Legal update: High Court clarifies remuneration of provisional liquidators

Jul252010

This update considers recent cases that clarify the statutory structure applying to a provisional liquidator’s remuneration. In particular, the cases illustrate the proper construction of Sections 194 and 196 of the Companies Ordinance and demonstrate how the application of the sections has evolved.

Background

Section 194(1A) of the ordinance enables the official receiver to appoint another person as the provisional liquidator of a company in his or her place where the official receiver has become the provisional liquidator pursuant to Section 194(1A) and considers that the company’s property is unlikely to exceed HK$200,000. The purpose of the provision is to relieve the official receiver of an administrative burden.

The relevant provisions of the ordinance in relation to the remuneration of provisional liquidators appointed under Section 194(1A) are:

  • Section 2, which defines the term ‘liquidator’ to include a provisional liquidator holding such office by virtue of Section 194 (unless the context requires otherwise);
  • Section 196(1A), which provides that a provisional liquidator is remunerated (i) in accordance with a scale of fees approved periodically by the official receiver, or (ii) on another basis, which the official receiver must approve in writing; and
  • Section 196(2), which provides that subject to Section 196(1A), where a person other than the official receiver is appointed as a liquidator, he or she is remunerated on a percentage basis, or as determined by the committee of inspection (if any) or by the court.

Re Sweetmart Garment Works Ltd

Facts

This case1 examined the proper construction of Sections 196(1A) and (2) on whether the remuneration of provisional liquidators appointed by the official receiver pursuant to Section 194(1A) should be determined by the court or by the official receiver.

The former provisional liquidators of Sweetmart Garment Works Ltd applied to the court for their bill (dated August 5 2008) to be taxed and to determine their remuneration.

The application came before Master A Ho on October 17 2008, who directed that the question of whether (on the proper interpretation of Sections 196(1A) and (2)) the court had jurisdiction to tax the bills of provisional liquidators appointed under Section 194(1A) should be referred to a companies judge for determination.

The question was whether the remuneration of provisional liquidators appointed by the official receiver pursuant to Section 194(1A) should be awarded (i) under Section 196(1A), whereby such remuneration is determined by the court, or (ii) under Section 196(2), whereby remuneration is determined by the official receiver.

Previous case law provided conflicting indications. In Re Gold Delta Development Ltd Ho had held that: (i) Section 196(1A) necessarily requires the official receiver to calculate the remuneration payable to provisional liquidators in accordance with the basis that he or she has fixed; and (ii) the court has no jurisdiction to determine the amount of remuneration payable to provisional liquidators appointed pursuant to Section 194(1A).2

However, in Re Bondfield International Ltd Justice Barma determined that, on a natural reading of Section 196(1A), the power thereby reserved to the official receiver related not to the assessment of the quantum of remuneration, but only to the fixing of the basis of such remuneration.3

Decision

In Re Sweetmart Garment Works Ltd Barma followed his decision in Re Bondfield International Ltd and held that a court has jurisdiction over provisional liquidators’ remuneration. In considering the natural meaning of Section 196(1A), he stated that:

“Section 196(1A) clearly refers to the fixing of the basis of remuneration, rather than the actual assessment of the level of remuneration allowed. It is perfectly possible to read Sections 196(1A) and (2) together harmoniously in the case of a Section 194(1A) provisional liquidator by allowing the basis of his remuneration to be determined by the official receiver (by whom he is appointed) pursuant to Section 196(1A), but, subject thereto, leaving the actual level of remuneration to be allowed to be assessed by the court, as is the position for other provisional liquidators and liquidators.”

As for the period after the making of a winding-up order, during which the provisional liquidator continues to hold office by virtue of Section 194(1)(aa), amendments made in 2000 require that the assessment of a provisional liquidator’s remuneration take place pursuant to Section 196(2), not according to the court’s inherent jurisdiction.

The judge also considered that Sections 196(1A) and (2) are not mutually exclusive. He stated that there is no clear and unambiguous language in the legislation to remove the court’s jurisdiction to determine the level of a provisional liquidator’s remuneration. Therefore, Section 196(1A) does not exclude the court’s jurisdiction to examine and determine the level of remuneration of a Section 194(1A) provisional liquidator.

The judge considered that an official receiver’s obligation to monitor the conduct of a liquidator pursuant to Section 204 does not require the official receiver to scrutinize the liquidators’ bills. Although the official receiver has a wide supervisory role in a compulsory winding-up, it is difficult to see why he or she should bear this responsibility in every compulsory winding-up in which he or she has appointed a provisional liquidator under Section 194(1A).

Re Lehman Brothers Securities Asia

Facts

In September 2008 petitions were presented for the winding-up of eight Hong Kong companies in the Lehman Brothers group pursuant to Section 179(1) of the ordinance.4 The petitions were presented either by the companies themselves or by their parent companies. Ex parte applications were also made for the appointment of provisional liquidators pursuant to Section 193. The partners of KMPG were appointed as the provisional liquidators and in turn engaged professionals and numerous agents to assist them in exercising their powers under the appointment orders.

Winding-up orders were made in November 2008. The provisional liquidators continued to act in this capacity by virtue of Section 194(1)(aa) of the ordinance, pending the appointment of liquidators.

In February 2009 meetings of creditors and contributories of each of the companies were held. The provisional liquidators were appointed liquidators, and committees of inspection were proposed to be appointed in respect of each of the companies. The court approved the appointment in March 2009.

On March 24 2009 the provisional liquidators applied to the court, seeking directions on:

  • the manner in which remuneration and disbursements should be assessed;
  • the assessment of such remuneration and disbursements and the payment thereof from the company’s estate; and
  • the making of interim payments in respect of remuneration and disbursements.

Directions were given in two hearings on May 26 2009 and June 12 2009.

First hearing – interim payment

The interim payment issue was considered at the May 26 2009 hearing. It was accepted that the court had jurisdiction to order interim costs, and that it was particularly important for the provisional liquidators that arrangements be made for interim payments on account. In considering the scale of the case, the judge stated that:

“[to] fail to make such arrangements in a case like the present would be to cause very real hardship to the provisional liquidators and to those of their agents who have provided extensive services to them.”

In considering the starting point for the interim payment, the judge stated that it was appropriate for interim payments to be granted at two-thirds of the amount sought.5

The judge ordered: (i) an interim payment of 75% of the fees incurred by the provisional liquidators and their agents (excluding fees incurred in respect of the present application and fees for scrutinizing the fees) from the date of their appointment to the date of the order appointing them as liquidators; and (ii) an interim payment of 100% of their other disbursements during the provisional liquidation period (ie, excluding the fees of their agents, which were covered by the first interim payment).

Second hearing – assessment of remuneration

The central issue was the method of assessing the remuneration of the provisional liquidators and their agents. This involved a consideration of: (i) the method whereby such remuneration and disbursements should be assessed; and (ii) the assessment of such remuneration and disbursements and the payment thereof from the company’s estate.

In considering the assessment method, the judge was concerned with the principles and statutory provisions applicable to the assessment of the provisional liquidators’ remuneration. The court identified two relevant periods in assessing such remuneration. The first period covered the time between the presentation of the petition and the making of a winding-up order. Section 193 of the ordinance provides that a provisional liquidator may be appointed during this period. The second period covered the time between the making of the winding-up order and the court’s appointment of a liquidator following meetings of the company’s creditors and contributories.

Legislation

Section 196(2) provides that, where a person other than the official receiver appoints the liquidator, the latter receives such remuneration as was agreed between the appointer and the committee of inspection. In the absence of such an agreement, remuneration is received as determined by the court.

However, the position has been changed by the introduction of Section 194(1)(aa), which provides that, where a person other than the official receiver has been appointed as provisional liquidator pursuant to Section 193, he or she continues to act in that capacity upon the making of the winding-up order until he or she – or another person – becomes the liquidator. Thus, a provisional liquidator appointed under Section 193 remains in place after the making of the winding-up order and remains in the role in the second period. However, the question of the remuneration of a provisional liquidator who remains in place after a winding-up order remains unanswered, as the ordinance is silent on the basis for such remuneration.

The issue in this case was whether the provisional liquidator’s remuneration, in both the first and second periods, fell within the court’s inherent jurisdiction.

Ruling

Inherent jurisdiction

The judge considered that the remuneration of provisional liquidators, in both the first and second periods, is within the court’s inherent jurisdiction. Having examined the legislative history, he stated that:

“it seems to me that the terms of paragraph 21 of the explanatory memorandum puts the matter beyond doubt, in terms of the intention behind the amendment, as it refers to the definition including a provisional liquidator holding such office by virtue of Section 194 as amended.”

Assessment of remuneration

Having concluded that the court has inherent jurisdiction to determine the remuneration of the provisional liquidator, the judge directed that the remuneration should be assessed on the basis of the Maxwell principles,6 which state as follows:

  • Administrators, liquidators, receivers, trustees in bankruptcy and other officers are charged with a duty to account for the way in which they exercise their powers and for the property with which they deal;
  • Allowance for remuneration to office holders represents an exception to the rule that a trustee must not profit from his or her trust – a principle that applies to all persons in a fiduciary position;
  • Office holders must give full particulars to justify the amount of a claim for remuneration. They must do more than list the total number of hours spent; rather, they must explain the nature of each main task undertaken and the considerations which led them to embark on it. The time spent must be linked to this explanation, so that the time devoted to each task can be seen; and
  • Office holders must keep proper, contemporaneous records.

Termination of provisional liquidation period

It was accepted that the provisional liquidation period comes to an end when the court appoints the provisional liquidators or other persons as liquidators.

Appointment of an assessor

It is unusual for a judge to assess the remuneration of provisional liquidators and their agents – most assessments are conducted by masters. However, due to the complexity of the case, the judge considered it preferable and appropriate to take charge of assessing the provisional liquidators’ claims to remuneration and reimbursement for their agents’ fees, and appointed an assessor to assist the court.

Comment

After Sweetmart, petitioners should be clear that the court is in a position to adopt the natural meaning of the Section 196(1A) and accordingly has jurisdiction to tax the bills of provisional liquidators appointed under Section 194(1A).

Lehman Brothers clarified that the court has inherent jurisdiction to assess the remuneration of the provisional liquidators appointed under Section 193 throughout the period before and after the making of the winding-up order. The Maxwell principles are the correct basis for the assessment.

These cases provide useful guidelines on the process of systematically assessing the remuneration of provisional liquidators and their agents – particularly solicitors and others employed by them – as part of the normal court process.

1.HCCW 755/20005, August 19 2009.
2.HCCW 915/2000.
3.HCCW 99 & 771/ 2002.
4.HCCW 437/2008, May 26 2009 and June 12 2009.
5.Re Independent Insurance Company 2 [2003] BPIR 577.
6.See Re Peregrine Investments Holdings Ltd (No 1).

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Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.