Bankruptcy

When the joke's on creditors

PUBLISHED : Thursday, 10 October, 2002, 12:00am
UPDATED : Thursday, 10 October, 2002, 12:00am

MORE FUN AND games at Luen Cheong Tai International Holdings.


A few weeks ago, this column described some unusual business deals that left creditors somewhat perplexed.


There were outstanding loans from mystery debtors - HK$78 million in all. Then there was rental income from companies part-held by company directors Chan Man-chuen and Vong Pak-cheong that never emerged.


And the company's botched dotcom foray: in April last year the company bought three Internet companies with net asset values of HK$3.35 million for HK$64 million.


A month later, the group wrote off all the goodwill for these Web sites at HK$60.2 million.


These details emerged in annual results that were nine months late.


Luen Cheong's largest creditor, the Bank of China, convinced a judge that there was sufficient suspicion to warrant the appointment of a provisional liquidator to protect the company's assets.


It will also allow the possibility of a corporate rescue of Luen Cheong, which now faces HK$97.83 million in claims by the bank. The company has assets worth HK$337 million.


In short, the bank had cast doubt over the conduct of Luen Cheong's management.


Since the appointment of provisional liquidators last month, events have unravelled in a manner which can only be described as less than smooth.


Here we are talking about access to the books and records of the company.


It is not something that would normally trigger visions of security guards, or court orders for forced entry.


This is exactly what happened.


The provisional liquidators gained access to the company's Canton Road premises, the 'Gateway', in early September. However, almost all of the company's documents had been removed.


The next day, Mr Vong took the provisional liquidators - according to a recent High Court judgment - to the company's Sheung Shui premises, where the books and records were stored.


Mr Vong, however, prevented them from removing the books and records. There then followed a few days of legal ping-pong which culminated on September 9 with an ultimatum: co-operate or we will get a court order and make you pay for it.


The directors changed tack slightly, arguing that because the books and records were not in good order, they would need time to sort them out.


The provisional liquidators instead went to court that same day.


Madam Justice Susan Kwan Shuk-hing ordered the delivery of all books, records, accounts, documents and other papers.


A few days later, some of the books and records were delivered. The provisional liquidators however had worked out that they did not in fact come from the Sheung Shui premises because they had posted their own security guards there to keep the office under watch.


The judge then gave the Luen Cheong directors 48 hours to provide access to the premises. They failed to do so. The directors, through their solicitors, said the premises were vacant. The only person with a key was a Mr Lo Yung-chun.


Mr Lo happened to be in China dealing with some estate matters of his father. Or so he claimed.


He wrote in a letter to the High Court that he would be back in Hong Kong after the Mid-Autumn festival.


The only problem was that the letter not only gave the Sheung Shui premises as a return address (the supposedly vacant one) but it was also not posted from China. It was posted the day before the Mid-Autumn festival, from Hong Kong.


Madam Justice Kwan gave the provisional liquidators entry into the premises 'if necessary by force'. She stressed: '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.'


It is not unusual for liquidators to come up against resistance or, for want of a better phrase, a merry dance, before directors cough up the books and records.


It is also not unusual for provisional liquidators to find the shelves where the books should have been filled instead with a shiny new shredder machine. Or they may just vanish into thin air.


What really stings is the lack of deterrent or recourse when it does actually happen.


The consequences to creditors and liquidators of having no record of a company's accounts - ie, an inability to trace assets - way outstrip the fines levied on directors for destroying or 'misplacing' them.


You are more likely to receive a heftier penalty for spitting.


At least other groups are becoming more vocal on this topic. The Law Reform Commission attacked the paltry fines doled out by magistrates in a working party report in 1999.


A consultants' report on the work of the Official Receiver's Office likewise berated the penalties earlier this year. It proposed a greater investigatory role for the office.


The Law Society has joined the chorus of disapproval, in a refreshingly blunt attack. It simply dubbed the fines 'a joke'.


In many cases, delinquent directors make a conscious decision to stymie any prospective investigation, 'particularly in those instances where a contributory factor to the downfall of the company involves misappropriation of assets,' it noted.


Yet with the average fine coming in at HK$300 or so, the directors are the ones laughing.


Graphic: bar10gbz


 
 
 
 

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