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B B
HCCW 191/2007
C C
IN THE HIGH COURT OF THE
D D
HONG KONG SPECIAL ADMINISTRATIVE REGION
E COURT OF FIRST INSTANCE E
COMPANIES (WINDING-UP) NO. 191 OF 2007
F F
____________
G IN THE MATTER of ORIENT G
POWER HOLDINGS LIMITED
H (RECEIVERS AND MANAGERS H
APPOINTED)(PROVISIONAL
I LIQUIDATOR I
APPOINTED)(COMPANY
REGISTRATION NO. F0005176)
J J
and
K K
IN THE MATTER of the Companies
L Ordinance, Cap. 32 L
M ____________ M
N Before: Hon Kwan J in Chambers N
Date of Hearing: 8 January 2008
O O
Date of Handing Down of Decision: 29 January 2008
P P
______________
Q DECISION Q
______________
R R
S S
1. This is a determination hearing under rule 45(2) of the
T Companies (Winding-up) Rules, for an order to appoint liquidators of T
Orient Power Holdings Limited (“the Company”). The issue of substance
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B to be resolved is whether Mr Roderick John Sutton, who is one of the B
receivers and managers of the Company appointed by the secured creditors
C C
under two debentures, should be appointed a liquidator in conjunction with
D two proposed independent appointees of a different firm of accountants, D
Mr Cosimo Borrelli and Miss Jacqueline Walsh.
E E
F 2. I gather that there is no reported instance of appointing as a F
liquidator an individual who is also a privately appointed receiver of the
G G
same company. The Official Receiver is opposed to this and submitted by
H Mr Godfrey Lam that the potential for conflict of interest in this situation H
is too great and would set a bad precedent.
I I
J 3. I should mention that the Official Receiver takes no issue with J
K
the fitness of Mr Sutton to act as liquidator, but for the fact that he is a K
receiver of the Company. Mr Sutton has indicated that he would accept
L L
the appointment only with the sanction of the court, in accordance with the
M
requirement in the Code of Ethics for Professional Accountants. He has no M
vested interest in the outcome.
N N
O 4. Mr Jeremy Bartlett, who appeared for the secured creditors, O
contended that the proposed appointment of Mr Sutton would be akin to
P P
that of a “special purpose” liquidator, in that his powers would be strictly
Q limited in the proposed order for his appointment so the potential for Q
conflict would be sufficiently managed and should not open the floodgates
R R
as might be apprehended.
S S
5. Other than the secured creditors, no unsecured creditor has
T T
filed evidence or appeared at the hearing despite the advertisement of the
U notice of the determination hearing. U
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B 6. I will first set out the relevant background matters. B
C C
The background
D D
7. The Company was incorporated in Bermuda in 1991 and was
E registered as an oversea company under Part XI of the Companies E
Ordinance, Cap. 32. The shares of the Company were listed on The Stock
F F
Exchange of Hong Kong Limited in September 1991. It is the holding
G company of a group of companies (“the Group”) which operated in the G
manufacture of electronic products, principally for home entertainment.
H H
I 8. In May 2005, substantial claims for damages for breaches of I
patent and contract were made against the Company and certain other
J J
companies in the Group. This triggered concerns among the financial
K K
creditors and they entered into discussions with the Group for debt
L
restructuring. The restructuring resulted in an arrangement that included a L
“Standstill Agreement” and a “Guarantee and Debenture” both dated
M M
14 October 2005. A steering committee of the lenders was set up under the
N Standstill Agreement. N
O O
9. By the debenture dated 14 October 2005, the companies listed
P as chargors in schedule 1, which included the Company and Orient Power P
Electronics Limited (“OPEL”), created a fixed charge or mortgage or
Q Q
floating charge, as the case may be, over all the assets of each chargor, as
R security for all present and future obligations and liabilities of each chargor R
to each of the financial creditors in the Standstill Agreement. Another
S S
debenture dated 9 December 2005 was entered into by a subsidiary of the
T Company creating a fixed charge or mortgage or floating charge over its T
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B present and future assets in similar terms as security for all liabilities of the B
Group.
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D 10. The security under both debentures was created in favour of D
the Standard Chartered Bank (Hong Kong) Limited as the security agent
E E
holding the benefit of the deeds on trust for the financial creditors. The
F identity of the secured creditors is not static because the debts have been F
traded on the secondary debt market. As of 3 December 2007, there are 22
G G
holders of the secured debt. The lenders are owed approximately HK$1.1
H billion. Four major creditors, including the security agent, hold H
approximately 57% of the secured debt.
I I
J 11. The secured creditors lost confidence in the management as J
K
the Group’s financial position continued to deteriorate. This led to the K
appointment of receivers and managers by the security agent under the
L L
powers in the debentures. On 3 May 2006, Mr Sutton and Mr Desmond
M
Chiong, both of Ferrier Hodgson, were appointed as the receivers and M
managers (“the Receivers”) of 41 out of a total of 56 companies in the
N N
Group, including the Company and OPEL. This is substantial group
O insolvency. O
P P
12. As at 3 May 2006, the Receivers estimated that the Company
Q had a deficiency of HK$282 million, before the inclusion of the secured Q
creditors’ cross-collateralised debt and contingent claims. They believed
R R
that the inter-company loans are irrecoverable as there is a significant
S deficiency of assets to meet liabilities across every entity of the Group. S
T T
13. From their appointment to the end of November 2006, the
U Receivers’ focus was on seeking to continue the trading operations of the U
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B Group, with a view to a restructuring of the debt, which ultimately proved B
not to be possible. There were asset sales for the benefit of the secured
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creditors. At the same time, they commenced investigations into what
D value was left in the Group for the benefit of creditors. D
E E
14. The Receivers’ investigations have been hindered owing to a
F freezing order in May 2006 over the Group’s accounting centre in the F
Mainland; the majority of records in that location have only recently
G G
become available after lengthy negotiations. Further, the Receivers did not
H have co-operation from the management and the auditors. H
I I
15. Notwithstanding that, they have undertaken substantial work
J and built up a substantial knowledge of the Group’s affairs. Their work J
K
involved a team of over 30 people at the peak of the engagement and K
involved stationing a significant number of personnel in the Mainland and
L L
Hong Kong. As such, the Receivers have obtained considerable first hand
M
knowledge of the day-to-day operating activities of the Group and its M
dealings with customers, suppliers and government authorities. They
N N
believe there is a need to conduct further investigations.
O O
16. Once the Receivers had recovered all readily available assets,
P P
and a restructuring proved not to be feasible, steps were taken to wind up
Q the Company in order for the investigations into the Group’s affairs to be Q
pursued further. On 2 May 2007, the winding-up petition was presented
R R
against the Company by OPEL, acting by the Receivers, on the basis of an
S inter-company loan of HK$84.7 million. S
T T
17. In June 2007, the solicitors for the Receivers sought the
U Official Receiver’s support for an application for a regulating order under U
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B section 227A in the event of liquidation of the Company, with a view to B
having the Receivers and a third person appointed liquidators without
C C
holding the first meetings of creditors and contributories. The Official
D Receiver turned down the request. D
E E
18. On 4 July 2007, a Master ordered the Company to be wound
F up. The Official Receiver became the provisional liquidator pursuant to F
section 194(1)(a) and proceeded to hold the first meetings of the creditors
G G
and contributories on 7 August 2007.
H H
19. The first meeting of creditors was attended by proxy by 29
I I
creditors. Of these creditors, 13 were Group companies already under the
J receivership of Mr Sutton and Mr Chiong (they were unsecured creditors J
K
with total claims of HK$264 million), another 13 were secured creditors K
and the remaining three were independent unsecured creditors. The total
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amount of the debts claimed by the 13 secured creditors came up to
M
HK$776 million. Each of them had estimated the value of their security at M
the nominal amount of HK$1.00 on the basis that the Group had no or
N N
minimal realisable assets, lodged a proof of debt for the balance and voted
O the unsecured portion of their debt. They represented 65% of the total O
claims and comprised the largest group of creditors in value, whether
P P
looked at as secured or in effect as unsecured creditors.
Q Q
20. The creditors passed a resolution appointing Mr Sutton,
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Mr Borrelli and Miss Walsh as joint and several liquidators. They also
S voted for a committee of inspection made up of the four major creditors. S
None of the creditors had voted against the resolutions, despite the
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reservations regarding the proposed appointment of Mr Sutton expressed
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B by the senior insolvency officer of the Official Receiver who chaired the B
meeting.
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D 21. No resolution was passed at the first meeting of contributories D
on 7 August 2007 and the meeting was adjourned to 21 August 2007. The
E E
adjourned meeting was inquorate and was not further adjourned.
F F
22. There being no identical resolutions at the first meetings of
G G
creditors and contributories, the Official Receiver sought directions for a
H determination hearing pursuant to section 194(1)(c) and rule 45 and made H
his first report on 14 September 2007.
I I
J 23. As at 28 November 2007 being the date of his second report, J
K
the Official Receiver has received 48 proofs of debt totalling HK$1,180 K
million. In addition to the 29 creditors who had attended the first meeting,
L L
the additional 19 unsecured creditors either had not filed a proof before the
M
meeting or had filed a proof but did not attend the meeting. The value of M
the debts of these additional creditors amounted to about HK$137 million
N N
which was 12% of the total claims.
O O
24. In his second report, the Official Receiver applied for an order
P P
that only Mr Borrelli and Miss Walsh should be appointed joint and
Q several liquidators of the Company. The secured creditors who appeared Q
by Mr Bartlett sought an order that Mr Sutton be appointed in conjunction
R R
with Mr Borrelli and Miss Walsh and proposed to restrict the powers of
S Mr Sutton as a liquidator in the terms set out in the draft order and on the S
basis that he would only exercise his powers with the approval of the other
T T
liquidators.
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B 25. I should also mention that the Receivers have been appointed B
as liquidators of two related companies to the Group, Pacific Crown
C C
Industrial Limited (“Pacific Crown”) and Dong Kuen Electronics Limited
D (“Dong Kuen”). The orders were made by a Master on 27 August 2007 D
and 21 September 2007 without opposition. The petitions to wind up
E E
Pacific Crown and Dong Kuen were presented by companies in the Group
F in which the Receivers were appointed as receivers. F
G G
General principles
H H
26. The general principles relating to the role of the court and its
I powers in appointing liquidators in a determination hearing are not I
controversial and may be stated as follows:
J J
(1) Under section 194(1)(c), the court is empowered to decide on
K K
the differences between the determinations of the meetings of
L the creditors and contributories for the appointment of L
liquidators and “make such order thereon as the court may
M M
think fit”. Under rule 45(2), in deciding the differences, the
N court is to make “such order as shall be necessary”. N
O (2) The court has a wide and unfettered discretion in the exercise O
of this power. It is not bound by the determinations of the
P P
meeting of the creditors or of the meeting of the contributories,
Q although the court would of course have due regard to those Q
determinations (Re Akai Holdings Ltd. & Anr. [2001] 2
R R
HKLRD 411 at 417J; section 287(1)).
S (3) In deciding whom to appoint as liquidator, the court considers S
what is in the best interests of all persons interested in the
T T
winding up (Re Akai Holdings, supra. at 418B). The court has
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undoubted power to decline to appoint any nominated
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B liquidator if his appointment conflicted or was likely to B
conflict with the best interests of the winding up as a whole
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including the best interests of all parties concerned in the
D winding up (Re Obie Pty. Ltd. (1983) 1 ACLC 1353 at 1363). D
E (4) As an officer of the court, a liquidator should maintain an even E
and impartial hand between all individuals whose interests are
F F
involved in the winding up (In re Contract Corporation (1872)
G 7 Ch. App 207). A guiding principle in appointing a G
liquidator is that he must be independent and seen to be
H H
independent, as it is of great importance there should be no
I possibility of criticism attaching to the liquidator as an officer I
of the court on the ground of a conflict of interest and duty
J J
(Re National Safety Council of Australia Victorian Division
K (1989) 15 ACLR 355 at 360 to 361; Re Biposo Pty. Ltd. (1995) K
17 ACSR 730 at 737). It would be inappropriate to appoint
L L
someone as liquidator in circumstances where there was some
M real prospect, even if small, of a conflict of interest and duty M
when the liquidator was conducting his or her duties
N N
(McPherson’s Law of Company Liquidation by Andrew Keay,
O 1st edition published in England and Wales, para. 8.09). O
P P
The conflict situation in this instance
Q Q
27. Liquidation is a class action designed to protect the interests of
R unsecured creditors, whereas receivership is designed to protect the R
interests of the security holders who appointed the receiver. A liquidator
S S
and a receiver operate in separate regimes for different purposes.
T Moreover, unlike a receiver appointed by the court, a receiver appointed T
out of court by a creditor under a security is not an officer of the court and
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B acts for the primary benefit of the creditor who appointed him (The Law of B
Administrators and Receivers of Companies by Lightman & Moss, 4th ed.,
C C
paras. 29-009 and 29-011). As the interests of the receiver and the
D liquidator will necessarily be different and in many cases conflicting, the D
same person who acted as receiver will normally not be appointed
E E
th
liquidator (Gower and Davies’ Principles of Modern Company Law, 7 ed.,
F page 844; In re Karamelli & Barnett, Ltd. [1917] 1 Ch. 203 at 205; Stead F
Hazel & Co. v. Cooper [1933] 1 KB 840 at 843). Only in rare and
G G
exceptional cases would the two offices be combined in one person
H (Buckley on the Companies Acts, 14th ed., page 591; Loose on Liquidators, H
5th ed., page 267).
I I
J 28. Where a receiver has acted to recover assets subject to a J
K
charge for the benefit of the secured creditor, considerations may arise as K
to the way in which he has performed his duties, making it inappropriate
L L
that he should act subsequently as liquidator because in that capacity it
M
may be inappropriate for him to challenge the way in which he performed M
his previous duties as receiver (Re Southern Cross Airlines Holdings Ltd.
N N
(1993) 10 ACSR 466 at 467; Re Sun’s Group Ltd., HCCW No. 425 of
O 2003, 17 June 2004, paras. 18, 19 and 21). While a receiver owes a duty of O
care to the company in the realisation of the charged assets, this duty is
P P
subordinated to the protection of the interest of the debenture holders (In re
Q Potters Oils Ltd. [1986] 1 WLR 201 at 206B; Medforth v. Blake [2000] Ch. Q
86 at 102F to G).
R R
S 29. There are other matters a liquidator is required to investigate S
and functions he has to perform that may impact on the duties and
T T
activities of a receiver. Mr Lam enumerated some obvious examples,
U including the following: U
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B (1) Under the debentures in this instance, the security agent has B
power to fix the remuneration of the Receivers. The
C C
liquidator may apply to court under section 300 to re-fix the
D remuneration of the Receivers, prospectively and D
retrospectively.
E E
(2) In the adjudication of proofs of debt, a liquidator who is also a
F F
receiver may justifiably be perceived to be partial towards the
G debenture holder in respect of the unsecured portion of his G
debt.
H H
(3) The secured creditors in this instance have estimated their
I security at the nominal value of HK$1.00. Under rule 127, a I
liquidator may require a secured creditor to give up his
J J
security for the benefit of the creditors generally on payment
K K
of the value estimated with an addition of 20%. A liquidator
L
who is also a receiver may be loath to exercise this power. L
(4) In investigating the affairs of the company, a receiver will be
M M
guided by what is likely to produce recovery for the debenture
N holders, whereas a liquidator will be guided by the prospects N
of recovery generally as well as his wider duties in carrying
O O
out a thorough investigation of the reasons for the collapse of
P the company and the public interest with the view of enabling P
appropriate action to be taken against those guilty of
Q Q
commercially culpable conduct (In re Pantmaenog Timber Co.
R Ltd. [2004] 1 AC 158 at 177E to G, para. 64). R
S (5) In choosing what claims to pursue in the liquidation, the S
secured creditors will prefer to pursue claims that belong as
T T
assets to the company because any recovery will be solely to
U their benefit. For unsecured creditors, it would be in their U
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B interest for the liquidator to pursue antecedent claims such as B
unfair preference or fraudulent trading where any recovery
C C
will form part of the general assets available for distribution to
D them. D
E (6) The receiver has all, or substantially all, of the assets of the E
company under his control by virtue of the security created by
F F
the debenture and retains the power to manage and realise
G those assets, so the liquidator must perforce wait on the G
sidelines as regards his distribution role until completion of
H H
the receivership, after which he will take over whatever assets
I that remain (Principles of Corporate Insolvency Law by Roy I
Goode, 3rd ed., paras. 5-02, 9-70). In selecting assets to be
J J
sold and the appropriate method of sale, a receiver may be
K affected by different considerations from those of a liquidator. K
The sale of part of the assets by the receiver may have the
L L
effect of preventing the liquidator from selling the business as
M a going concern or making it difficult to sell the remaining M
assets (In re John Wiper Ltd. (1972) 5 SASR 360 at 370).
N N
O 30. Mr Lam submitted that the problems of conflict that arise in O
this situation are legion and pervade the tasks of the liquidator in that the
P P
scope for possible conflict will be as wide as the range of functions and
Q activities of the receivers and liquidators. Q
R R
31. The accountancy profession has long recognised the potential
S for conflict. In the Code of Ethics for Professional Accountants issued by S
the Hong Kong Institute of Certified Public Accountants in December
T T
2005, section 432 deals with integrity, objectivity and independence in
U U
insolvency. The present situation is governed squarely by paragraph
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B 432.16, which is under the heading of “Insolvent liquidation following B
receivership” and reads as follows:
C C
“Where a partner in or an employee of a practice is, or in the
D previous two years has been, receiver of any of the assets of a D
company, no partner in or employee of the practice should accept
appointment as liquidator of the company in an insolvent
E liquidation. This restriction does not apply where the E
appointment was sanctioned by the court.”
F F
32. Paragraph 432.18 of the Code deals with potential conflicts in
G G
group situations in these terms:
H H
“Members should be particularly aware of the difficulties likely
to arise from the existence of inter-company transactions or
I guarantees in group, associated or ‘family-connected’ company I
situations. Acceptance of an insolvency appointment in relation
to more than one company in the group or association may raise
J issues of conflict of interest. Nevertheless, it may be J
impracticable for a series of different insolvency practitioners to
K act. A member should not accept multiple appointments in such K
situations unless he or she is satisfied that he or she is able to
take steps to minimise problems of conflict and that his or her
L overall integrity and objectivity are, and are seen to be, L
maintained.”
M M
N Appointments in other conflict situations N
33. Mr Bartlett pointed to some other situations in which the
O O
courts have taken a pragmatic approach and appointed a liquidator despite
P his prior involvement with the company in liquidation. The rationale is P
expediency, to promote efficiency, to avoid delay and to save costs.
Q Q
R 34. In large group insolvencies, the potential for conflicts of R
interest may arise in a variety of matters, such as inter-company balances,
S S
competing claims to assets, allocation of liabilities, guarantee and
T T
indemnity claims, issues of set-off or double proof, the validity of security,
U
tax and avoidance or recovery actions. It is recognised that by and large, it U
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B is prima facie in the interests of the general body of creditors to appoint a B
common liquidator for the companies in the group than to have a separate
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liquidator for each. Instead of a rigid requirement to avoid conflict and not
D allowing the same individual to act, the courts have taken a common sense D
approach and made appointments where it is possible to manage the
E E
conflict effectively by appropriate measures depending on the
F circumstances of each case. Examples of such measures include obtaining F
independent legal advice, the appointment of an additional partner from the
G G
same firm, the appointment of an independent partner from a different firm.
H It matters not if the conflict is potential or actual; the question is whether H
such conflict is capable of being effectively managed. If it cannot be
I I
managed, then the appointment would not be made. The above is a
J J
summary of the discussion in Sisu Capital Fund Ltd. & Ors. v. Tucker &
K
Ors. [2005] EWHC 2170 (Ch) at paras. 91 to 120. K
L L
35. In Re Arrows Ltd. [1992] BCC 121, provisional liquidators
M
were appointed for a company notwithstanding that one of them and a M
partner from the same firm of accountants were appointed by the court as
N N
receivers to 80 companies with which the company was connected, the
O court having noted that the potential conflicts could be adequately O
addressed by the provision of independent legal advice or by the
P P
appointment of independent members of the same firm to act against their
Q partners in case of conflict (at 123F). Re Southern Cross Airlines Holdings Q
Ltd., supra. is another instance in which a receiver was appointed the
R R
provisional liquidator of the same company, the court drawing the
S distinction that the receiver there was appointed by the court and not by the S
secured creditor pursuant to a security.
T T
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B 36. In Re Maxwell Communications Corporations plc [1992] B
BCLC 465, administrators were appointed notwithstanding that the same
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firm of accountants had acted as the auditors of a sub-subsidiary of the
D company. As there was merely a distant possibility that the administrators D
might have to investigate that audit, the court did not think it necessary to
E E
make immediate provision for the appointment of an additional
F independent administrator and left the matter to be dealt with if and when F
it arose.
G G
H 37. There had been a settled practice as a general rule of H
convenience, to avoid trouble and expense, for the courts to appoint the
I I
liquidators as receivers where debenture holders or mortgagees applied to
J court for the appointment of receivers after the winding up, unless there J
K
was a conflict between the interests of the secured creditors and of the K
other creditors, see Perry v. Oriental Hotels Company (1870) L.R. 5 Ch.
L L
App. 420; In re Henry Pound, Son, & Hutchins (1889) 42 Ch. D. 402 at
M
411 to 412, 419; and In re Joshua Stubbs, Ltd. [1891] 1 Ch. 475. M
N N
38. As was stated by Santow J in Advance Housing Pty. Ltd. v.
O Newcastle Classic Developments Pty. Ltd. (1994) 14 ACSR 230 at 234: O
“… the correct balance is struck by permitting a liquidator to act
P as such even if there be a prior involvement with the company in P
liquidation, provided that involvement is not likely to impede or
inhibit the liquidator from acting impartially in the interests of all
Q Q
creditors or be such as would give rise to a reasonable
apprehension on the part of a creditor that the liquidator might be
R so impeded or inhibited.” R
S S
39. The pragmatic approach was followed in a number of cases in
T Hong Kong, such as Re Akai Holdings, supra.; Re Luen Cheong Tai T
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B Construction Co. Ltd. [2002] HKEC 1544; and Re Yiu Wing Construction B
Co. Ltd. [2002] HKEC 1438.
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D D
The proposition by the secured creditors
E 40. On behalf of the secured creditors, it is accepted that the E
appointment of a privately appointed receiver as a liquidator is rare and
F F
unusual, and Mr Bartlett has not been able to find any reported instance of
G such an appointment. He submitted that there is no bar at law for such an G
appointment and contended that it would be appropriate for such an
H H
appointment to be made here where it could be shown that the potential
I conflicts arising from the appointment of a receiver appointed out of court I
could be managed effectively.
J J
K K
41. In the draft order submitted, the powers of Mr Sutton as a
L
liquidator would be curtailed in important respects. He would be L
empowered to investigate and identify any causes of action available to the
M M
Company or to the liquidators against third parties. All ancillary powers
N given to him as provided are for the purposes of the investigation aforesaid. N
As for his power to bring or defend legal proceedings for the Company,
O O
this would be subject to appropriate sanction of the court and to be
P exercised in conjunction with the other two independent liquidators. All P
the powers conferred on him are exercisable only with the approval of the
Q Q
other two liquidators, who would be in the majority.
R R
42. It is further provided in the draft order that the Receivers shall
S S
allow the liquidators full access to any books and documents relating to the
T Company held by them in their capacity as receivers save for any books T
and documents in respect of which they are entitled to claim legal
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B professional privilege, and that Mr Sutton shall not, without the consent of B
the other liquidators, release to any secured creditor or to Mr Chiong any
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information relating to the Company obtained by Mr Sutton in his capacity
D as liquidator. D
E E
43. Thus, Mr Sutton would not be required to undertake
F problematic tasks of ‘self-review’ into matters such as the validity of the F
appointment of the Receivers under the debentures, the performance of the
G G
Receivers’ duties and their dealings with the assets of the Company, and
H the remuneration of the Receivers. He would not be carrying out other H
duties for which he might be perceived to be partial towards the secured
I I
creditors, as has been canvassed by Mr Lam. For the investigation of
J possible claims and the bringing of legal proceedings for recovery, J
K
Mr Sutton would exercise his powers with the approval of the independent K
liquidators. If notwithstanding these measures a conflict should arise and
L L
is not resolved by discussion with the independent liquidators, Mr Sutton
M
has assured the creditors that he would promptly refer the issue of conflict M
to the court for direction.
N N
O 44. Mr Bartlett submitted that the proposed appointment of O
Mr Sutton may be viewed to some extent analogous to the appointment of
P P
“special purpose” liquidators on grounds of expediency, in which the court
Q gives the conduct of a particular matter arising in the liquidation to one of Q
several liquidators where there is a position of conflict, as in Re Midland
R R
Land and Investment Corporation [1887] WN 58; Re Spedley Securities
S Ltd. (In Liquidation) (1991) 4 ACSR 555; and Onefone Australia Pty. Ltd. S
v. One.Tel Ltd. (In Liquidation) [2003] NSWSC 1228. An order of this
T T
nature was made by Hartmann J in Re HIH Insurance (Asia) Ltd., HCCW
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B No. 337 of 2001 on 24 June 2002 for the appointment of an additional B
provisional liquidator.
C C
D 45. Mr Bartlett further made the point that in the present situation, D
a relatively rare set of circumstances has come together to make it possible
E E
for the potential conflict to be effectively managed. There is the
F willingness of the creditors, secured and unsecured, to fund the F
appointment of two additional liquidators from an independent firm of
G G
accountants. There is unanimous support among the creditors, secured and
H unsecured, for the appointment of Mr Sutton. The secured creditors as the H
appointors of the Receivers support the compromises put forward to
I I
manage the potential conflict in the limitation of Mr Sutton’s powers and
J in connection with information sharing. No competing appointees have J
K
been proposed by different stakeholder camps. Mr Sutton had worked K
with Mr Borrelli and Miss Walsh on other assignments and he has met
L L
with them to discuss the practicalities of this liquidation. I am given to
M
understand the two independent professionals have indicated that subject M
to the sanction of the court, they are comfortable with the arrangement
N N
proposed and are confident that it is workable.
O O
The exercise of the discretion
P P
46. Mr Lam urged the exercise of caution and submitted that the
Q Q
court should approach the matter by asking whether there is a compelling
R need for Mr Sutton to be appointed so as to attain objects beneficial to the R
winding up as a whole. I think that may be putting the requirement too
S S
high. The secured creditors take the view that the investigation could not
T be done as quickly, efficiently and as cost-effectively if Mr Sutton was not T
put in charge. They are keen to utilise to the full extent the considerable
U U
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B knowledge acquired by the Receivers during the course of their B
appointment to the Group. It is understandable that they do not want new
C C
liquidators to have to start afresh. Apart from the question of expenses for
D the ‘re-education’ of new liquidators, which the secured creditors are not D
inclined to fund, and the implication on efficiency, there is the difficulty of
E E
replicating the knowledge acquired by the Receivers given the passage of
F time and uncertainty of whether the sources of their information would still F
be available.
G G
H 47. Mr Lam queried whether the proposed appointment of two H
liquidators with Mr Sutton would result in an obvious saving in costs, as
I I
the additional liquidators would need to be brought up to the level of
J knowledge that Mr Sutton has acquired, if they were not to be excluded J
K
from the investigation. It seems to me that the secured creditors here (they K
are all financial institutions) must have weighed up the costs involved in
L L
the proposed arrangement and they ought to be acutely aware of what is
M
best for them financially. M
N N
48. The investigation to date by the Receivers has cost the secured
O creditors very substantial sums. There are no funds left in the liquidation O
account for further investigation to be carried out. The only way forward
P P
is with creditor funding. No funding is forthcoming from the unsecured
Q creditors. The secured creditors are prepared to fund the appointment of Q
Mr Sutton with two independent professionals, in order that thorough
R R
investigations may be completed as quickly and as cost-effectively as
S possible. It would be premature to consider funding arrangements for the S
bringing of claims and the allocation of proceeds of recovery at this stage,
T T
as claims have yet to be identified.
U U
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由此
A
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B 49. As was stated in Re Akai Holdings, supra. at 422H, creditors B
who are funding the liquidators are entitled to make sure that the funds are
C C
not wasted and be vigilant that the liquidators who will be expending the
D funds are worthy of their confidence. In providing funding for the D
appointment of liquidators in this instance, there is nothing to suggest that
E E
any of the liquidators would be yielding their independence to the secured
F creditors, unlike the position in Re Goodway Ltd. [1999] 1 HKC 141. F
G G
50. There is clearly a public interest in the proper investigation of
H the circumstances in which this listed company became insolvent. So far H
as the investigation of possible claims is concerned, all the creditors are in
I I
the same boat. I am inclined to agree with Mr Bartlett there is little point
J now to anticipate what is to happen at the next stage when claims are J
K
brought and what provision should be made for this, in view of the K
uncertainty of the outcome of further investigation, and whether any viable
L L
claims would be covered by the debentures or whether they would be in
M
the nature of antecedent claims. For the present, the best thing to do is to M
leave the liquidators to get on with further investigation, with recourse to
N N
the court where necessary.
O O
51. In the special circumstances of this case, I am persuaded that
P P
if the principle of avoiding the appearance of lack of impartiality were to
Q be strictly adhered to, this would be ‘making the perfect the enemy of the Q
good’. I am satisfied that the conflicting loyalties of Mr Sutton could be
R R
effectively managed with the proposed terms of appointment. I do not
S think this should lead to the opening of floodgates in that proposals to S
manage potential conflict would become the norm rather than the
T T
exception. I emphasise the circumstances here are special and each case
U U
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B would be closely scrutinised to see to it that the liquidator appointed is in B
the best interests of all persons interested in the winding up.
C C
D D
The orders
E 52. I make an order to appoint Mr Sutton, Mr Borrelli and E
Miss Walsh as joint and several liquidators of the Company. The terms of
F F
appointment are as per the draft order submitted by the secured creditors
G with the amendments proposed in the course of the arguments. G
H H
53. Other orders sought in the determination hearing are not in
I dispute. They relate to the appointment of a committee of inspection, and I
consequential directions for the liquidators to give security and to advertise
J J
and gazette a notice of their appointment. There will be an order in terms
K K
as per the draft order submitted by the secured creditors. The solicitors for
L
the secured creditors are to submit a revised draft order for the approval of L
the court.
M M
N
54. I make an order nisi that the costs of this application, N
including the costs of the Official Receiver, are to be paid out of the assets
O O
of the Company and that such payment is validated pursuant to section 182.
P P
Q Q
R R
S (S. Kwan) S
Judge of the Court of First Instance
T High Court T
U U
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由此
A
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B Mr Jeremy Bartlett, instructed by Messrs Lovells, for the secured creditors B
C Mr Godfrey Lam, instructed by the Official Receiver and provisional C
liquidator
D D
E E
F F
G G
H H
I I
J J
K K
L L
M M
N N
O O
P P
Q Q
R R
S S
T T
U U
V V
由此
A A
B B
HCCW 191/2007
C C
IN THE HIGH COURT OF THE
D D
HONG KONG SPECIAL ADMINISTRATIVE REGION
E COURT OF FIRST INSTANCE E
COMPANIES (WINDING-UP) NO. 191 OF 2007
F F
____________
G IN THE MATTER of ORIENT G
POWER HOLDINGS LIMITED
H (RECEIVERS AND MANAGERS H
APPOINTED)(PROVISIONAL
I LIQUIDATOR I
APPOINTED)(COMPANY
REGISTRATION NO. F0005176)
J J
and
K K
IN THE MATTER of the Companies
L Ordinance, Cap. 32 L
M ____________ M
N Before: Hon Kwan J in Chambers N
Date of Hearing: 8 January 2008
O O
Date of Handing Down of Decision: 29 January 2008
P P
______________
Q DECISION Q
______________
R R
S S
1. This is a determination hearing under rule 45(2) of the
T Companies (Winding-up) Rules, for an order to appoint liquidators of T
Orient Power Holdings Limited (“the Company”). The issue of substance
U U
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B to be resolved is whether Mr Roderick John Sutton, who is one of the B
receivers and managers of the Company appointed by the secured creditors
C C
under two debentures, should be appointed a liquidator in conjunction with
D two proposed independent appointees of a different firm of accountants, D
Mr Cosimo Borrelli and Miss Jacqueline Walsh.
E E
F 2. I gather that there is no reported instance of appointing as a F
liquidator an individual who is also a privately appointed receiver of the
G G
same company. The Official Receiver is opposed to this and submitted by
H Mr Godfrey Lam that the potential for conflict of interest in this situation H
is too great and would set a bad precedent.
I I
J 3. I should mention that the Official Receiver takes no issue with J
K
the fitness of Mr Sutton to act as liquidator, but for the fact that he is a K
receiver of the Company. Mr Sutton has indicated that he would accept
L L
the appointment only with the sanction of the court, in accordance with the
M
requirement in the Code of Ethics for Professional Accountants. He has no M
vested interest in the outcome.
N N
O 4. Mr Jeremy Bartlett, who appeared for the secured creditors, O
contended that the proposed appointment of Mr Sutton would be akin to
P P
that of a “special purpose” liquidator, in that his powers would be strictly
Q limited in the proposed order for his appointment so the potential for Q
conflict would be sufficiently managed and should not open the floodgates
R R
as might be apprehended.
S S
5. Other than the secured creditors, no unsecured creditor has
T T
filed evidence or appeared at the hearing despite the advertisement of the
U notice of the determination hearing. U
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B 6. I will first set out the relevant background matters. B
C C
The background
D D
7. The Company was incorporated in Bermuda in 1991 and was
E registered as an oversea company under Part XI of the Companies E
Ordinance, Cap. 32. The shares of the Company were listed on The Stock
F F
Exchange of Hong Kong Limited in September 1991. It is the holding
G company of a group of companies (“the Group”) which operated in the G
manufacture of electronic products, principally for home entertainment.
H H
I 8. In May 2005, substantial claims for damages for breaches of I
patent and contract were made against the Company and certain other
J J
companies in the Group. This triggered concerns among the financial
K K
creditors and they entered into discussions with the Group for debt
L
restructuring. The restructuring resulted in an arrangement that included a L
“Standstill Agreement” and a “Guarantee and Debenture” both dated
M M
14 October 2005. A steering committee of the lenders was set up under the
N Standstill Agreement. N
O O
9. By the debenture dated 14 October 2005, the companies listed
P as chargors in schedule 1, which included the Company and Orient Power P
Electronics Limited (“OPEL”), created a fixed charge or mortgage or
Q Q
floating charge, as the case may be, over all the assets of each chargor, as
R security for all present and future obligations and liabilities of each chargor R
to each of the financial creditors in the Standstill Agreement. Another
S S
debenture dated 9 December 2005 was entered into by a subsidiary of the
T Company creating a fixed charge or mortgage or floating charge over its T
U U
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B present and future assets in similar terms as security for all liabilities of the B
Group.
C C
D 10. The security under both debentures was created in favour of D
the Standard Chartered Bank (Hong Kong) Limited as the security agent
E E
holding the benefit of the deeds on trust for the financial creditors. The
F identity of the secured creditors is not static because the debts have been F
traded on the secondary debt market. As of 3 December 2007, there are 22
G G
holders of the secured debt. The lenders are owed approximately HK$1.1
H billion. Four major creditors, including the security agent, hold H
approximately 57% of the secured debt.
I I
J 11. The secured creditors lost confidence in the management as J
K
the Group’s financial position continued to deteriorate. This led to the K
appointment of receivers and managers by the security agent under the
L L
powers in the debentures. On 3 May 2006, Mr Sutton and Mr Desmond
M
Chiong, both of Ferrier Hodgson, were appointed as the receivers and M
managers (“the Receivers”) of 41 out of a total of 56 companies in the
N N
Group, including the Company and OPEL. This is substantial group
O insolvency. O
P P
12. As at 3 May 2006, the Receivers estimated that the Company
Q had a deficiency of HK$282 million, before the inclusion of the secured Q
creditors’ cross-collateralised debt and contingent claims. They believed
R R
that the inter-company loans are irrecoverable as there is a significant
S deficiency of assets to meet liabilities across every entity of the Group. S
T T
13. From their appointment to the end of November 2006, the
U Receivers’ focus was on seeking to continue the trading operations of the U
V V
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B Group, with a view to a restructuring of the debt, which ultimately proved B
not to be possible. There were asset sales for the benefit of the secured
C C
creditors. At the same time, they commenced investigations into what
D value was left in the Group for the benefit of creditors. D
E E
14. The Receivers’ investigations have been hindered owing to a
F freezing order in May 2006 over the Group’s accounting centre in the F
Mainland; the majority of records in that location have only recently
G G
become available after lengthy negotiations. Further, the Receivers did not
H have co-operation from the management and the auditors. H
I I
15. Notwithstanding that, they have undertaken substantial work
J and built up a substantial knowledge of the Group’s affairs. Their work J
K
involved a team of over 30 people at the peak of the engagement and K
involved stationing a significant number of personnel in the Mainland and
L L
Hong Kong. As such, the Receivers have obtained considerable first hand
M
knowledge of the day-to-day operating activities of the Group and its M
dealings with customers, suppliers and government authorities. They
N N
believe there is a need to conduct further investigations.
O O
16. Once the Receivers had recovered all readily available assets,
P P
and a restructuring proved not to be feasible, steps were taken to wind up
Q the Company in order for the investigations into the Group’s affairs to be Q
pursued further. On 2 May 2007, the winding-up petition was presented
R R
against the Company by OPEL, acting by the Receivers, on the basis of an
S inter-company loan of HK$84.7 million. S
T T
17. In June 2007, the solicitors for the Receivers sought the
U Official Receiver’s support for an application for a regulating order under U
V V
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B section 227A in the event of liquidation of the Company, with a view to B
having the Receivers and a third person appointed liquidators without
C C
holding the first meetings of creditors and contributories. The Official
D Receiver turned down the request. D
E E
18. On 4 July 2007, a Master ordered the Company to be wound
F up. The Official Receiver became the provisional liquidator pursuant to F
section 194(1)(a) and proceeded to hold the first meetings of the creditors
G G
and contributories on 7 August 2007.
H H
19. The first meeting of creditors was attended by proxy by 29
I I
creditors. Of these creditors, 13 were Group companies already under the
J receivership of Mr Sutton and Mr Chiong (they were unsecured creditors J
K
with total claims of HK$264 million), another 13 were secured creditors K
and the remaining three were independent unsecured creditors. The total
L L
amount of the debts claimed by the 13 secured creditors came up to
M
HK$776 million. Each of them had estimated the value of their security at M
the nominal amount of HK$1.00 on the basis that the Group had no or
N N
minimal realisable assets, lodged a proof of debt for the balance and voted
O the unsecured portion of their debt. They represented 65% of the total O
claims and comprised the largest group of creditors in value, whether
P P
looked at as secured or in effect as unsecured creditors.
Q Q
20. The creditors passed a resolution appointing Mr Sutton,
R R
Mr Borrelli and Miss Walsh as joint and several liquidators. They also
S voted for a committee of inspection made up of the four major creditors. S
None of the creditors had voted against the resolutions, despite the
T T
reservations regarding the proposed appointment of Mr Sutton expressed
U U
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B by the senior insolvency officer of the Official Receiver who chaired the B
meeting.
C C
D 21. No resolution was passed at the first meeting of contributories D
on 7 August 2007 and the meeting was adjourned to 21 August 2007. The
E E
adjourned meeting was inquorate and was not further adjourned.
F F
22. There being no identical resolutions at the first meetings of
G G
creditors and contributories, the Official Receiver sought directions for a
H determination hearing pursuant to section 194(1)(c) and rule 45 and made H
his first report on 14 September 2007.
I I
J 23. As at 28 November 2007 being the date of his second report, J
K
the Official Receiver has received 48 proofs of debt totalling HK$1,180 K
million. In addition to the 29 creditors who had attended the first meeting,
L L
the additional 19 unsecured creditors either had not filed a proof before the
M
meeting or had filed a proof but did not attend the meeting. The value of M
the debts of these additional creditors amounted to about HK$137 million
N N
which was 12% of the total claims.
O O
24. In his second report, the Official Receiver applied for an order
P P
that only Mr Borrelli and Miss Walsh should be appointed joint and
Q several liquidators of the Company. The secured creditors who appeared Q
by Mr Bartlett sought an order that Mr Sutton be appointed in conjunction
R R
with Mr Borrelli and Miss Walsh and proposed to restrict the powers of
S Mr Sutton as a liquidator in the terms set out in the draft order and on the S
basis that he would only exercise his powers with the approval of the other
T T
liquidators.
U U
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由此
A
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B 25. I should also mention that the Receivers have been appointed B
as liquidators of two related companies to the Group, Pacific Crown
C C
Industrial Limited (“Pacific Crown”) and Dong Kuen Electronics Limited
D (“Dong Kuen”). The orders were made by a Master on 27 August 2007 D
and 21 September 2007 without opposition. The petitions to wind up
E E
Pacific Crown and Dong Kuen were presented by companies in the Group
F in which the Receivers were appointed as receivers. F
G G
General principles
H H
26. The general principles relating to the role of the court and its
I powers in appointing liquidators in a determination hearing are not I
controversial and may be stated as follows:
J J
(1) Under section 194(1)(c), the court is empowered to decide on
K K
the differences between the determinations of the meetings of
L the creditors and contributories for the appointment of L
liquidators and “make such order thereon as the court may
M M
think fit”. Under rule 45(2), in deciding the differences, the
N court is to make “such order as shall be necessary”. N
O (2) The court has a wide and unfettered discretion in the exercise O
of this power. It is not bound by the determinations of the
P P
meeting of the creditors or of the meeting of the contributories,
Q although the court would of course have due regard to those Q
determinations (Re Akai Holdings Ltd. & Anr. [2001] 2
R R
HKLRD 411 at 417J; section 287(1)).
S (3) In deciding whom to appoint as liquidator, the court considers S
what is in the best interests of all persons interested in the
T T
winding up (Re Akai Holdings, supra. at 418B). The court has
U U
undoubted power to decline to appoint any nominated
V V
由此
A
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B liquidator if his appointment conflicted or was likely to B
conflict with the best interests of the winding up as a whole
C C
including the best interests of all parties concerned in the
D winding up (Re Obie Pty. Ltd. (1983) 1 ACLC 1353 at 1363). D
E (4) As an officer of the court, a liquidator should maintain an even E
and impartial hand between all individuals whose interests are
F F
involved in the winding up (In re Contract Corporation (1872)
G 7 Ch. App 207). A guiding principle in appointing a G
liquidator is that he must be independent and seen to be
H H
independent, as it is of great importance there should be no
I possibility of criticism attaching to the liquidator as an officer I
of the court on the ground of a conflict of interest and duty
J J
(Re National Safety Council of Australia Victorian Division
K (1989) 15 ACLR 355 at 360 to 361; Re Biposo Pty. Ltd. (1995) K
17 ACSR 730 at 737). It would be inappropriate to appoint
L L
someone as liquidator in circumstances where there was some
M real prospect, even if small, of a conflict of interest and duty M
when the liquidator was conducting his or her duties
N N
(McPherson’s Law of Company Liquidation by Andrew Keay,
O 1st edition published in England and Wales, para. 8.09). O
P P
The conflict situation in this instance
Q Q
27. Liquidation is a class action designed to protect the interests of
R unsecured creditors, whereas receivership is designed to protect the R
interests of the security holders who appointed the receiver. A liquidator
S S
and a receiver operate in separate regimes for different purposes.
T Moreover, unlike a receiver appointed by the court, a receiver appointed T
out of court by a creditor under a security is not an officer of the court and
U U
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B acts for the primary benefit of the creditor who appointed him (The Law of B
Administrators and Receivers of Companies by Lightman & Moss, 4th ed.,
C C
paras. 29-009 and 29-011). As the interests of the receiver and the
D liquidator will necessarily be different and in many cases conflicting, the D
same person who acted as receiver will normally not be appointed
E E
th
liquidator (Gower and Davies’ Principles of Modern Company Law, 7 ed.,
F page 844; In re Karamelli & Barnett, Ltd. [1917] 1 Ch. 203 at 205; Stead F
Hazel & Co. v. Cooper [1933] 1 KB 840 at 843). Only in rare and
G G
exceptional cases would the two offices be combined in one person
H (Buckley on the Companies Acts, 14th ed., page 591; Loose on Liquidators, H
5th ed., page 267).
I I
J 28. Where a receiver has acted to recover assets subject to a J
K
charge for the benefit of the secured creditor, considerations may arise as K
to the way in which he has performed his duties, making it inappropriate
L L
that he should act subsequently as liquidator because in that capacity it
M
may be inappropriate for him to challenge the way in which he performed M
his previous duties as receiver (Re Southern Cross Airlines Holdings Ltd.
N N
(1993) 10 ACSR 466 at 467; Re Sun’s Group Ltd., HCCW No. 425 of
O 2003, 17 June 2004, paras. 18, 19 and 21). While a receiver owes a duty of O
care to the company in the realisation of the charged assets, this duty is
P P
subordinated to the protection of the interest of the debenture holders (In re
Q Potters Oils Ltd. [1986] 1 WLR 201 at 206B; Medforth v. Blake [2000] Ch. Q
86 at 102F to G).
R R
S 29. There are other matters a liquidator is required to investigate S
and functions he has to perform that may impact on the duties and
T T
activities of a receiver. Mr Lam enumerated some obvious examples,
U including the following: U
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由此
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B (1) Under the debentures in this instance, the security agent has B
power to fix the remuneration of the Receivers. The
C C
liquidator may apply to court under section 300 to re-fix the
D remuneration of the Receivers, prospectively and D
retrospectively.
E E
(2) In the adjudication of proofs of debt, a liquidator who is also a
F F
receiver may justifiably be perceived to be partial towards the
G debenture holder in respect of the unsecured portion of his G
debt.
H H
(3) The secured creditors in this instance have estimated their
I security at the nominal value of HK$1.00. Under rule 127, a I
liquidator may require a secured creditor to give up his
J J
security for the benefit of the creditors generally on payment
K K
of the value estimated with an addition of 20%. A liquidator
L
who is also a receiver may be loath to exercise this power. L
(4) In investigating the affairs of the company, a receiver will be
M M
guided by what is likely to produce recovery for the debenture
N holders, whereas a liquidator will be guided by the prospects N
of recovery generally as well as his wider duties in carrying
O O
out a thorough investigation of the reasons for the collapse of
P the company and the public interest with the view of enabling P
appropriate action to be taken against those guilty of
Q Q
commercially culpable conduct (In re Pantmaenog Timber Co.
R Ltd. [2004] 1 AC 158 at 177E to G, para. 64). R
S (5) In choosing what claims to pursue in the liquidation, the S
secured creditors will prefer to pursue claims that belong as
T T
assets to the company because any recovery will be solely to
U their benefit. For unsecured creditors, it would be in their U
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由此
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B interest for the liquidator to pursue antecedent claims such as B
unfair preference or fraudulent trading where any recovery
C C
will form part of the general assets available for distribution to
D them. D
E (6) The receiver has all, or substantially all, of the assets of the E
company under his control by virtue of the security created by
F F
the debenture and retains the power to manage and realise
G those assets, so the liquidator must perforce wait on the G
sidelines as regards his distribution role until completion of
H H
the receivership, after which he will take over whatever assets
I that remain (Principles of Corporate Insolvency Law by Roy I
Goode, 3rd ed., paras. 5-02, 9-70). In selecting assets to be
J J
sold and the appropriate method of sale, a receiver may be
K affected by different considerations from those of a liquidator. K
The sale of part of the assets by the receiver may have the
L L
effect of preventing the liquidator from selling the business as
M a going concern or making it difficult to sell the remaining M
assets (In re John Wiper Ltd. (1972) 5 SASR 360 at 370).
N N
O 30. Mr Lam submitted that the problems of conflict that arise in O
this situation are legion and pervade the tasks of the liquidator in that the
P P
scope for possible conflict will be as wide as the range of functions and
Q activities of the receivers and liquidators. Q
R R
31. The accountancy profession has long recognised the potential
S for conflict. In the Code of Ethics for Professional Accountants issued by S
the Hong Kong Institute of Certified Public Accountants in December
T T
2005, section 432 deals with integrity, objectivity and independence in
U U
insolvency. The present situation is governed squarely by paragraph
V V
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B 432.16, which is under the heading of “Insolvent liquidation following B
receivership” and reads as follows:
C C
“Where a partner in or an employee of a practice is, or in the
D previous two years has been, receiver of any of the assets of a D
company, no partner in or employee of the practice should accept
appointment as liquidator of the company in an insolvent
E liquidation. This restriction does not apply where the E
appointment was sanctioned by the court.”
F F
32. Paragraph 432.18 of the Code deals with potential conflicts in
G G
group situations in these terms:
H H
“Members should be particularly aware of the difficulties likely
to arise from the existence of inter-company transactions or
I guarantees in group, associated or ‘family-connected’ company I
situations. Acceptance of an insolvency appointment in relation
to more than one company in the group or association may raise
J issues of conflict of interest. Nevertheless, it may be J
impracticable for a series of different insolvency practitioners to
K act. A member should not accept multiple appointments in such K
situations unless he or she is satisfied that he or she is able to
take steps to minimise problems of conflict and that his or her
L overall integrity and objectivity are, and are seen to be, L
maintained.”
M M
N Appointments in other conflict situations N
33. Mr Bartlett pointed to some other situations in which the
O O
courts have taken a pragmatic approach and appointed a liquidator despite
P his prior involvement with the company in liquidation. The rationale is P
expediency, to promote efficiency, to avoid delay and to save costs.
Q Q
R 34. In large group insolvencies, the potential for conflicts of R
interest may arise in a variety of matters, such as inter-company balances,
S S
competing claims to assets, allocation of liabilities, guarantee and
T T
indemnity claims, issues of set-off or double proof, the validity of security,
U
tax and avoidance or recovery actions. It is recognised that by and large, it U
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B is prima facie in the interests of the general body of creditors to appoint a B
common liquidator for the companies in the group than to have a separate
C C
liquidator for each. Instead of a rigid requirement to avoid conflict and not
D allowing the same individual to act, the courts have taken a common sense D
approach and made appointments where it is possible to manage the
E E
conflict effectively by appropriate measures depending on the
F circumstances of each case. Examples of such measures include obtaining F
independent legal advice, the appointment of an additional partner from the
G G
same firm, the appointment of an independent partner from a different firm.
H It matters not if the conflict is potential or actual; the question is whether H
such conflict is capable of being effectively managed. If it cannot be
I I
managed, then the appointment would not be made. The above is a
J J
summary of the discussion in Sisu Capital Fund Ltd. & Ors. v. Tucker &
K
Ors. [2005] EWHC 2170 (Ch) at paras. 91 to 120. K
L L
35. In Re Arrows Ltd. [1992] BCC 121, provisional liquidators
M
were appointed for a company notwithstanding that one of them and a M
partner from the same firm of accountants were appointed by the court as
N N
receivers to 80 companies with which the company was connected, the
O court having noted that the potential conflicts could be adequately O
addressed by the provision of independent legal advice or by the
P P
appointment of independent members of the same firm to act against their
Q partners in case of conflict (at 123F). Re Southern Cross Airlines Holdings Q
Ltd., supra. is another instance in which a receiver was appointed the
R R
provisional liquidator of the same company, the court drawing the
S distinction that the receiver there was appointed by the court and not by the S
secured creditor pursuant to a security.
T T
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B 36. In Re Maxwell Communications Corporations plc [1992] B
BCLC 465, administrators were appointed notwithstanding that the same
C C
firm of accountants had acted as the auditors of a sub-subsidiary of the
D company. As there was merely a distant possibility that the administrators D
might have to investigate that audit, the court did not think it necessary to
E E
make immediate provision for the appointment of an additional
F independent administrator and left the matter to be dealt with if and when F
it arose.
G G
H 37. There had been a settled practice as a general rule of H
convenience, to avoid trouble and expense, for the courts to appoint the
I I
liquidators as receivers where debenture holders or mortgagees applied to
J court for the appointment of receivers after the winding up, unless there J
K
was a conflict between the interests of the secured creditors and of the K
other creditors, see Perry v. Oriental Hotels Company (1870) L.R. 5 Ch.
L L
App. 420; In re Henry Pound, Son, & Hutchins (1889) 42 Ch. D. 402 at
M
411 to 412, 419; and In re Joshua Stubbs, Ltd. [1891] 1 Ch. 475. M
N N
38. As was stated by Santow J in Advance Housing Pty. Ltd. v.
O Newcastle Classic Developments Pty. Ltd. (1994) 14 ACSR 230 at 234: O
“… the correct balance is struck by permitting a liquidator to act
P as such even if there be a prior involvement with the company in P
liquidation, provided that involvement is not likely to impede or
inhibit the liquidator from acting impartially in the interests of all
Q Q
creditors or be such as would give rise to a reasonable
apprehension on the part of a creditor that the liquidator might be
R so impeded or inhibited.” R
S S
39. The pragmatic approach was followed in a number of cases in
T Hong Kong, such as Re Akai Holdings, supra.; Re Luen Cheong Tai T
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B Construction Co. Ltd. [2002] HKEC 1544; and Re Yiu Wing Construction B
Co. Ltd. [2002] HKEC 1438.
C C
D D
The proposition by the secured creditors
E 40. On behalf of the secured creditors, it is accepted that the E
appointment of a privately appointed receiver as a liquidator is rare and
F F
unusual, and Mr Bartlett has not been able to find any reported instance of
G such an appointment. He submitted that there is no bar at law for such an G
appointment and contended that it would be appropriate for such an
H H
appointment to be made here where it could be shown that the potential
I conflicts arising from the appointment of a receiver appointed out of court I
could be managed effectively.
J J
K K
41. In the draft order submitted, the powers of Mr Sutton as a
L
liquidator would be curtailed in important respects. He would be L
empowered to investigate and identify any causes of action available to the
M M
Company or to the liquidators against third parties. All ancillary powers
N given to him as provided are for the purposes of the investigation aforesaid. N
As for his power to bring or defend legal proceedings for the Company,
O O
this would be subject to appropriate sanction of the court and to be
P exercised in conjunction with the other two independent liquidators. All P
the powers conferred on him are exercisable only with the approval of the
Q Q
other two liquidators, who would be in the majority.
R R
42. It is further provided in the draft order that the Receivers shall
S S
allow the liquidators full access to any books and documents relating to the
T Company held by them in their capacity as receivers save for any books T
and documents in respect of which they are entitled to claim legal
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B professional privilege, and that Mr Sutton shall not, without the consent of B
the other liquidators, release to any secured creditor or to Mr Chiong any
C C
information relating to the Company obtained by Mr Sutton in his capacity
D as liquidator. D
E E
43. Thus, Mr Sutton would not be required to undertake
F problematic tasks of ‘self-review’ into matters such as the validity of the F
appointment of the Receivers under the debentures, the performance of the
G G
Receivers’ duties and their dealings with the assets of the Company, and
H the remuneration of the Receivers. He would not be carrying out other H
duties for which he might be perceived to be partial towards the secured
I I
creditors, as has been canvassed by Mr Lam. For the investigation of
J possible claims and the bringing of legal proceedings for recovery, J
K
Mr Sutton would exercise his powers with the approval of the independent K
liquidators. If notwithstanding these measures a conflict should arise and
L L
is not resolved by discussion with the independent liquidators, Mr Sutton
M
has assured the creditors that he would promptly refer the issue of conflict M
to the court for direction.
N N
O 44. Mr Bartlett submitted that the proposed appointment of O
Mr Sutton may be viewed to some extent analogous to the appointment of
P P
“special purpose” liquidators on grounds of expediency, in which the court
Q gives the conduct of a particular matter arising in the liquidation to one of Q
several liquidators where there is a position of conflict, as in Re Midland
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Land and Investment Corporation [1887] WN 58; Re Spedley Securities
S Ltd. (In Liquidation) (1991) 4 ACSR 555; and Onefone Australia Pty. Ltd. S
v. One.Tel Ltd. (In Liquidation) [2003] NSWSC 1228. An order of this
T T
nature was made by Hartmann J in Re HIH Insurance (Asia) Ltd., HCCW
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B No. 337 of 2001 on 24 June 2002 for the appointment of an additional B
provisional liquidator.
C C
D 45. Mr Bartlett further made the point that in the present situation, D
a relatively rare set of circumstances has come together to make it possible
E E
for the potential conflict to be effectively managed. There is the
F willingness of the creditors, secured and unsecured, to fund the F
appointment of two additional liquidators from an independent firm of
G G
accountants. There is unanimous support among the creditors, secured and
H unsecured, for the appointment of Mr Sutton. The secured creditors as the H
appointors of the Receivers support the compromises put forward to
I I
manage the potential conflict in the limitation of Mr Sutton’s powers and
J in connection with information sharing. No competing appointees have J
K
been proposed by different stakeholder camps. Mr Sutton had worked K
with Mr Borrelli and Miss Walsh on other assignments and he has met
L L
with them to discuss the practicalities of this liquidation. I am given to
M
understand the two independent professionals have indicated that subject M
to the sanction of the court, they are comfortable with the arrangement
N N
proposed and are confident that it is workable.
O O
The exercise of the discretion
P P
46. Mr Lam urged the exercise of caution and submitted that the
Q Q
court should approach the matter by asking whether there is a compelling
R need for Mr Sutton to be appointed so as to attain objects beneficial to the R
winding up as a whole. I think that may be putting the requirement too
S S
high. The secured creditors take the view that the investigation could not
T be done as quickly, efficiently and as cost-effectively if Mr Sutton was not T
put in charge. They are keen to utilise to the full extent the considerable
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B knowledge acquired by the Receivers during the course of their B
appointment to the Group. It is understandable that they do not want new
C C
liquidators to have to start afresh. Apart from the question of expenses for
D the ‘re-education’ of new liquidators, which the secured creditors are not D
inclined to fund, and the implication on efficiency, there is the difficulty of
E E
replicating the knowledge acquired by the Receivers given the passage of
F time and uncertainty of whether the sources of their information would still F
be available.
G G
H 47. Mr Lam queried whether the proposed appointment of two H
liquidators with Mr Sutton would result in an obvious saving in costs, as
I I
the additional liquidators would need to be brought up to the level of
J knowledge that Mr Sutton has acquired, if they were not to be excluded J
K
from the investigation. It seems to me that the secured creditors here (they K
are all financial institutions) must have weighed up the costs involved in
L L
the proposed arrangement and they ought to be acutely aware of what is
M
best for them financially. M
N N
48. The investigation to date by the Receivers has cost the secured
O creditors very substantial sums. There are no funds left in the liquidation O
account for further investigation to be carried out. The only way forward
P P
is with creditor funding. No funding is forthcoming from the unsecured
Q creditors. The secured creditors are prepared to fund the appointment of Q
Mr Sutton with two independent professionals, in order that thorough
R R
investigations may be completed as quickly and as cost-effectively as
S possible. It would be premature to consider funding arrangements for the S
bringing of claims and the allocation of proceeds of recovery at this stage,
T T
as claims have yet to be identified.
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B 49. As was stated in Re Akai Holdings, supra. at 422H, creditors B
who are funding the liquidators are entitled to make sure that the funds are
C C
not wasted and be vigilant that the liquidators who will be expending the
D funds are worthy of their confidence. In providing funding for the D
appointment of liquidators in this instance, there is nothing to suggest that
E E
any of the liquidators would be yielding their independence to the secured
F creditors, unlike the position in Re Goodway Ltd. [1999] 1 HKC 141. F
G G
50. There is clearly a public interest in the proper investigation of
H the circumstances in which this listed company became insolvent. So far H
as the investigation of possible claims is concerned, all the creditors are in
I I
the same boat. I am inclined to agree with Mr Bartlett there is little point
J now to anticipate what is to happen at the next stage when claims are J
K
brought and what provision should be made for this, in view of the K
uncertainty of the outcome of further investigation, and whether any viable
L L
claims would be covered by the debentures or whether they would be in
M
the nature of antecedent claims. For the present, the best thing to do is to M
leave the liquidators to get on with further investigation, with recourse to
N N
the court where necessary.
O O
51. In the special circumstances of this case, I am persuaded that
P P
if the principle of avoiding the appearance of lack of impartiality were to
Q be strictly adhered to, this would be ‘making the perfect the enemy of the Q
good’. I am satisfied that the conflicting loyalties of Mr Sutton could be
R R
effectively managed with the proposed terms of appointment. I do not
S think this should lead to the opening of floodgates in that proposals to S
manage potential conflict would become the norm rather than the
T T
exception. I emphasise the circumstances here are special and each case
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B would be closely scrutinised to see to it that the liquidator appointed is in B
the best interests of all persons interested in the winding up.
C C
D D
The orders
E 52. I make an order to appoint Mr Sutton, Mr Borrelli and E
Miss Walsh as joint and several liquidators of the Company. The terms of
F F
appointment are as per the draft order submitted by the secured creditors
G with the amendments proposed in the course of the arguments. G
H H
53. Other orders sought in the determination hearing are not in
I dispute. They relate to the appointment of a committee of inspection, and I
consequential directions for the liquidators to give security and to advertise
J J
and gazette a notice of their appointment. There will be an order in terms
K K
as per the draft order submitted by the secured creditors. The solicitors for
L
the secured creditors are to submit a revised draft order for the approval of L
the court.
M M
N
54. I make an order nisi that the costs of this application, N
including the costs of the Official Receiver, are to be paid out of the assets
O O
of the Company and that such payment is validated pursuant to section 182.
P P
Q Q
R R
S (S. Kwan) S
Judge of the Court of First Instance
T High Court T
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B Mr Jeremy Bartlett, instructed by Messrs Lovells, for the secured creditors B
C Mr Godfrey Lam, instructed by the Official Receiver and provisional C
liquidator
D D
E E
F F
G G
H H
I I
J J
K K
L L
M M
N N
O O
P P
Q Q
R R
S S
T T
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