Buried Treasure: Hong Kong Court refuses to reinstate dissolved company 

This article is produced by Lau, Horton & Wise LLP, a Hong Kong law firm in association with CMS Hasche Sigle, Hong Kong LLP.

The general rule in Hong Kong (and indeed English) law is that once a company has been dissolved, it is removed from the companies register and simply ceases to be. The dissolved company cannot bring claims, nor can claims be brought against it. Its directors owe no more duties to it, and its books are no longer kept.

However, there is a way to bring the company back to life – by the statutory power of restoration. Section 765(2) of the Companies Ordinance (“CO”), which is similar to s1029 of the Companies Act in England & Wales, allows a company to be restored to the companies register. Crucially (and unusually) the effect is retroactive, meaning that it is for all intents and purposes as if the company had never been dissolved. This “legal fiction” avoids logical (and financial) difficulties caused by the restoration.

The restoration procedure is more commonly used by creditors to restore a dissolved company to the register, so that they can proceed against it - and potentially against the directors, for instance by obtaining access to the company's records. This is reflected by the wording of s765 of the CO, which allows "any interested party" to apply for the restoration of the dissolved company. It is also reflected in the existing body of case-law on the procedure, which leans in favour of the Court exercising its discretion to resurrect prematurely dissolved companies, for the benefit of creditors.

However, in Re: Trade Treasure Ltd (Zadeh v Registrar of Companies) [2019] HKCFI 2976, the facts were very different.

Facts

A Hong Kong company (Trade Treasure Ltd, the “Company”) was dissolved to avoid the consequences of an ongoing London arbitration, which the company presumably expected to lose.

The ultimate controllers and beneficial owners of the Company, the Islamic Republic of Iran Shipping Lines (“IRISL”) continued to direct (and presumably to fund) the defence of the London arbitration all the way to an Award.

The Company was successful in the arbitral Award. In the course of negotiations over the costs of the arbitration, the claimant in the arbitration (Jaldhi Overseas Pte Ltd, the “Intervener”) for the first time realised that the Company had been deregistered.

In England, the Intervener sued the Company’s (former) solicitors for breach of warranty of authority, on the basis that they had purported to represent the Company when it did not in fact exist. The Intervener sought to recover the sums already paid out pursuant to the Award. The Intervener also refused to continue negotiations regarding costs.

In Hong Kong, IRISL, by its servants or agents, principally Mr Zadeh (the “Applicants”) applied to restore the Company to the register.

It was undisputed that, had the Applicants succeeded in doing so, the 'retroactive' effect of the restoration procedure would have meant that:

(a) The Company’s former solicitors in London would not have been in breach of the warranty of authority; and

(b) The Company would be entitled to the sums awarded in the London arbitration.

However, the Applicants had some explaining to do, in order to persuade the Court to grant their application.

In order to voluntarily dissolve the company, the Company had submitted Form DR-1 to the Registrar of Companies, certifying inter alia that the Company had no outstanding liabilities - which was clearly untrue, given the (at that time) ongoing arbitration. In addition, that Form had been signed by the sole shareholder of the Company - a company incorporated in the Isle Of Man. It later transpired that this company had itself also been dissolved before a purported resolution to file the Form DR-1.

The Applicants also relied on the apparent defects in the Form DR-1 in order to bring a separate action for rectification of the companies register, essentially on the grounds of mistake. This was brought separately and alternatively to the application for restoration, and proceeded on the basis that the Company had not been validly dissolved (and that therefore there simply needed to be an administrative correction made to the companies register). It was therefore factually inconsistent with the restoration application, which proceeded on the basis that the Company had been validly dissolved (and therefore needed to be restored).

The Applicants denied that the company had been dissolved to avoid the consequences of the arbitration, but its evidence was inconsistent (at best). By way of example, the Applicants’ first evidence in the restoration action was that the application was being made on behalf of the dissolved Isle of Man company, which simply could not be correct. Eventually, the Applicants produced documentation purporting to show that the share in the Company had been transferred prior to the dissolution of the Isle of Man company to the Applicants (held on trust for IRISL).

Given the inconsistencies, the Registrar of Companies (assisted by the Intervener in correspondence) refused to consent to the application.

The Applicants were therefore compelled to proceed with the Action before the Hong Kong Court, where their evidence continued to evolve in response to inconsistencies pointed out in it by the Intervener. In doing so, the Intervener took on the role of a ‘contradictor’ – which the Court held was in the public interest, and in line with the adversarial system of justice on which the common law is founded.

Judgment

By a Judgment dated 12 December 2019, the Honourable Mr Justice Coleman dismissed the application to restore the Company to the companies register (under HCMP 1867/2017) and the separate and alternative application to rectify the register on the grounds of mistake (under HCMP 76/2019).

The key issue was the requirement in s765 of the CO is that it be "just in all the circumstances" for the company to be restored.

The Judge expanded widely in the Judgment on the 'discretionary mix' which led him to decide it would not. The quality of the evidence submitted on behalf of the Applicants was fatal in this regard. Described variably by the Judge as “confused” and riddled with “almost staggering inconsistencies”, the Judge held that the Applicants had:

(a) De-registered the company to avoid an adverse arbitral Award; and, more worryingly, had

(b) Fabricated documents in the pursuit of the restoration / rectification applications.

In weighing up this highly unsatisfactory state of affairs, the Judge kept in mind that this was effectively an ex parte application, and hence requiring the highest standards of full and frank disclosure.

This is because the Registrar of Companies typically takes a passive role in restoration applications, and has a “limited involvement” in them.

Unsurprisingly, the Applicants’ evidence “did not come close” to meeting the high threshold of full and frank disclosure.

Both of the applications were dismissed, and the Applicants were ordered to pay costs to the Intervener – assessed on the indemnity basis.

Comment

In many ways, this case is largely sui generis, as with any case involving an application for a discretionary power to be exercised on the grounds of fairness.

However, there are still some key takeaways:

1. The Court will pay close attention to the witness evidence served by a party over the entire course of proceedings, and not look only at the latest affirmation. Consistency, and of course truthfulness, are key;
2. In applications technically made against the Registrar of Companies, there is a duty of full and frank disclosure given the Registrar’s limited participation;
3. In such cases, there is scope for an interested third party to join the action as an intervener, on the grounds that having a ‘contradictor’ is an important safeguard and provides valuable assistance to the Court; and
4. On a cautionary note, Solicitors should ensure that their clients remain in existence throughout the retainer, to avoid breaching the warranty of authority. This is particularly where a third party may be giving instructions and paying bills, and it may not therefore be immediately apparent that the underlying client of record has disappeared.

Lau, Horton & Wise LLP acted for the successful Intervener in this Action.