Spring 2013
e.Bulletin
SHINEWING Specialist Advisory Services Limited
SHINEWING
In this issue …
Thumbnails – hidden treasure!
Headquartered in Beijing and
with branch offices in Hong
Kong, Singapore, Australia,
Japan, Shanghai, Shenzhen,
Chengdu, Xi'an, Tianjin,
Qingdao, Changsha,
Changchun, Yinchuan,
Kunming, Jinan, Dalian,
Guangzhou, Fuzhou, Nanjing
and Urumuqi, SHINEWING is
positioned to provide services
throughout Asia Pacific.
Forensic examiners are attentive to search for little pieces of evidence to
build or break a case; and thumbnails is somewhere to look for hidden
treasure.
Personal Bankruptcy - Part Two
If a bankrupt does not cooperate with his trustees for the bankruptcy
administration, or even leaves Hong Kong before the making of a
bankruptcy order, what can the trustees do? This article will tell you some
of the possible solutions.
Things you need to know when managing your China investments
Four key areas that investors may need to pay attention when dealing with
their investments in China. What are they?
CONTACT US
Knowledge - Recovery and Reorganisation
Three Musketeers in company’s insolvency administrations: Provisional
liquidators, Liquidators and, Receivers and Managers
43/F., The Lee Gardens,
33 Hysan Avenue,
Causeway Bay, Hong Kong
T. (852) 3583 8000
F. (852) 3583 8581
W. www.shinewing.hk
SHINEWING SAS’s expertise in the PRC Enterprise Bankruptcy Law
Upcoming events – FIS Insight workshops
Email Us:
sasmarketing@shinewing.hk
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Thumbnails – hidden treasure!
By Matthew Chu, Senior Manager and Kenneth Lam, Assistant Manager
Forensic examiners always seek
page of documents without having to
Benefits of thumbnails
the smallest pieces of evidence to
open them with their associated
In Windows, thumbnails of pictures
build a case; whereas the function
application.
and sometimes documents (such as
of thumbnails in Windows has
Word, Excel and PDF, etc.) are
proved to be successful for
For earlier versions of Windows, e.g.
generated, and maybe cached when
different and sometimes difficult
Windows XP, it stores thumbnails in a
the folder containing these files are
investigations. This is especially
file named thumbs.db. However,
being accessed.
true when most programs
Windows Vista, Windows 7 and
generate thumbnails (or
Windows 8 bring enhancements that
While thumbnails speed up the
thumbcaches) of the original
centralise the thumbnail cache under
viewing process for users, forensic
images that are unknowingly
the files: thumbcache_idx.db,
examiners take advantage by
stored on the computer even if the
thumbcache_1024.db,
examining these cached thumbnails
original picture(s) have been
thumbcache_256.db,
and can potentially identify deleted
deleted.
thumbcache_96.db and
files that may have previously
thumbcache_32.db, collectively
existed on a suspect’s computer;
Generally speaking, the thumbnail
“thumbnail database” to automatically
and in some cases, files previously
function allows users to be able to
store the cached thumbnails.
viewed from an external device such
quickly preview pictures or the first
as a USB storage device. These are
the pieces of evidence for forensic
examiners to retrieve and prove that
a file has previously been existed or
viewed on the suspect’s computer.
The word "thumbnail" is a reference to the
human thumbnail and alludes towards the
small size of the image or picture, comparable
to the size of the human thumbnail (source:
http://en.wikipedia.org/wiki/Thumbnail)
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A step towards the right
example, it first centralises the
Summary
direction
cached pictures and documents and
With improvements of functionality
In earlier versions of Windows, the
then stores them, into different sizes
and how thumbnails are being
thumbnails (or the thumbs.db) are
from a small picture (32 points) up to
managed via recent releases of
stored together within the same
a big picture (1024 points), in the
Windows, forensic examiners can
folder as the picture(s) or
thumbnail database which allows the
retrieve and extract potential
document(s), and that could be
forensic examiner to examine these
discriminating evidence to help in
intentionally deleted; or removed if
potential evidence. This provides
proving that certain files have
it was stored on a USB storage
forensic examiners a few more
previously existed and/or been
device. However, in Windows 7 for
sources when retrieving electronic
accessed through a suspect’s
evidence.
computer, although the original files
might have been intentionally
deleted or removed. With bigger
A simple illustration, shows
how a forensic examiner can
locate thumbnails.
2. A thumbnail is
created and cached
automatically
`
1. A picture
“target.jpg” is viewed
on the computer
sized (or higher resolution)
thumbnails, thumbnail examination
could help to make or break a case!
4. Forensic examiner
may retrieve the
thumbnail from
database
3. A picture is deleted
and overwritten
matthew.chu@shinewing.hk /
kenneth.lam@shinewing.hk
forensic and investigation
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Personal Bankruptcy - Part Two
By Pauline Au, Manager
Introduction
of co-operation from Mr X in the
“the bankrupt has failed to co-operate
In Part 1 of the same series, we
bankruptcy administration, three
in the administration of his estate” and
outlined the statutory framework
court applications were taken by the
“the conduct of the bankrupt, either in
for the automatic discharge of
trustees in bankruptcy (the
respect of the period before or the
bankrupts and grounds for
“Trustees”) against Mr X.
period after the commencement of the
bankruptcy has been unsatisfactory.”
objection before the end of the 4
years bankruptcy period (or 5
Before a substantial hearing was
through a war story the practical
Application 1: Application for
objecting Mr X’s automatic
discharge
tools for trustees when a bankrupt
Subsequent to the making of
applications against Mr X. We will
is not cooperative, or even leaves
bankruptcy order in November 2010,
come back and discuss in later part of
Hong Kong without informing his
the Trustees, appointed in March
this article an important issue relating
trustees. Furthermore, we will
2007, wrote to Mr X’s last known
to this objection application.
discuss possible “for” and
overseas addresses requesting for
“against” arguments in an
the provision of details of his assets
application for the objection of an
and liabilities (i.e. completion of the
automatic discharge under Section
statement of affairs and an annual
Application 2: Application for
court examination
30A(10)(a) of the Bankruptcy
statement of earnings).
During the administration of the estate,
years for repeated bankrupts). In
this article, we will illustrate
Ordinance (“BO”).
War Story of Mr X,
a bankrupt
heard for this application, the
Trustees took out another two
it was noted that Mr X was an
Despite repeated requests, Mr X
experienced businessman and
was not cooperative with the
professional investor prior to the
Trustees or provided any information
commencement of his bankruptcy.
in relation to his financial affairs.
Apparently, he was in breach of his
Background
obligations under the BO. In view of
A creditor’s bankruptcy petition
the expiration of the 4-year
was presented against Mr X, who
bankruptcy period, under Section
is not a permanent resident in
30A of the BO, the Trustees
Hong Kong. Before making a
submitted an application in late 2010
bankruptcy order against him, Mr
objecting to the discharge of Mr X
X left Hong Kong. Due to the lack
under the grounds that, inter alia,
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SHINEWING Specialist Advisory Services Limited
order for examination by substituted
order prohibiting Mr X from leaving
service and the examination hearing
Hong Kong and the warrant of arrest
His refusal to submit the
was then fixed in November 2011.
were granted by the court in April
statement of affairs, despite
However, Mr X failed to attend the
2012.
repeated requests from the
hearing and was adjourned to a date
Trustees, may suggest that he
to be fixed.
A week after the granting of the
was mindful to disclose his assets
prohibition order and the warrant of
and also, he was concerned of the
arrest, Mr X was arrested when he
consequences for filing an
passed through an immigration check
Trustees believed that Mr X might
Application 3: Application for
prohibition order (and warrant
of arrest)
in fact, have means to repay debts
While failing to get Mr X to attend
undertaking for his attendance to a
owed to his creditors.
the examination hearing, the
court hearing for the examination
Trustees had to use other means to
scheduled at the end of April 2012, Mr
In the circumstances, due
obtain information from Mr X. Based
X was discharged from the prohibition
completion of his statement of
on the travelling records of Mr X
order and warrant of arrest
affairs and private examination of
provided by the Immigration
accordingly.
Mr X became important and
Department, it was noted that Mr X
necessary. In May 2011, under
travelled frequently to PRC via Hong
Section 29 of the BO, the Trustees
Kong, but did not bother to inform
applied for a court examination
the Trustees of his itinerary. The
Application for objecting Mr X’s
automatic discharge
against Mr X. The summons for
Trustees believed that Mr X had
Now, let’s go back to the application
examination, together with
deliberately attempted to avoid his
for objecting Mr X’s automatic
relevant court documents, was
examination and delay the
discharge. During the evidence
served to the last known overseas
bankruptcy proceedings against him.
submission stage, an issue on
incorrect statement of affairs. The
addresses of the Bankrupt and in
point and he was then brought to the
court within 24 hours. By giving an
constitutionality of Section 30A(10)(a)
July 2011, an order for
Another court application was then
of the BO was raised. Pending the
examination was granted by the
made by the Trustees for a
court’s raised. Pending the court’s
court.
prohibition order and a warrant of
decision on this constitutionality
arrest, under Section 21B of the
issue, the court examination of Mr X
Upon obtaining further leave from
High Court Ordinance and Section
(under Application 2 of the Trustees)
the court, the Trustees served the
27 of the BO respectively. The
was adjourned sine die.
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What does the legislation say?
The legislation states that if a
bankrupt has, before the
commencement of the bankruptcy,
left Hong Kong and has not
returned thereafter, the relevant
period that a bankrupt is
discharged from bankruptcy by
the expiration of the relevant
period, shall not commence to run
until such time as he returns to
Hong Kong and notifies the
trustee of his return.
In this case, Mr X left Hong Kong
before the making of bankruptcy
order in November 2006. He
admitted that he had received
some legal and court documents
apparently relating to the debts
owed to his creditors before he left
Hong Kong, but he did not read
those documents at all. Whether
this Section 30A(10)(a) applies to
Mr X, and whether this piece of
legislation is against constitution is
currently unknown.
Possible arguments for the
legislation are:
 it is an important provision
enacted to ensure that a
bankrupt would stay in Hong
Kong and within the “radar” of the
trustee at the early stage of his
bankruptcy; and which is
intended to discourage
absconding;
 the presence of a bankrupt in
Hong Kong, in particular at the
commencement of his
bankruptcy, is necessary and
appropriate for the effective
operation of the statutory scheme
of bankruptcy; and
 it protects the rights of the
creditors and maintains
commercial morality.
Possible arguments against the
legislation are:
 reasons of innocence or
negligence - the bankrupt may
not be “aware of” his bankruptcy
when he leaves Hong Kong;
 the legislation applies
indiscriminately to “all” situations
- it is imposed whatever the
circumstances, irrespective of
whether it has occasioned any
prejudice to the administration of
the estate and even where the
bankrupt's co-operation is not
required; and
 the sweeping application of the
legislation means that there is no
discretion vested in the court to
disapply the legislation or to mitigate
its consequences, however
meritorious or deserving the
circumstances.
It remains to be seen what the
outcome is from the discussion of this
constitutionality issue.
Conclusion
No doubt that the court’s comments
and decision is important to clarify the
meaning of “bankruptcy period” and on
what basis or principles that the
trustees in future, may object to the
discharge of bankrupts who have
ignored their statutory duties and
obligations under the law; and left
Hong Kong before (and even after) the
making of the bankruptcy order.
We believe substantial arguments, and
maybe a court decision, on this issue
will be available later this year; and we
shall update the readers the outcome
in our coming eBulletin.
pauline.au@shinewing.hk
recovery and reorganisation
Disclaimer: This is not a legal advice; please consult your legal representative for proper advice.
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Spring 2013
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SHINEWING Specialist Advisory Services Limited
Things you need to know when
managing your China investments
By June Siu, Vice President
Many foreign acquirers or
financial pressure in the downturn,
of RMB130 million for the period.
investors of Chinese enterprises
or when they intend to sell their
Share price of Boshiwa
would expect that most of the
businesses.
subsequently plunged by over 40%
challenges are over after
after the resignation of its ex-auditor
completing their M&A deals. The
Acquirers may need to pay a high
who casted doubt on the existence and
reality is that they are still subject
price if they fail to identify
commercial substance of certain
to various hidden risks during the
accounting misconducts in the
business transactions. Trading of the
investment stage, which are quite
acquired company. In January this
stock was then suspended. Currently,
often overlooked especially when
year, the US equipment maker,
the company is still undergoing an
their businesses are performing
Caterpillar Inc. discovered an
investigation by a professional firm on
well.
accounting misconduct within a
the matters raised by the ex-auditor.
recently acquired Chinese
What are the major areas that
company, ERA Mining Machinery
Prevention is always better than cure.
investors need to pay special
Ltd (a company previously listed on
To reduce such risks, investors should
attention to in respect of their
the Stock Exchange of Hong Kong
closely monitor the financial
investments in China?
which subsequently delisted
performance of their investee
in October 2012). As a result,
companies, and stay alert of any
Caterpillar announced that it will
warning signals including:
Risks of frauds and
misstatements
have to write off “non-cash goodwill
Frauds usually involve
million out of the US$700 million it
misappropriation of company
paid for the acquisition of ERA.
impairment charge” of US$580
 When earnings increase, cash flows
from operations reduce.
assets/funds, while misstatements
usually involve earnings or profit
Investors may also suffer huge loss
inflation. Typical examples include
if they are unable to detect financial
capitalisation of expenses, or
abnormalities. Last year, Boshiwa
sales and related accounts
International (1698.HK, trading
receivable recorded in premature
suspended since March 2012), a
periods. Research indicated that
Chinese children’s wear company,
there is an increasing likelihood of
reported an operating cash outflow
frauds and misstatements when
of over RMB900 million in its 2011
corporations are feeling greater
interim results, albeit a net earnings
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SHINEWING Specialist Advisory Services Limited
 Earnings increase while
assist management to respond to
 Review the existing trading terms
investing cash outflows / capital
adverse changes quickly. Such
with customers and creditors. Make
expenditure reduce.
forecast also helps minimise the
sure that they are effectively
risk of corporate failure as a result
managed to cater for the company’s
 Significant increase in
of cash flow problems. In reality,
cash flow needs.
receivables without
many Chinese local enterprises,
corresponding increase in
especially small businesses, do not
earnings and cash balances.
have a good practice of preparing
inventories and creditors, review
cash flow forecast on a regular
other areas for possible cash
basis, but rather on “when-needed”
savings, such as the existing tax and
transactions, e.g. fund flows or
basis. When market turns or a
rental arrangements.
financing arrangements with
major debtor defaults, these
related parties, large non-cash
companies’ liquidity position could
transactions.
be severely affected.
 Existence of abnormal
 In addition to managing debtors,
Shareholders’ disputes
While the incorporation of proper “reps
 Issue of qualified audit opinions,
or resignation of auditors.
A few points to note when
and warranties” in investment
preparing and reviewing cash flow
agreements can protect investor’s
forecasts:
rights to some extent, the legal
The above are just some of the
common warning signals. As
enforceability of agreements in China
 Keep abreast of the latest market
is sometimes questionable.
today’s fraud can take many forms
developments. When the market
Furthermore, many Chinese owners
and is sometimes complex,
situation becomes more volatile,
are not willing to hand over their
investors should consider bringing
focus on accurate, shorter-term
management control after the sale of
in independent experts to
or rolling forecasts, and revisit
their majority stake, therefore investors
undertake detailed business
forecast assumptions more often
may not effectively control the
review or investigation when
(say, bi-weekly or monthly).
company’s operations in the event of
shareholders’ disputes. The recent
necessary.
 “Stress-test” your investee
conflict between the founder of NVC
company’s working capital
Lighting Holding (HK.2222) and its
Cash flows and working
capital management
regularly, and make sure that
foreign partners is a classic example,
there is sufficient liquidity to
although much extreme.
In practice, a good cash flow
manage short-term financing and
forecast can be an effective tool to
significant commitment needs.
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The conflict has led to a strike and
Investors should be reminded that
hindered by the local management
business suspension in an attempt
in China, holding a controlling
team, who refused to open the
to bring the founder back to the
stake on paper does not guarantee
financial books for buyer’s due
board of directors.
investors the right to sell as they
diligence.
wish. When doing deals in China,
Very often, the goals of foreign
investors also need to carefully
and local partners in joint ventures
manage the “relationship” and
Conclusion
might be different, e.g. foreign
“communication” with their local
No one has a “crystal ball” and can
partner looks for market
partners. Earlier in this year, Actis,
accurately foresee all hidden risks
expansion and quick profit return,
a British private equity firm and
associated with its investments. To
while the local partner looks for
controlling shareholder of the
reduce the chance of investment
technology advancement. To
popular mainland hotpot chain,
failure and minimise the risk, investors
reduce the chance of disputes,
Xiabu Xiabu Catering Management
should always take precautionary
investors should not only carry out
encountered great pressure from
measures, such as regularly
thorough background checks on
the Chinese founding family when
monitoring their investments and
owners and managers before the
it tried to sell its stake to its
staying alert of any unusual warning
deal, but also need to look for, and
preferred buyers, who offered more
signs.
work with the local partners
attractive prices than other bidders.
towards common business goals
The potential sale was once
during the investment stage.
The “exit” challenges
Many investors will consider an
“exit” of their investment several
years after making their initial
investment in a company.
june.siu@shinewing.hk
corporate finance
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Spring 2013
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SHINEWING Specialist Advisory Services Limited
Knowledge
Recovery and Reorganisation
Three Musketeers in
company, including but not limited
Receivers & Managers
insolvency administrations:
to carrying on businesses,
(Receivers)
Provisional liquidators,
preparing cash flow forecasts,
Receivers are usually appointed by
reporting to court and obtaining
debenture holders according to the
offer from potential buyer
terms of a debenture or loan
regarding future selling of assets.
document. Receivers, being an agent
PLs generally do not have the
of the company, are usually appointed
power of sale unless ordered by
to preserve and realise the charged
the court.
assets and repay the secured debts of
Liquidators and Receivers
Do you know these three
musketeers and some of the
differences between them? This
article gives you a brief introduction
of these musketeers, their roles,
duties and powers in company’s
the debenture holders. Powers of
insolvency administrations.
Receivers are governed by the
Provisional Liquidators (PLs)
PLs could be appointed in a
creditors voluntary liquidation
(S.228A of Companies Ordinance
(Cap.32)(CO)) or compulsory
liquidation. There is no specific
qualification for the appointment
PLs except for the appointment
under S.228A where the appointees
must be a solicitor or professional
accountant under the Professional
Accountants Ordinance (Cap.50).
PLs usually have limited powers as
given by a court order. Key
responsibilities of PLs are
preserving assets of the
Liquidators (Ls)
debenture and/or appointment
Under normal circumstances, Ls
document, which may include
are appointed at the first creditors’
collecting, realising and selling of the
meeting. In a compulsory winding-
charged assets. Upon the
up, a court order for appointment
appointment of Receivers, directors’
is required. Since the PLs (if any)
powers have ceased except to assist
have preserved assets and
Receivers to understand the
maintained status quo for the
company’s previous affairs /
company, Ls may decide to realise
transactions. Receivers have no duty
the assets in good faith and
to carrying on the business of the
exercise powers. Amongst other
company unless it is justified that
duties, Ls are also bounded to
trading-on would generate profits.
carrying out statutory
Otherwise, Receivers may be
investigations into the company’s
personal liable for the trading losses.
affairs and directors’ conduct in
Company in receivership does not
order to safeguard the interest of
mean that it has been wound-up.
all creditors and contributories.
However, in most cases, unsecured
creditors would petition to the court for
a company’s winding-up subsequent
to the appointment of Receivers.
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Differences between PLs, Ls
but an insolvent company may
primarily duty are acting in the interest
and Receivers
have Receivers and Ls (or PLs)
of secured creditors while liquidators
A company in liquidation could have
co-exist. In most cases, secured
are acting in the interest of all
PLs and followed by Ls when a
creditors, usually banks, would
creditors. Liquidators have extensive
winding-up order is made.
appoint Receivers but not putting
powers of investigation, which are not
However, Receivers are usually
the Company into liquidation, for
available to Receivers. Receivers are
appointed by debenture holder prior
the purpose of realising the
usually indemnified by company’s
to the time when PLs or Ls are
charged assets on a trading-on
assets if validly appointed but they
appointed.
basis in priority to all other
become the principal if recovery
unsecured creditors. Receivers
actions are not endorsed by the
Companies appointed Receivers do
under the CO are required to pay
liquidators.
not mean the company is insolvent
preferential debts, but their
Provisional
Liquidators
Insolvency
administration
Receivers
and
Managers
Liquidators
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Spring 2013
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SHINEWING SAS’s expertise in the
PRC Enterprise Bankruptcy Law
Alan Tang, the head of SAS, was
In total, over 1,500 participants,
a technical paper on “Confronting
invited to speak at more than six
mostly are government officials,
Practical Challenges and Pursuing
local and international forums to
PRC senior bankruptcy judges,
Creative Solutions” which was
share his views and expertise, from
bankers, investors, lawyers,
issued in July 2012 under the 24th
an experienced insolvency
academics and insolvency
technical paper of the INSOL
practitioner’s perspective, in PRC
practitioners joined these forums.
Technical Papers Series.
enterprises’ restructuring and
Alan’s participation in these events
insolvency related matters, in 2012.
was also reported in the newsletter
Under the leadership of Alan, our
These forums included a training of
of SHINEWING Beijing issued in
SAS team is dedicated to promote
some 200 senior PRC bankruptcy
January 2013 and Ningbo Finance
the perfection of PRC Enterprise
judges in a World Bank sponsored
Magazine issued in February 2013.
Bankruptcy Law and to assist our
clients in resolving the practical
training program at the Beidahe
National Judges College near
Apart from the above conferences,
restructuring and insolvency issues
Beijing, INSOL International Beijing
Alan is also one of the co-authors of
they encounter.
PRC seminar, the fourth annual
conference for the East Asian
Association of Insolvency &
Restructuring, the fifth China
Bankruptcy Law Forum organised
by the Supreme People’s Court of
the PRC, Seminar on corporate
restructuring and precautions for
bankruptcy organised by Ningbo
Financial Association and the
Restructuring and Insolvency
Faculty lunch seminar organised by
Hong Kong Institute of Certified
Public Accountants.
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Spring 2013
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SHINEWING Specialist Advisory Services Limited
Upcoming events
FIS Insight workshops
Forensics & Investigation Services
Topics of the workshops are:
Disputes need to be resolved efficiently. They usually
involve disagreement amongst shareholders or
Digital Forensics and beyond – 6 March 2013
family members, breaches of contracts, suspected

What are digital investigations?
fraud, employee misconduct, litigation and asset

Digital evidence awareness and related challenges
tracing.

The approach of a computer forensics examiner

Modus operandi and motives – suspect profiling

Evolution of computer forensics and crime
SHINEWING’s forensic accounting and investigation
experts act professionally and independently to meet
with clients’ needs.
Building up your digital evidence – e-discovery
20 March 2013
Details of the workshops and registration

Digital evidence and computers
arrangements will be announced under separate

A sea full of artifacts – types of evidence
emails.

The Good, the Bad and the Ugly – protect your
information

Case study – war stories on cases with digital
evidence
Hands-on with Intella… (TBC)

Intella as an investigative tool

The players – team alpha, beta and bravo

Concepts and tagging – finding the needle…

Case study – examine, tag and report
Feedback from readers is essential
to our success. We welcome and value
your comments or suggestions. Feel free
to contact us for any questions as well.
© 2013 SHINEWING Specialist Advisory Services Limited. All rights reserved.
The aim of this newsletter is to provide information relating to recent business developments. The information is general in nature and it is not to be taken as a
substitute for specific advice. Accordingly, SHINEWING accepts no responsibility for any loss on the information contained herein without further consultation
with ourselves.
(SAS – 004)
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