemnity basis.”

12.  In this case, the liquidators submit that, as in Hill v O’Driscoll, the claim against them in the action was misconceived and procedurally wrong, in that the proper course would have been for GGI to have applied under section 276 of the Companies Ordinance (Cap. 32) in respect of the liquidators’ acts of which complaint was made.  They also point out that their solicitors had drawn this to GGI’s solicitors at an early stage, but that GGI had pressed on with the action nonetheless.

13.  GGI submits that the litigation was simply ordinary hostile litigation, where the general rule is to order party and party costs, and that there is nothing in their conduct of the proceedings which should attract an award of indemnity costs against them.  GGI also says that the liquidators relied on other, bad, grounds for striking out (principally the contention that GGI was not a creditor of Ocean Time at all), and that the point on which the application to strike out was decided was not free from difficulty.  It was also pointed out that certain information was not provided by the liquidators until the course of the hearing.  GGI suggests that the fact that the company in Hill v O’Driscoll was known to be without assets was a relevant factor in ordering indemnity costs, and that Re Wing Fai was a special case concerning alleged criminal contempt of court as to which it had been found there was no case to answer.

14.  In my view, while it will not invariably be the case that a liquidator sued personally should be entitled to indemnity costs, it seems to me that there are in this case special circumstances which make it appropriate for GGI to be ordered to pay the liquidators costs of the striking out application and of the action on an indemnity basis.

15.  It would, I think, be unjust for the liquidators to be left out of pocket as to any part of their costs in dealing with the action brought against them by GGI.  The action arises out of their acts as liquidators in disposing of Ocean Time’s property.  This is clearly something which was done as part of the liquidation, and for the benefit of the creditors as a whole.  Where this is the position, in an ordinary case, it might be appropriate for the creditors to bear the shortfall between party and party costs recoverable from the other side and the actual costs incurred in dealing with the proceedings.

16.  However, in this case, the position is that the action has been struck out, on the grounds that it discloses no reasonable cause of action.  In my judgment of 1 June 2006, I held that it was not open to GGI, as a creditor, to sue the liquidators in respect of alleged wrongdoing which had resulted in a loss to the estate of the company of which it was a creditor, and that the correct procedure would have been to bring an application against the liquidators pursuant to section 276 of the Ordinance, having first (if necessary) established GGI’s status as a creditor of Ocean Time.  Had this been done (as the liquidators’ solicitors pointed out fairly early on in the proceedings), the matter would have been placed on a proper procedural footing, and would not have been susceptible to being struck out on the grounds on which it was struck out.

17.  Moreover, as the underlying complaint has not been considered on its merits, there is nothing to prevent GGI from seeking to pursue its complaint by way of an application under section 276.  As a result, the proceedings in HCA 1463 of 2005 will have proven to be wholly futile, and will amount to a waste of costs which will have achieved nothing.  The liquidators and creditors will remain at risk of further proceedings in relation to the same underlying complaint, in respect of which costs will be incurred, and as to which there is no guarantee that, even if they are successful in defending it, costs will be awarded to them on an indemnity basis.  In such circumstances, it seems to me that it would be unjust for either the liquidators or the creditors of Ocean Time to have to bear the difference between the costs of the action, recoverable on a taxation on the party and party basis, and the actual costs incurred by the liquidators in dealing with GGI’s claim against them.

18.  I do not think that the fact that the liquidators took the point, which turned out to be ill-founded, that GGI was not a creditor of Ocean Time, should be held against them in this context.  At the time when this point was made, GGI’s proof of debt had been rejected, and no appeal had been lodged.  In the event, GGI was able to satisfy me that it should be permitted to appeal against the rejection out of time.  Whatever had been the outcome of that appeal, the action as it stood would have failed for the reasons which I gave.

19.  Similarly, although it is true that the liquidators provided certain information which GGI had sought rather late in the day, nothing turned on these documents in the context of the striking out application, and this is therefore not a basis for making some other award of costs.

20.  Further, while I would accept that GGI in this case did not think (as the losing party in Hill v O’Driscoll appears to have known) that the liquidators would not be able to recoup themselves from the assets of Ocean Time (which would seem likely to be sufficient to cover any shortfall in costs), I do not think that this is the only basis on which it would be proper to make an award of costs on the indemnity basis.

21.  For the foregoing reasons, therefore, I would vary my order nisi as to the costs of the striking out application so as to award the costs of that application and of the action to the liquidators, such costs to be taxed on the indemnity basis if not agreed.  So far as the costs of the application to vary the costs order nisi are concerned, I think that these should be treated as part of the costs of the action and therefore order that such costs should be likewise recoverable by the liquidators from GGI on the indemnity basis.

Messrs Lovells for the Liquidators (in HCCW 334, 336 & 338/2004) and the Defendants (in HCA 1463 of 2005)

Mr Godfrey Lam, instructed by Messrs Michael Li & Co., for the Creditor (Grand Gain Investment Limited) (in HCCW 334, 336 & 338/2004) and the Plaintiff (in HCA 1463 of 2005)

HCCW 334/2004
HCCW 336/2004
HCCW 338/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO. 334 OF 2004

COMPANIES WINDING-UP NO. 336 OF 2004

COMPANIES WINDING-UP NO. 338 OF 2004

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____________

AND

HCA 1463/2005

 IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1463 OF 2005

____________

____________

Before: Hon Barma J in Chambers

______________

J U D G M E N T

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The applications before the court

1.  At this hearing, there were four applications before the court.  Three were applications by Grand Gain Investment Limited (“GGI”), made respectively in the liquidations of each of Tinson International Limited (“Tinson”), Goldgood Properties Limited (“Goldgood”) and Ocean Time Development Limited (“Ocean Time”) by summonses dated 12 October 2005, seeking leave to apply out of time to reverse the decision of the liquidators of each of those companies (in each case Mr Cosimo Borelli and Mr Kelvin Flynn) (“the liquidators”) by which the liquidators rejected proofs of debt submitted by GGI in each of the liquidations, and seeking the substantive reversal of such rejections.  In the case of Tinson, GGI also seeks leave to amend its proof of debt by reducing the amount claimed.  The fourth was an application by the liquidators, to strike out a claim made against them by GGI in HCA 1463 of 2005 in relation to certain matters done by them in their handling of the liquidation of Ocean Time.

The appeals against the rejection of GGI’s proofs of debt

2.  I shall deal first with the applications to reverse the liquidators’ decisions in respect of the proofs of debt filed by GGI in the three liquidations.

3.  Each of Tinson, Goldgood and Ocean Time is a company in which GGI and Zhu Kuan (Hong Kong) Company Limited (“ZKHK”) were, directly or indirectly, interested.  GGI held 40% of the shares in Tinson (ZKHK holding the other 60%), which in turn held 98% of the shares in Ocean Time (the remaining 2% being held by a company unrelated to either GGI or ZKHK).  Ocean Time’s principal asset appears to have been property in the New Territories.  GGI held 30% of the shares in Goldgood (ZKHK holding the other 70%), which owned various assets.

4.  ZKHK was a “window company” for the Zhuhai Municipal Government.  It was wound up pursuant to the petition of Standard Chartered Bank presented on 12 August 2003.  The liquidators (who had earlier been appointed as provisional liquidators of ZKHK) were appointed its liquidators.  In the course of their conduct of the provisional liquidation and liquidation of ZKHK, they took steps to get in its assets.  These included putting various of ZKHK’s subsidiaries, including Tinson, Goldgood and Ocean Time, into liquidation.

5.  On 22 November 2004, GGI submitted a proof of debt in respect of each of Tinson, Goldgood and Ocean Time.  The proof of debt was in each case signed by one of its directors, a Madam Yu Hung Ping (“Madam Yu”).  GGI claimed to be a creditor of Tinson in the amount of HK$69,386,343.25 in respect of advances made by it to Tinson.  It claimed to be a creditor of Goldgood in the amount of HK$37,767,830.09 in respect of advances made by it to Goldgood.  Finally, it claimed to be a creditor of Ocean Time in the amount of HK$1,302,574.00 in respect of various payments of management fees and administration expenses paid by it on behalf of Ocean Time.  The proofs of debt were accompanied by a copy of the audited accounts of the companies concerned - in the case of Tinson and Ocean Time, for the year ended 31 March 1999, and in the case of Goldgood, for the year ended 31 March 1998.

6.  The liquidators were not satisfied with the proofs submitted by GGI.  On 1 February 2005, they wrote to GGI asking for further information and documentation to be provided in respect of each of the alleged debts.  GGI did not respond to the request, and the liquidators wrote again to GGI on 3 March 2005, stating that since no further information had been received, the liquidators would adjudicate the claims on the basis of the information provided to date.  Thereafter, on 30 March 2005, the liquidators sent GGI notices of rejection in respect of each of the proofs of debt.  However, GGI did not challenge the rejection of its proofs of debt until 12 October 2005, well after the expiry of the 21 day period provided for in rule 95 of the Companies (Winding-Up) Rules within which an aggrieved creditor can lodge an appeal against rejection as of right.

7.  Each of GGI’s applications for leave to appeal out of time and for the substantive reversal of the liquidators’ decisions was supported by an affidavit of Madam Chan Wang Yu (“Madam Chan”).  Madam Chan describes herself as an employee of the Grand Gain group of companies since 1995, whose duties involve “the handling of incoming faxes and correspondence and also dealing with the various accounting matters of [GGI]”.  She explains that while she remembers having seen the letters of 1 February 2005, which she passed on to Madam Yu for handling, she does not recollect ever having received the letters of 3 March 2005, or the notices of rejection dated 30 March 2005.  She says that by March 2005, Madam Yu had fallen out with Mr Lau Wong Fat (“Mr Lau”), the other director and main shareholder of GGI, and that Madam Yu may well have intercepted these documents to cause problems for GGI.

8.  Madam Chan’s affirmations went on to deal with the underlying merits of the debts.  In each case, she exhibited additional sets of audited accounts of the companies concerned, going back to the financial year ending on 31 March 1994 in the case of Tinson, and 31 March 1993 in the case of Goldgood and Ocean Time.  However, no audited accounts were produced for any period after 31 March 1999 in the case of Tinson and Ocean Time, or after 31 March 1998 in the case of Goldgood.  Where there was a difference between the balance shown in the latest available set of audited accounts and the amount claimed in the proof of debt, she sought to provide an explanation for the difference.  In the cases of Ocean Time and Goldgood, the amounts claimed in the proofs of debt exceeded the figure shown in the latest accounts.  Madam Chan stated that the additional amount represented management fees and administration expenses in the case of Ocean Time, and what were described as “miscellaneous advances” in the case of Goldgood.  In the case of Tinson, while the figure in the latest audited accounts of Tinson was slightly more than that in the proof of debt filed by GGI against it, Madam Chan explained that as Tinson had received a distribution in respect of its share of the compensation paid by the Government on the resumption of part the land owned by Ocean Time, credit would be given for this amount, so as to reduce the amount of the proof to HK$41,911,916.00.

Whether GGI should be given leave to appeal out of time

9.  At the hearing, Mr Carolan, appearing for the liquidators, indicated that while he was not in a position to consent to GGI being given leave to appeal against the rejections of the proofs of debt out of time, he would not make any submissions as to this, and would leave it to the court to exercise its discretion on this point, as all the material which was likely to be available for the purposes of determining the substantive appeal was already before the court.

10.  I am satisfied that it would be appropriate for me to exercise my discretion in GGI’s favour, so as to allow it to challenge the liquidators’ decisions despite the delay in doing so.  Madam Chan has put forward an explanation for the failure to respond promptly to the notices of rejection, and it seems to me most unlikely that GGI would have been likely to have intended to accept the rejection of its proofs of debt, having regard to the amounts involved, and also having regard to the fact that it has brought proceedings against the liquidators which are premised on its status as a creditor of Ocean Time and Tinson.  I therefore give leave to GGI to challenge the decisions of the liquidators to reject its proofs of debt in respect of each of Tinson, Ocean Time and Goldgood, notwithstanding that the time prescribed for doing so under Rule 95 of the Companies (Winding-Up) Rules has expired.

11.  I turn now to consider the merits of GGI’s appeals against the liquidators rejection of its proofs of debt.

The Tinson proof of debt

12.  I shall deal first with the position in relation to Tinson.  As I have noted, the amount for which GGI now seeks to prove has been reduced to HK$41,911,916.00.

13.  Mr Chan S.C., appearing for GGI, submits that in determining this question, the court is simply required to conclude whether, on a balance of probabilities, GGI has established that it is a creditor of Tinson.  In doing so, he says, the court should have regard to all of the evidence placed before it.  In this case, the evidence adduced by GGI consists of the audited accounts of Tinson and Madam Chan’s evidence as to why the amount shown in the audited accounts is to be reduced to that now claimed.  The audited accounts for the financial year ending on 31 March 1995 indicate that Tinson had debts of HK$127,196,113.00 and HK$72,206,961.00 respectively owing to its “holding company” and “a shareholder”.  As Tinson had only two shareholders, ZKHK holding 60% and GGI holding 40% of its shares, it followed that the debt owing to its “holding company” was owed to ZKHK, and the debt owing to “a shareholder” was owed to GGI.

14.  Mr Chan also points to the fact that Tinson’s issued share capital was relatively small (HK$1,000,000.00) in comparison with its assets (its investment in Ocean Time), so that absent any source of external funding (and there is no suggestion that there was any), the source of Tinson’s ability to provide funds to Ocean Time to enable Ocean Time to acquire its main asset must have been its shareholders, as indicated by its audited accounts.  Finally, Mr Chan drew my attention to Madam Chan’s evidence that the audited accounts were supplied to ZKHK regularly, and that it could be expected that ZKHK would have queried the accounts if they did not accurately reflect the loans by itself and GGI respectively.

15.  Against this, Mr Carolan submitted that the approach which should be adopted was as follows:-

(1) The onus of proof was on GGI to show that there was a real debt due to it;

(2) In determining whether or not to admit a proof of debt, the liquidators were not bound by the accounts, and could go behind them to form their own conclusions as to the existence or otherwise of a debt;

(3) The liquidators were not bound to assume that all relevant documents were available when the accounts were prepared;

(4) The liquidators were entitled to require satisfactory evidence of the debt proved for; and

(5) The evidence, such as it might be, had to be considered on its own merits.

16.  Mr Carolan went on to submit that the liquidators were entitled to conclude that the audited accounts could not be relied upon as evidence of the existence of a real debt due from Tinson to GGI, having regard to the following matters:-

(1) The liquidators had not been given any explanation of how the debt arose, other than Madam Chan’s statement in her affirmation it was, in effect, a shareholder’s loan by GGI to Tinson.

(2) Mr Lau had been unhelpful in the course of the liquidators investigation of the affairs of the Zhu Kuan group, and had failed (despite an order for his examination being made under section 221 of the Companies Ordinance) to provide any meaningful information, books or records relating to companies in the Zhu Kuan group (including the three companies with which I am concerned).  The only evidence of the debt was the audited accounts which were signed by Mr Lau (who was himself ultimately beneficially interested in it, through his ownership of GGI) as a director of Tinson.

(3) On the basis of investigations made by the liquidators (details of which were not provided, the liquidators considered that there was reason to doubt the independence of the auditor who had audited Tinson’s accounts, as he appeared to have been closely involved in restructuring transactions involving Mr Lau and the Zhu Kuan group, and also to have had a wide-ranging relationship with GGI.  The auditor was also said to have, without any good explanation, destroyed various audit files certain companies in the Zhu Kuan group before the expiry of seven years from the carrying out of such audits.

17.  I do not think that Mr Chan dissented from the legal approach suggested by Mr Carolan, which is based on Re Adam Holdings Limited [1985] 2 HKC 608 and Louis Lo v Toohey [2005] 1 HKC 51 (Court of Appeal) and (unreported) HCCW 180/1998 13 May 2004, Kwan J.  His position was that applying that approach, the question of GGI’s status as a creditor of Tinson should be resolved in favour of GGI, for the reasons summarised in paragraphs 13 and 14 above.  He submitted that the second and third factors relied upon by Mr Carolan did not justify a conclusion that the audited accounts of Tinson, which were prepared some years before the Zhu Kuan group experienced the financial difficulties which ultimately resulted in its liquidation, could not or should not be relied upon as a true record of its indebtedness to GGI.

18.  In my view, Mr Chan is right.  While it is no doubt correct to say that the court is not bound to accept the accounts of a company at face value, it seems to me that, nonetheless, weight should be given to the fact that the accounts in question have been audited, a process which requires the auditor to satisfy himself that the accounts provide a true and fair view of the company’s financial position.  Where there is evidence to show that the accounts are, or may be, inaccurate, or to cast doubt on the way in which the auditor carried out his duties, this will be a factor to take into account.

19.  However, it seems to me that there is no evidence before me on which I could conclude that the audited accounts which have been put forward may be (still less, are) inaccurate or incorrect.  The position here is rather different in this respect from that in either Re Adam Holdings or Louis Lo v Toohey.  In Re Adam Holdings, it is not clear whether the court was considering audited accounts of the company, or ledgers which had been written up by its auditors.  Nonetheless, it is clear from Jones J’s summary of the evidence in relation to the various advances relied on in that case (at pages 610G to 612A of the judgment) that such evidence indicated that the advances were not made by the applicant in that case, but by other companies or entities associated with it.  In those circumstances, it is not surprising that Jones J did not think it right to rely on accounts which suggested that the loans had been made by the applicant.  In Louis Lo v Toohey, reliance was placed, not on audited accounts, but on statements of affairs made by the directors of the company, one of which was made by the director who was said to be a creditor, whose trustee in bankruptcy’s proof was rejected.  Such a document can clearly be regarded as being of less weight than audited accounts which are not contradicted by any contrary evidence.

20.  Quite apart from this, it seems to me that the objective circumstances mentioned in paragraph 14 above do support the conclusion that GGI is indeed a creditor of Tinson in the amounts indicated in Tinson’s audited accounts.  Moreover, the liquidators are also the liquidators of ZKHK, and in that capacity will no doubt have information as to whether or not ZKHK is a creditor of Tinson, and whether the amount of the debt due by Tinson to ZKHK corresponds with the figure for the loan from the holding company which appears in Tinson’s audited accounts.  If there was a basis for regarding that latter figure as inaccurate, and so to doubt the accuracy of the audited accounts, this would no doubt have been pointed out.

21.  Further, I do not think that either of the points made by liquidators as to their concern about the integrity of Tinson’s audited accounts would justify a conclusion that GGI is not, on the available evidence, a creditor of Tinson as it claims.

22.  As to the point concerning Mr Lau’s involvement in the affairs of Tinson, I do not consider that the fact that Mr Lau may have been regarded as uncooperative in relation to the liquidators inquiries into the affairs of the Zhu Kuan group can be a basis for inferring that the audited accounts of Tinson may be suspect.  Nor does the fact that such accounts were signed by Mr Lau give rise to valid grounds for suspicion.  The accounts were, according to Madam Chan, supplied to ZKHK, and were for a number of years accepted without demur.  It seems unlikely that ZKHK would have accepted the figures stated in the accounts if there was reason for them to think that they were inaccurate.

23.  So far as the role of Tinson’s auditors in the wider affairs of the Zhu Kuan group is concerned, the liquidators have not provided details of the investigations which have given rise to their stated concerns.  Moreover, the fact that the auditor may have been involved in restructuring efforts relating to the Zhu Kuan group (which took place from about 1999 onwards) does not, in my view, provide a sound basis for doubting the accuracy of accounts which were prepared for several years before then.  Nor, in my view, do the other aspects of the auditor’s involvement give rise to such concerns.  Apart from the fact that the accounts were not challenged by ZKHK at any time, it seems improbable that those in control of GGI would have had any reason to misstate the position in relation to loans by GGI to Tinson from as early as 1994 or 1995, a period when there would appear to have been no reason to suppose that ZKHK or other companies with which it was associated were likely to run into financial difficulties some years later.  Once this is accepted, it is clear from an examination of the audited accounts which are available that the figure stated in the accounts for the year ended 31 March 1995 is carried forward with minor variations through to the accounts for the year ended 31 March 1999.

24.  Thus, I do not consider that there are good grounds for questioning the accuracy or reliability of the audited accounts in this case.  That being so, I see no reason to do otherwise than to accept the audited accounts as evidence of a debt due from Tinson to GGI in the amount indicated in those accounts.  There being no evidence to the contrary, it follows that GGI has established, on a balance of probabilities, the debt proved for.

25.  There was a small reduction in the amount proved for as compared with the balance stated to be owing to GGI in the last available set of audited accounts.  While this is not explained, it is nonetheless a reduction, and is not one which I would regard as particularly material.  Further, GGI has provided an explanation for the reduction of the debt from the figure stated in its proof to the figure now claimed.  While it may be, as Mr Carolan said, that the way in which the repayment was effected was not entirely in accordance with best practice (in that it would appear that rather than leaving the resumption compensation proceeds in Ocean Time for onward distribution, they were simply distributed amongst its shareholders), I do not see that this alters the position so as to affect Tinson’s liability to GGI for such amount as remains due to GGI.

26.  I am therefore satisfied that GGI is a creditor of Tinson in the amount of HK$41,911,916.00 and would grant leave to GGI to amend its proof of debt in Tinson’s liquidation accordingly, reverse the decision of the liquidators rejecting such proof, and order the proof to be admitted to rank for dividend in the winding up of Tinson in the sum of HK$41,911,916.00.

The Goldgood proof of debt

27.  I turn next to consider GGI’s appeal in respect of its proof in the Goldgood liquidation.  The position here is very similar to that in relation to Tinson.  Again, the evidence adduced by GGI consists of the audited accounts of Goldgood and Madam Chan’s evidence as to why the amount shown in the latest available audited accounts is to be increased to that now claimed.  The audited accounts for the financial year ending on 31 March 1994 indicate that Goldgood had debts of HK$88,318,249.00 and HK$37,864,966.00 respectively owing to its “holding company” and “a shareholder”.  As Goldgood had only two shareholders, ZKHK holding 70% and GGI holding 30% of its shares, it followed that the debt owing to its “holding company” was owed to ZKHK, and the debt owing to “a shareholder” was owed to GGI.  Goldgood’s share capital was only HK$10,000.00, so that, as with Tinson, absent any source of external funding (and there is no suggestion that there was any), the source of its ability to acquire its assets must have been its shareholders, as indicated by its audited accounts.  Unlike Tinson, however, the audited accounts were signed not by Mr Lau, but by directors representing ZKHK’s interests.

28.  As with Tinson, it is possible to trace the amount disclosed in the audited accounts as being due to GGI through each set of audited accounts until the last available set, for the period ended 31 March 1998.  In those accounts, the debt is stated to be HK$36,965,867.00.  The amount of GGI’s proof, however, is for the slightly larger figure of HK$37,767,830.09.  Madam Chan ascribes the increase to miscellaneous advances by GGI to Goldgood and/or expenses paid by GGI for Goldgood after 31 March 1998.  However, no underlying documentation has been put forward in support of this assertion.

29.  Save in respect of the increase of HK$801,936.09 over the figure stated in the audited accounts for 31 March 1998, the arguments advanced by Mr Carolan and Mr Chan in respect of GGI’s proof of debt in the Goldgood liquidation were the same as those in respect of the proof of debt in the Tinson liquidation.  For the reasons which I have explained above, I am satisfied that GGI is a creditor of Goldgood in the amount of HK$36,965,867.00, as appears from Goldgood’s last available set of audited accounts.

30.  Mr Carolan submitted that even if I were to conclude that the audited accounts constituted sufficient evidence of the indebtedness of Goldgood to GGI, I should hold that GGI had not discharged its burden of proving that Goldgood was indebted to it in respect of the balance of HK$801,936.09, as the only evidence that GGI had put forward as to this was the bare assertion of Madam Chan that this amount represented payments made to or for Goldgood by GGI.  Mr Carolan pointed out that Madam Chan did not appear to hold a particularly senior position within GGI, and that GGI had not provided any documentation to support her assertion.

31.  In my view, the position in relation to the additional HK$801,936.09 is different to that in relation to the amount recorded in the audited accounts.   In the case of the amount recorded in the accounts, the fact that the accounts have been audited indicates that the company’s books and records have been examined by its auditors, and that they are satisfied that the accounts have a proper foundation and represent a true and fair view of the company’s financial position.  By contrast, where there are no audited accounts to support the alleged debt, it is, I think, incumbent on a party claiming to be a creditor of a company in liquidation to put forward some other material to support its claim.  Here, all that Madam Chan is able to say is that the additional amount arises from payments made to or for Goldgood by GGI.  In her affirmation, she gives as her source of knowledge her personal knowledge, and the books and records of GGI.  However, for reasons which have not been explained, no such books and records have been provided in support of this part of the debt claimed by GGI.  I think it also fair to say that Madam Chan’s description of her role in GGI is not one which suggests that she necessarily had a close personal involvement in the transactions which might have given rise to the additional amount.  She provides no details of when further payments might have been made, of their individual amounts or of their particular purpose.  In these circumstances, I do not consider that GGI has discharged the burden which it carries of establishing that Goldgood is in fact indebted to it in respect of this additional sum.

32.  I would therefore vary (but not reverse entirely) the decision of the liquidators rejecting GGI’s proof of debt in Goldgood’s liquidation, and order the proof to be admitted to rank for dividend in the winding up of Goldgood in the sum of HK$36,965,867.00.

The Ocean Time proof of debt

33.  Turning finally to GGI’s proof of debt in relation to Ocean Time, the position is again broadly similar to that in relation to Tinson.  The evidence adduced by GGI consists of the audited accounts of Ocean Time and Madam Chan’s evidence as to why the amount shown in the latest available audited accounts is to be increased to that now claimed.  The audited accounts for the financial year ending on 31 March 1994 indicate (in the balance sheet) that Ocean Time had debts of HK$91,570.00 owing to “related companies”.  Note 8 to the accounts makes it clear that this amount was owing to GGI (whereas the previous year, the debts to related companies consisted of two smaller amounts owing to GGI and a related company Grand Gain Holdings Limited.  Ocean Time’s balance sheet also recorded liabilities to its “holding company” and “a shareholder”, these being Tinson and the other shareholder holding a 2% interest in Ocean Time.  Ocean Time’s share capital was only HK$10,000.00, so that, as with Tinson and Goldgood, there being no evidence of external sources of funds, the source of its ability to acquire its property must have been its shareholders, as indicated by its audited accounts.  The balance sheet of Ocean Time was, in general, signed by two directors, these being Mr Lau, and one other director who represented ZKHK’s interests.

34.  As with Goldgood, there was a difference between the amount of the debt disclosed in the latest available audited accounts of Ocean Time (those for the year ended 31 March 1999), and the debt proved for.  While the latest audited accounts recorded a debt of HK$875,155.00 owing to “a related company”, the amount of the proof was for HK$1,302,574.  Madam Chan ascribes the increase to further management fees payable to GGI and administration expenses paid by GGI on behalf of Ocean Time.

35.  Mr Carolan also made one additional submission in relation to the proof of debt in the Ocean Time liquidation.  This was that there was insufficient evidence to identify the “related company” to whom the debt stated in the audited accounts for the year ended 31 March 1999 was owed.  This submission was made on the basis that, while GGI was a related company of Ocean Time, Ocean Time had other related companies as well, including Grand Gain Holdings Limited, with which (according to the accounts) it had an agreement for the provision of management services.  It was therefore, said Mr Carolan, unclear whether the related company recorded as a creditor of Ocean Time was in fact GGI.

36.  It is fair to say that looking at the audited accounts for the year ended 31 March 1999 in isolation, there might be some doubt as to the identity of the “related company” referred to as being a creditor of Ocean Time.  However, when one examines the audited accounts from the year ended 31 March 1994 until the year ended 31 March 1999, it becomes apparent from the notes to the accounts that the “related company” is in fact GGI, as the accounts in each year provide the prior year figure for the item in question, and by comparing the figures in each set of accounts, it is possible to ascertain that the amount recorded in the 31 March 1999 accounts relates to the same related company from year to year, going back to the HK$91,570.00 mentioned in the audited accounts for the year ended 31 March 1994.

37.  Apart from this point, the arguments in relation to GGI’s proof of debt in the Ocean Time liquidation were the same as those in relation to its proof in the Goldgood liquidation.  For the reasons which I have give in relation to the proofs in relation to Tinson and Goldgood, I am satisfied that it would be right for me to find that GGI has proved that it is a creditor of Ocean Time for the amount of HK$875,155.00 as shown in the latest set of audited accounts which are available, but not for the additional sums claimed in its proof of debt.

38.  I would therefore vary (but not reverse entirely) the decision of the liquidators rejecting GGI’s proof of debt in Ocean Time’s liquidation, and order the proof to be admitted to rank for dividend in the winding up of Ocean Time in the sum of HK$875,155.00.

Costs of the appeals against rejection of the proofs of debt

39.  So far as the costs of these applications are concerned, having regard to the fact that the three applications were heard together, and that GGI was substantially, but not wholly, successful in its appeals, I shall make an order nisi that the liquidators should pay to GGI 90% of GGI’s costs of the appeals, such costs to be taxed on the party and party basis if not agreed.

The liquidators’ application to strike out GGI’s claim

40.  Having dealt with GGI’s appeals against the liquidators’ rejection of its proofs of debt in the Tinson, Goldgood and Ocean Time liquidations, I turn to consider the liquidators’ application to strike out the statement of claim in HCA 1463 of 2005.

41.  This action concerns the sale by the liquidators, as liquidators of Ocean Time, of property owned by Ocean Time in Yuen Long in the New Territories.  The principal complaint is that the liquidators failed in their duty to obtain a proper price for the sale of this property, which was the principal asset of Ocean Time, in that they sold it in January 2005 at substantially less than its true value, selling it for a price of HK$53,000,000.00 when it was in fact worth much more - HK$126,000,000.00 according to a valuation report obtained by GGI.

42.  GGI’s statement of claim pleads (in paragraphs 3 and 4) that Ocean Time was indebted to GGI and Tinson (which was itself indebted to GGI), and that GGI was also a member of the Committee of Inspection in the liquidations of both Ocean Time and Tinson.  It then alleges (in paragraph 5) that because of this, the liquidators owed a duty of care towards GGI arising from their position of liquidators of the two companies.  The scope of the duty is then pleaded (in paragraph 6), as including requirements that the liquidators should act in good faith towards the creditors and Committee of Inspection members; that they should obtain the best price when realising assets of the companies; that they should take steps to ensure that this was achieved; that they should inform the creditors and Committee of Inspection members of the progress of the liquidations; that they should not withhold information concerning the liquidation or otherwise deceive or mislead the creditors or members of the Committee of Inspection.

43.  It is then pleaded that Ocean Time’s property was sold by the liquidators at a substantial undervalue at the end of January 2005.  It is also alleged that the liquidators misled GGI by informing it in January 2005 that the land had been sold, when in fact no sale and purchase agreement was executed until 26 April 2005, thereby depriving GGI of the opportunity to locate and introduce a buyer who was prepared to pay a higher price.  These acts are pleaded (in paragraph 14) as constituting breaches by the liquidators of the duty of care alleged and particularised in paragraphs 5 and 6 of the statement of claim. It is said (in paragraph 15) that GGI has in consequence suffered loss and damage.  Although the loss and damage allegedly suffered is not particularised, it would seem that what the pleader (who, I should point out, was neither Mr Chan nor Mr Godfrey Lam, who appeared with him before me) had in mind was the additional amount that GGI could have expected to obtain by way of dividend in either the Ocean Time or Tinson liquidation had the liquidators achieved the sale price of HK$126,000,000.00 (or any price in excess of HK$53,000,000.00) as it is said they should have done.

44.  The statement of claim concludes by claiming damages, or alternatively an order requiring the liquidators to pay HK$73,000,000.00 to Ocean Time, interest, further or other relief and costs.

45.  Although the application to strike out was founded on various limbs of RHC Order 18 rule 19(1), namely sub-paragraphs (a), (c) and (d) thereof, at the hearing, Mr Carolan was content to make the application on the basis of RHC Order 18 rule 19(1)(a) - i.e. on the basis that the statement of claim disclosed no reasonable cause of action.  The alternative relief sought by the summons, of determination of questions of law pursuant to RHC Order 14A rule 1, was also not pursued.  In the circumstances, I shall proceed on the assumption (which may or may not ultimately be a good one) that GGI will be able to establish the facts which it alleges in its statement of claim.

46.  Mr Carolan submitted that GGI’s claim was plainly and obviously unsustainable in the light of the decision of the English Court of Appeal in Kyrris v Oldham [2004] 1 BCLC 306, in which it was held that absent some special relationship, an administrator owed no common law duty of care to unsecured creditors in relation to the conduct of his administration, as his position was analogous to that of a director conducting the company’s affairs.  It was also held that the applicable statutory provisions enabled the court to compel an administrator to provide compensation in the event of misfeasance or breach of fiduciary or other duty to the company, so that it was not open to an individual creditor to bring a claim for losses caused to the company in liquidation.

47.  In coming to this conclusion, Jonathan Parker LJ in Kyrris v Oldham applied by analogy the earlier decision of the English Court of Appeal in Peskin v Anderson [2001] 1 BCLC 372, a case concerning fiduciary duties owed by directors to individual shareholders, to the question of whether administrators owed duties to individual creditors.  In Peskin v Anderson, it was held that where special circumstances existed in the facts of the particular case, directors might owe fiduciary duties to individual shareholders, but absent such special circumstances giving rise to a fiduciary relationship between himself and a shareholder, a director would owe fiduciary duties to the company alone.  It is to be noted that in paragraph 32 of the judgment in Peskin v Anderson, Mummery LJ noted the observations of Millett LJ (as he then was) in Stein v Blake (No. 2) [1998] 1 BCLC 573 to the effect that where such a direct fiduciary relationship existed, the shareholder might be able to recover for losses caused to him directly (as opposed to losses suffered by him by reason of a diminution in the value of his shareholding in the company).

48.  In this case, Mr Carolan submitted, no special circumstances were pleaded so as to indicate any basis for concluding that there was any scope for any duty of care owed to GGI as an individual creditor, in addition to that owed by the liquidators to Ocean Time, the company in liquidation.  Mr Carolan submitted that if GGI considered that the liquidators were in breach of their duties towards Ocean Time, the proper course would be for them to take out proceedings for misfeasance, seeking compensation on behalf of Ocean Time, pursuant to section 276 of the Companies Ordinance.

49.  Mr Chan, for his part, submitted that there were circumstances in which a liquidator had been held to owe duties to an individual creditor, drawing my  attention to Pulsford v Devenish [1903] 2 Ch 625 and James Smith & Sons (Norwood) Ltdv Goodman [1936] Ch 216.  However, as Jonathan Parker LJ pointed out in Kyrris v Oldham, in both of those cases, the company had, by the time the action was commenced, been dissolved, so that there was (on the court’s construction of the equivalent of our section 276) no longer any scope for misfeasance proceedings to be brought against the liquidator concerned.

50.  In my view, neither of these cases assists Mr Chan here.  In Pulsford v Devenish, a company was placed into voluntary liquidation, and the liquidator failed to inform its creditors of the liquidation and distributed the company’s assets to its contributories without regard to the position of the creditors.  It is scarcely surprising that the creditors should, in that situation, have been found to have a right to claim against the liquidator, whom the court regarded as being under an absolute duty to apply the companies property in accordance with the statutory scheme, a duty which survived the dissolution of the company.  It will also be noted that the nature of the creditors’ loss in that case was personal to them - there would appear to have been no element of loss to the company itself, there being no suggestion that any of its assets had been realised for less than proper value.

51.  The position in James Smith & Sons v Goodman was very similar, in that the liquidator there distributed its assets without making provision for the claim of a particular creditor for future rent under leases owned by the company of which the creditor was the lessor.  Again, the company was dissolved with no dividend having been paid to the particular creditor.  It is again easy to see that the creditor should have been permitted to claim against the liquidator, and moreover, that his claim was personal to him, and was in no way a reflection of losses suffered by the company.

52.  Mr Chan also submitted that the claims made by the statement of claim extended beyond a claim for negligent breach of duty of care, and included claims that involved breaches of fiduciary duty, misrepresentation or deceit, and wrongful non-disclosure.  I confess that this is not entirely clear on the pleading, which appears to treat all of these matters as particulars of breach of the duty of care which is alleged.

53.  However, even assuming in GGI’s favour that the statement of claim should be read as one alleging either breach of fiduciary duty or misrepresentation, it seems to me that there remains a fundamental difficulty in GGI’s path.  This is that however one looks at it, the nature of the losses allegedly suffered by GGI are entirely reflective of losses suffered by Ocean Time as a result of the sale of its principal asset at an alleged undervalue.  There is nowhere any suggestion of any loss on the part of GGI above and beyond the losses which it would suffer as a consequence of the sale of the property at less than proper value.  That being so, such losses are in my view clearly irrecoverable as a matter of law, by reason of the “no reflective loss” rule which has been reiterated by the House of Lords in Johnson v Gore Wood & Co. [2002] 2 AC 1.  That rule makes it clear that where a plaintiff suffers loss by reason of a diminution in the value of a company in which he is interested (and it matters not for present purposes whether he is interested in that company as a shareholder or as a creditor), the proper complainant is the company itself, and not the plaintiff.

54.  Where the company is still operating, it may be possible for an aggrieved shareholder to pursue a cause of action on its behalf by way of a derivative action where the company itself fails to do so.  Where the company is in liquidation, a derivative action will no longer be available.  However, a shareholder or creditor then has available to him the remedy provided by section 276 of the Companies Ordinance.

55.  Mr Chan suggested that there were a number of reasons why the rule should not apply in this case, namely:-

(1) that while the “no reflective loss” rule had a place where the company was still a going concern, there should be no objection to recovery of “reflective losses” once a company was in liquidation, since it was then only a matter of time before it would be dissolved, and thus, as it was possible for a creditor to sue a liquidator once dissolution had taken place, there was no reason why he should not be permitted to do so earlier, provided that dissolution was only a matter of time (as was the case here);

(2) that there was a difference between cases of negligence or non-deliberate wrongdoing, and cases where the wrongdoing was deliberate, as in the case of a claim for deceit, which was raised in this case on the facts pleaded in the statement of claim; and

(3) where dissolution was a foregone conclusion there was no risk of double recovery.

56.  Mr Chan also suggested that where the wrongful act was deliberate, the claim should not be struck out even if “reflective losses” were not recoverable, as it would be open to the court to award nominal damages.

57.  I do not think that these reasons are well founded.  So far as Mr Chan’s first reason is concerned, it remains the case that the loss allegedly suffered by GGI is purely reflective of the loss suffered by Ocean Time.  When a company is in liquidation, control of its affairs passes from its directors to its liquidators.  If the liquidators decide against pursuing a claim apparently open to the company, that is as much a decision on behalf of the company as a decision by its directors to the same effect while it is a going concern.  In any event, the shareholder or creditor who is aggrieved by the decision of the liquidator can pursue the matter, if necessary by bringing misfeasance proceedings against the liquidator pursuant to section 276 of the Companies Ordinance.

58.  As to the second argument, this, with respect, fails to recognise that the objection to recovery of “reflective losses” arises from the nature of the losses themselves, and not from the nature of the act or omission said to give rise to liability.  Indeed, in Prudential Assurance Company Limited v Newman Industries Limited (No. 2) [1982] Ch 204, one of the first authorities in which the non-recoverability of “reflective losses” was extensively discussed, the example was given of a person who was persuaded by a deceit practised upon him to part with the key to a safe deposit box holding substantial assets of a company in which he was interested.   Notwithstanding that the deceit must have involved a deliberate dishonest act on the part of the person responsible for it, the Court of Appeal was clearly of the view that there was no basis for recovery on the part of the shareholder on whom the deceit was practised.

59.  As to the third argument, it does not, in my view, follow that simply because dissolution will take place sooner or later, there is no risk of double recovery.  If a creditor were permitted to bring proceedings in respect of reflective losses against a liquidator, and recover for himself, there would, until the company is actually dissolved, remain the possibility that another creditor might seek to take misfeasance proceedings against the liquidator in respect of the same matter.  In such a case, the risk of double liability on the part of the liquidator, and potentially double recovery on the part of the creditor, would seem to be a real one.

60.  Finally, as to the suggestion that the claim should not be struck out because of the possibility of an award of nominal damages, I do not consider that nominal damages would be available in respect of a claim in tort.  The general rule in relation to tort claims is that damage is the essence of the tort, so that in the absence of damage the tort is not complete, and not actionable.

61.  Mr Chan also referred to the fact that the statement of claim contained a prayer seeking recovery on behalf of Ocean Time.  I do not see that this assists GGI.  First, there is no factual basis pleaded in the body of the statement of claim to support a claim to relief on behalf of Ocean Time.  There is no allegation that Ocean Time (as distinct from GGI) has suffered loss.  In any event, such a claim for relief is more typically to be found in a derivative action, which this claim does not purport to be.  Moreover, it seems to me that the appropriate vehicle for such a claim, if one is to be made, would be an application pursuant to section 276 of the Ordinance, which would be open to GGI, as I have held it to be a creditor of Ocean Time.

62.  For these reasons, I am satisfied that GGI’s claim against the liquidators is plainly and obviously unsustainable, and should be struck out.

63.  Mr Chan suggested that, even if GGI’s claim were struck out, it might be appropriate to afford GGI an opportunity to offer an amendment rather than to dismiss the action here and now.  However, no such amendment has been proferred.  Nor has any form of possible amendment been suggested by Mr Chan.  On the basis of the matters pleaded, I have some difficulty in seeing what claim might be advanced that would not suffer from the defect of offending against the rule against recovery of reflective losses.  That being so, I am satisfied that the appropriate consequence of striking out GGI’s claim is that its action should be dismissed.

64.  I shall therefore order that GGI’s statement of claim in HCA 1463 of 2005 is to be struck out, and that its action against the liquidators should be dismissed.

65.  So far as costs are concerned, I shall make an order nisi that the costs of the striking out application and of the action are to be paid by GGI to the liquidators, to be taxed on the party and party basis if not agreed.