Enforcing Private Examination Order by Contempt Proceedings

Introduction
In the recent decision of Bruno Arboit as Sole Liquidator of Highfit Development Co Ltd v Koo Siu Ying and Another HCMP 2749/2012, the Liquidator successfully obtained an order of committal against 2 former directors for contempt of court in breaching a Court Order under s.221 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32), which required them to “produce all books, correspondence and documents in their custody or power relating to the business and affairs of the Company including the documents set out in Schedule 2 attached to the Summons”.

Background
The 1^st defendant, Koo, was the “third wife” of Lim, who was a wealthy and high-profile businessman. The 2^nddefendant, Ling, was their daughter. Highfit Development Co Ltd (“the Company”) was incorporated in Hong Kong on 25 April 1991 to develop a luxury commercial and residential project in Shanghai. Initially, Lim and Koo were the only shareholders and directors. Ling became the 3^rd director as well as a shareholder of the Company in subsequent years. Lim died in 2005. The Company went into liquidation in late 2008 as it was unable to pay its debts.

The investigation carried out by the Liquidator revealed possible misappropriation of assets of the Company by the defendants. It appeared that the defendants caused the Company to transfer its only significant asset at serious undervalue to another company, in which the defendants were substantially interested. The Liquidator repeatedly sought explanation from the defendants about the sale and also sought the Company’s books, papers and records in their possession. But the defendants did not cooperate.

As such, the Liquidator took out a summons under s.221 of the CWUMPO and obtained the said Court Order. But the defendants produced none of the documents by the deadline, but only some of the Documents post deadline (“the Post-Deadline Documents”), after much criticism from the Liquidator. The Liquidator therefore applied for an order of committal against the defendants for contempt of court in breach of the Court Order.

General Principles
A court order must be complied with strictly in accordance with its terms. But the burden is on the Liquidator to prove a defendant’s contempt beyond reasonable doubt: Kao, Lee & Yip v Koo Hoi Yan (2009) 12 HKCFAR 830. A defendant cannot be regarded to be in contempt just because he did not have the means to comply with the court order, or it was impossible to comply: Kao, Lee & Yip; Concorde Construction v Colgan Co Ltd & Anor (No.2) [1984] HKC 252.

Decision of the Court
The defendants advanced four defences. First, they claimed that they knew nothing (“the Ignorance Defence”). Secondly, it was said that the Court Order was not defined with specificity (“the Lack of Specificity Defence”). Thirdly, the defendants contended that they did not have possession of the documents (“the No Possession Defence”). Lastly, they argued that there was no sufficient evidence that the documents which they allegedly failed to produce were in existence at the time of the Court Order (“the No Proof of Existence Defence”).

Above all, the court found the defendants to be incredible and unreliable. They had given inconsistent evidence and told lies, to suit their positions at different points in time.

The Ignorance Defence was rejected by the court outright. Au-Yeung J referred to two affirmations made by Ling in 2002 and 2008 respectively, in which Ling expressly admitted that the family retained management control of the Company and she has all along been involved in the affairs of the Company. The court was therefore satisfied that there was nobody but Koo and Ling, who have had knowledge and control of the affairs and finance of the Company and related companies.

With regard to the Lack of Specificity Defence, the court considered that a defendant cannot be found guilty of breach of an order if the order was not defined with specificity: Sino Wood Investment Ltd v Wong Kam Yin (2005) 8 HKCFAR 715. It was pointed out that the Court Order was an order to produce documents.Therefore, any requirement of information or explanation would be outside the ambit of the order and should not have been pursued by the Liquidator. Apart from that, the court held that the provisions were not uncertain or lacked specificity and therefore rejected the lack of specificity defence.

Further, in a situation where it is said that the contemnor has failed to produce documents as ordered, it is crucial to determine that he did have the documents in his possession, custody or power at the time of the order: Re Bramblevale Ltd [1969] 3 All ER 1062. It was said that the defendants did not have possession of the documents and if the documents were in their possession, they did not know about it. On the evidence, Au-Yeung J formed the view that the defendants actually had unfettered control of the Company and related companies. It was plain that the Documents were and are in their power or control. Their lack of knowledge that they were in custody, power or possession of the Documents was irrelevant.

Au-Yeung J then went on to consider the No Proof of Existence Defence. Her Ladyship agreed with the defendants’ counsel that the fact that the defendants were likely to have custody or power of a company’s documents, or that documents were likely to have existed in a particular year is not in itself sufficient. Neither is the fact that the defendants have lied: Re Bramblevale Ltd. It is for the Liquidator to prove beyond reasonable doubt that the Documents existed at the time of the Court Order.

The Liquidator relied on the statutory duty of the Company and the defendants to produce and/or keep certain documents, such as audited accounts and minutes of meetings of the Company. The court considered that although the documents should have been in existenceand should have been in custody or power of the defendants, this was not sufficient as the defendants were not charged with breach of statutory duty to prepare accounts but contempt. However the court found the defendants to be indubitably in contempt in relation to the Post-Deadline Documents.

Having found that the defendants failed to comply with the Court Order, Au-Yeung J went on to consider if such failure was accompanied by the state of mind necessary to establish punishable contempt. In this regard, her Ladyship found that there had been persistent lack of cooperation with the Liquidator and refusal to provide information or documents sought. The breach was not causal or accidental but intentional and contumacious.

In conclusion, the court was satisfied that this was a wholesale failure to comply with the Court Order and described the attitude of the defendants as “Catch me if you can”. Accordingly, the court found the defendants guilty of contempt and adjourned the matter for the defendants to address the court in mitigation and the appropriate sentence.  

Conclusion
This recent decision would be welcomed by insolvency practitioners to ensure strict compliance with a s.221 order as non-compliance could result in the respondent being found guilty of contempt and sentenced. However, it also points to the need to prepare the s.221 questions and requests carefully and the importance in establishing the existence of specific documents before launching contempt proceedings.

Published by ONC Lawyers © 2016