RE GOLDLORY RESTAURANT LTD

HCCW 886/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

(HCCW 886/00, 953/00, 996/00, 504/01, 572/01, 575/01,
748/01, 294/02, 628/02, 1295/02, 36/03, 456/01, 1290/01, 999/01,
1017/02, 1046/02, 1316/02, 968/01, 1184/02, 365/03 & 557/03)

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D E C I S I O N

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The issue for determination and the hearing

1.  I have before me an issue for determination (“the Issue”) referred by Master Kwang and it is as follows:

“On what basis should the remuneration of liquidators appointed under s 227F of the Companies Ordinance, Cap. 32 be assessed, pursuant to section 196(2) of the said Ordinance and rule 146(2) of the Companies (Winding-up) Rules?”

2.  The Issue came to be referred by the Master in this way.

3.  At a taxations hearing in HCCW Nos. 456 of 2001 and 1290 of 2001 on 27 August 2004, the Master first raised the Issue and other matters relating to the proper interpretation of section 196(2) and rule 146(2).  He queried if the remuneration of liquidators in summary cases under section 227F should be fixed on a percentage basis or a time cost basis, as rule 146(2) would seem to be couched in mandatory terms in that the remuneration shall be fixed on a percentage basis unless otherwise provided for under Cap. 32 or ordered by the court.  He directed the Official Receiver to attend the adjourned hearing to assist the court.

4.  In a subsequent communication, the Master raised the question whether the practice in England in the 1960 edition of Palmer’s Company Precedents should be followed in Hong Kong, since section 196(2) and rule 146(2) were modelled on English legislation in 1948 and 1949.  The old English practice would appear to be that liquidators were required to apply by summons if they sought to have their remuneration fixed other than on a percentage basis and in small liquidations, the supporting affidavit would need to show special circumstances and exceptional difficulty before liquidators could charge on some other basis such as time cost basis.  The Master has queried if the correct position is to apply the percentage basis as the norm, with a discretion in the court to depart from this where special circumstances are shown on an ad hoc application by the liquidator concerned, made at or near the conclusion of the process of liquidation.

5.  The Official Receiver made a report to the Master dated 1 June 2005, setting out his submissions on the interpretation of the statutory provisions and the views of the interested bodies canvassed by him, being the Law Society of Hong Kong and the Hong Kong Institute of Certified Public Accountants.  As a decision on the Issue would have material impact on the remuneration of liquidators in the Panel T Scheme operated by the Official Receiver, with the leave of the Master, the Official Receiver sent a letter to the two professional bodies aforesaid and to all private practitioners participating in the Panel T Scheme on 12 September 2005, drawing their attention to the Issue pending for determination, and inquiring if any one would wish to be heard in a consolidated hearing of cases involving the Issue before the Companies Judge.

6.  A number of private practitioners indicated that they would wish to take part in such a hearing and they have identified a number of cases which are before the court involving the Issue.

7.  On 8 March 2006, the Master made the directions referring the Issue to me for determination in 21 cases.  Four firms are involved.  Two of them, Alvarez & Marsal Asia Limited (“Alvarez & Marsal”) and Baker Tilly Hong Kong Business Recovery Limited (“Baker Tilly”), have filed affidavits in this hearing.  The Official Receiver has made a total of six reports and I have had very helpful submissions from Mr. Bartlett, who appeared for the Official Receiver.  The two professional bodies did not make any separate representation at this hearing, having written to the Official Receiver in December 2004 and setting out their views in some detail.  In short, the position of every one who took part in this hearing and all those whose views were canvassed are in favour of the time cost basis as the standard to be adopted for the remuneration of liquidators appointed under section 227F.

The statutory provisions and legislative history

8.  I will first set out the relevant statutory provisions and give an account of their legislative history.

9.  I should begin with section 227F, as this is the first of the relevant provisions to be enacted.  The current version of section 227F(1) reads as follows:

“227F.  Application of Ordinance to small winding-up

(1) Where after the presentation of a winding-up petition -

(a) the court is satisfied; or

(b) the Official Receiver or the provisional liquidator reports to the court, that the property of the company is not likely to exceed in value $200,000, the court may make an order that the company be wound up in a summary manner, and thereupon the provisions of this Ordinance shall apply subject to the following modifications -

(i) the Official Receiver or the provisional liquidator, as the case may be, shall be the liquidator but there shall be no meetings of creditors and contributories under section 194 or 206;

(ii) there shall be no committee of inspection, and the liquidator may do all things which may be done by a liquidator with the sanction of a committee of inspection;

(iii) such other modifications as may be prescribed with a view to saving expense and simplifying procedure.”

10.  Section 227F was added to Cap. 32 by Ordinance No. 81 of 1976 and it came into operation on 1 January 1977.  The purpose of the amendment was to simplify the procedure applicable to the winding up of companies with assets unlikely to exceed HK$10,000.00 (this has been revised to the present figure of HK$200,000.00 in 1985), so that the liquidation of companies with negligible assets would be carried out in as cost-effective a manner as possible.  A special characteristic is the restriction on reference to the wishes of creditors or contributories.  The section seems to have been taken from section 129 of the Bankruptcy Act 1914 and was introduced in Hong Kong in 1976 into both the personal insolvency and the liquidation contexts.  There is no equivalent provision to section 227F in the 1948 Companies Act in the United Kingdom, or in the legislation for company insolvencies in Australia or New Zealand.  The position in the United Kingdom for bankruptcy is now governed by section 275 of the Insolvency Act 1986, which provides a summary administration procedure in debtors’ petition cases.  Hong Kong would seem to be unique in applying the summary procedure in the liquidation context.

11.  The next relevant provision is section 196(2), which was first introduced into Cap. 32 by Ordinance No. 25 of 1985.  This is the general provision governing the remuneration of private liquidators and the current version reads as follows (I have italicized the words amended by Ordinance No. 46 of 2000 for ease of reference):

“196.  General provisions as to liquidators

(2) Subject to subsection (1A), where a person other than the Official Receiver is appointed liquidator, he shall receive such remuneration by way of percentage or otherwise as is determined -

(a) where there is a committee of inspection, by agreement between the liquidator and the committee of inspection; or

(b) where there is no committee of inspection or the liquidator and the committee of inspection fail to agree, by the court,

and if two or more persons are appointed liquidators, their remuneration shall be distributed among them in such proportions as may be determined by the committee of inspection or the court, as the case may be.”

12.  This provision was enacted to encourage the use of outside liquidators by allowing the remuneration of an outside liquidator to be decided by agreement between the liquidator and the committee of inspection or by the court.  Section 196(2) was modelled on section 242(2) of the Companies Act 1948, but there is some difference in that section 196(2) allows for greater flexibility, as the English provision did not provide for the committee of inspection agreeing the basis of remuneration on other than percentage terms.

13.  The other relevant provisions all came to be enacted by Ordinance No. 46 of 2000.  They came into operation on 1 July 2000 and are as follows:

“194.  Appointment, style, etc. of liquidators

(1A)    Where the Official Receiver -

(a)   is the provisional liquidator of the company by virtue of subsection (1)(a); and

(b)   is of the opinion that the property of the company is not likely to exceed in value $200,000,

he may, at any time, appoint 1 or more persons as provisional liquidator in his place.”

“196.  General provisions as to liquidators

(1A)    A provisional liquidator appointed under section 194(1A) shall be remunerated -

(a)   in accordance with a scale of fees approved from time to time by the Official Receiver; or

(b)   on such other basis as the Official Receiver approves in writing.”

14.  The reason for enacting section 194(1A) is to enable the Official Receiver to appoint external provisional liquidators in summary cases.  Section 196(1A) allows the Official Receiver to fix the remuneration of a provisional liquidator appointed under section 194(1A).  A consequential amendment was made to section 196(2) in the manner as indicated above.

15.  Rule 146(2) was in existence before but was amended by Ordinance No. 46 of 2000.  I have italicized the amendments for ease of reference.  Rule 146 reads as follow:

“146. Remuneration of liquidator

(1) Where the remuneration of a liquidator is determined by the committee of inspection, it may be in the nature of a commission or percentage of which one part shall be payable on the amount realized, after deducting the sums (if any) paid to secured creditors (other than debenture holders) out of the proceeds of their securities, and the other part on the amount distributed in dividend.

(2) If there is no committee of inspection, the remuneration of the liquidator shall, unless otherwise provided for under the Ordinance or ordered by the court, be fixed by the scale of fees and percentages for the time being payable on realizations and distributions by the Official Receiver as liquidator.

(3) This rule shall only apply to a liquidator appointed in a winding up by the court.”

16.  Rule 146(2) corresponds to rule 159(3) of the Companies (Winding-up) Rules 1949 in the United Kingdom.  Mr. Bartlett drew my attention to the difference between rule 146(1) and the corresponding English provision in rule 159(1).  The English provision appears to make it mandatory to adopt the percentage basis when remuneration is fixed by the committee of inspection, whereas our rule 146(1) is discretionary.

Summary cases and the Panel T Scheme

17.  The Official Receiver has provided the statistics of liquidations in the last 10 years for which a summary procedure order under section 227F(1) was made.

18.  In 2000, the number of winding-up orders made was almost double the number in 1995.  In that year there were 910 winding-up orders, and 809 summary procedure orders.  The number of insolvency cases continued to rise in the following years.  In 2001, there were 1,066 winding-up orders and 1,005 summary procedure orders.  In 2002, the numbers were 1,292 winding-up orders and 1,167 summary procedure orders.  In 2003, 1,248 winding-up orders and 999 summary procedure orders were made.  In 2004, there were 1,147 winding-up orders and 761 summary procedure orders.  Out of the 1,147 liquidations in 2004, 1,095 cases were handled by external liquidators under the Panel T Scheme, and 756 of them have summary procedure orders made, the status of the rest is not yet known.  In 2005, there were 849 winding-up orders and 274 summary procedure orders.  Out of the 849 liquidations, 800 are Panel T cases and 274 of them have summary procedure orders made, the status of the rest is not yet known.

19.  In September 1997, the Official Receiver set up a pilot scheme, known as the Panel B Scheme, for contracting out summary cases to private practitioners.  There was already a scheme known as the Panel A Scheme for contracting out non-summary liquidations to the private sector.  The Standing Committee on Company Law Reform (“the SCCLR”) found the Panel B Scheme problematic.  Under the legislative provisions at the time, the Official Receiver was necessarily the provisional liquidator in every case.  Hence, a private sector practitioner could only act as the Official Receiver’s agent; the Official Receiver had to authorise the practitioner to carry out various aspects of the winding up.  The ultimate responsibility still rested with the Official Receiver and the Official Receiver was vicariously liable for the acts of private practitioners.  The SCCLR proposed an amendment to section 194 to give the Official Receiver authority to appoint directly a suitable person as provisional liquidator on the making of a winding-up order and thereafter the liquidator.  This was the background to the enactment of section 194(1A) and other consequential provisions in Ordinance No. 46 of 2000.  As mentioned earlier, these provisions came into effect on 1 July 2000.

20.  The Official Receiver then set up the Panel T Scheme to replace the Panel B Scheme.  A summary of the tender process under the new scheme is found in paragraph 15 of the judgment of Barma J in Re Bondfield International Ltd & Anr (No. 1), HCCW Nos. 99 & 711 of 2002, 27 January 2005.

21.  Paragraph 6 in Part III of the Special Conditions attached to the tender documents of the Panel T Scheme deals with the fees and remuneration of provisional liquidators appointed by the Official Receiver under section 194(1A).  The conditions in paragraph 6 are then incorporated into the letter of appointment of the Official Receiver, so they would become contractually binding on the Official Receiver and the private sector practitioner who takes up the appointment.

22.  Paragraph 6(a) provides for the Official Receiver’s right to scrutinize bills and to require taxation by the court if necessary, and that when acting as summary procedure provisional liquidator, the fees and remuneration shall be on a time cost basis.  Paragraph 6(b) provides that when acting as liquidator under a summary procedure order, the fees and remuneration shall be approved by the court.  Paragraphs 6(c) to (f) provide for the payment of a government subsidy where the company’s assets are insufficient to meet the fees of the provisional liquidator or liquidator, and that the shortfall will be met from the subsidy but (a) only to the extent of a required subsidy pre-agreed at the tender stage; and (b) only at or below the time cost rates pre-agreed at the tender stage.

23.  The subsidy is only payable where a summary procedure order under section 227F is made, otherwise the fees and remuneration are as pursuant to the Ordinance.  In practice, where the subsidy is payable, 60% is paid when the summary procedure order is made and the balance of 40% when a release of the liquidator is obtained.  Also, in practice, the subsidy payment is made only after the Official Receiver has scrutinised the bill of the practitioner in accordance with the court’s taxation guidelines for provisional liquidators, or after taxation of the bill of the liquidator by the court.

24.  Panel T cases are allocated strictly on a rota basis.  There is a periodic tender process.  A firm participating in the process must specify the maximum subsidy it would expect to receive in the event the assets in a liquidation are insufficient to meet its time costs, and time costs are calculated on a scale which the practitioner sets out in his tender proposal.

25.  I should also mention that when the Official Receiver acts as provisional liquidator, he will charge his costs on a time cost basis pursuant to Item II(b) of Table B to Schedule 3 of the Companies (Fees and Percentages) Order.

26.  The Official Receiver’s present system has the benefit of government subsidy, set at a figure which seems to provide a reasonable return that has permitted private practitioners to take up the work as economically viable.  It might not be commercially viable for the private sector to take up appointments in summary cases, if the remuneration of liquidators were to be made on a percentage basis of the realisations, as summary cases would yield minimal realisations.  The Official Receiver is greatly concerned that if the remuneration of liquidators in summary cases is set not on a time cost basis, this would act as a disincentive for private practitioners to take up appointments under section 194(1A), the burden of administering these cases would fall back on the Official Receiver and this would put great strain on the limited resources of his department.

27.  Furthermore, the percentage basis of remuneration fails to take into account that even in summary cases, the liquidators must undertake a minimum level of work which would give rise to no or negligible realisations.  Examples of such work are given in the evidence filed by Alvarez & Marsal and Baker Tilly.  They include complying with the statutory obligations of a liquidator, liaising with directors, investigation work, work relating to assets, and work relating to creditors.  Work undertaken in these respects is not materially different as that undertaken in a non-summary case.

Construction of the statutory provisions

28.  Mr. Bartlett recognised that on the ordinary and natural meaning of the words in rule 146(2), absent an order of the court, it may be contended that the ‘default’ basis of the remuneration of a liquidator in a summary case will be the percentage basis applicable to the Official Receiver as liquidator, being that pursuant to the Companies (Fees and Percentages) Order.  He submitted however this construction should not be adopted, for the following reasons.

29.  The Companies (Winding-up) Rules comprise procedural rules for the purpose of carrying into effect the objects of Cap. 32, as provided in section 296(1).  The Rules are by nature subsidiary legislation.  Under section 196(2)(b), the court clearly has a discretion to determine the appropriate basis for awarding remuneration in summary cases where there is no committee of inspection.  Rule 146(2) should not be construed in such a manner as to detract in any sense from the breadth of the discretion accorded to the court in section 196(2)(b) under the primary legislation.  I have no quarrel with this proposition.

30.  Mr. Bartlett further submitted that although rule 146(2) and section 196(2) were modelled on old English legislation, there are material differences in the Hong Kong legislation, as mentioned earlier.  The differences in our legislation would militate against applying the old English practice based on the provisions in 1948 and 1949 as an aid to construction of our statutory provisions.  I agree with this.

31.  I also agree with the observation of Mr. Bartlett that the old English provisions would seem to be reflective of the times in which they were enacted in that there was less flexibility with a greater emphasis on the percentage basis.  The historic basis for remuneration of liquidators was the percentage basis, subject to exception.  The legislative position in the United Kingdom has moved on from the 1948 Act and the 1949 Rules and the time cost basis has become ubiquitous.  As Mr. Bartlett has remarked, the differences in our legislation would seem to indicate we have moved on with the widespread acceptance of the time cost basis in modern times.

The historic English practice

32.  For the historic English practice alluded to by the Master and mentioned at the beginning of this decision, it is noted that in Palmer’s Company Precedents, 17^th ed. (published in 1960), Part 2 Winding-up Forms and Practice, Chapter 23, no authority was mentioned in connection with the apparent practice in 1960 of allowing the remuneration of a liquidator, where there was no committee of inspection, on the basis of the scale of fees payable in the case of the Official Receiver.  It should also be noted that an exception was made for small liquidations involving exceptional difficulty, in that allowance was made, not for remuneration on a time cost basis, but for lump sum daily amounts of five guineas for the liquidator’s own time, two guineas for assistants if they were chartered accountants, and one guinea for other assistants.

33.  The case of Re Carton Ltd. (1923) 39 TLR 194 showed that a flexible approach on the basis of remuneration of a liquidator could be adopted in certain circumstances.  Although the practice at the time was to assess remuneration based on a percentage of the realisations according to the results attained, “whenever this basis yields a fair remuneration” (at 196), P. O. Lawrence J accepted that the time cost basis might be used in “special circumstances”, as “where the proceeds of realisation were so small as to be out of proportion to the work done in producing them” (at 197).  The time cost basis was rejected in that instance because the percentage basis did not render it unfair or unjust to the liquidators, it was noted “the proceeds of realisation and the amounts distributed were very substantial” (at 197).

34.  Re Carton Ltd. was considered by Vinelott J in Re Exchange Securities & Commodities Ltd. & Ors. (No. 2) (1986) 2 BCC 98,932.  This again showed the flexibility of the court’s practice.  The judge declined to prescribe the basis on which the Official Receiver’s remuneration as provisional liquidator was to be fixed, finding it premature to fix remuneration in relation to moneys or assets which may transpire to be held on trust by the companies, and deferred the exercise until the trust claims and inter-company claims were resolved (at 98,940).

35.  The historic English practice has not been adopted in Hong Kong.  There is no question of changing any long-standing practice here.  By and large, regardless of whether it was provided for in the summary procedure order, the remuneration of liquidators in summary cases has been fixed on a time cost basis in recent years, particularly as the time cost basis was already adopted as the basis of remuneration for provisional liquidators in the tender process under the Panel T Scheme.

36.  Decisions on practice (meaning the habitual, repetitive or continual use of practical methods or modes of proceeding, see Halsbury’s Laws of Hong Kong, Vol. 5(1) (2006 Reissue), para. [90.0012]) are governed by practical considerations pertaining at the time, and are not binding or persuasive when times have changed and different rules and considerations are applicable (Halsbury’s Laws of Hong Kong, op. cit., para. [90.0017]).  Adopting or changing a practice in an area and on an issue such as this is not a question of substantive law bound by precedent.  The historic English practice does not restrict me in determining what should be the appropriate practice here.  I agree with Mr. Bartlett that it is proper for the court to take into account a variety of considerations to arrive at an appropriate practice.

The appropriate practice

37.  The Official Receiver is in favour of a uniform practice to adopt the time cost basis for liquidators’ remuneration in summary cases, rather than being left with an uncertain situation to be resolved on an ad hoc application to the court by the liquidator concerned.  He has put forward these matters for the consideration of the court in support of the uniform practice:

(1) A central feature of summary cases is that they are of low or negligible assets.  In view of the minimal realisations generally achievable in such cases, private practitioners would have no incentive to participate in the Panel T Scheme if the remuneration of liquidators were fixed on a percentage basis of the realisations.  Even under the old English practice, it was recognised that the percentage basis could be departed from where this did not yield a fair remuneration.

(2) The volume of liquidations and summary cases in particular has increased greatly in recent years.  An efficient means of dealing with this increase is necessary.  The Official Receiver does not have sufficient resources to deal with the summary cases.  The Panel T Scheme was set up pursuant to government policy to outsource, to reduce the size of the civil service and promote greater involvement of the private sector in the delivery of public services.  This would also enable the Official Receiver to focus on cases where there is a greater possibility of recovering a dividend for creditors.

(3) Departure from the historic preference for a percentage basis of remuneration is already an established fact in other contexts.  Times and practices have changed.  The traditional rationale for the percentage basis, namely that the results focus would stimulate the liquidator to work efficiently, must give way to recognition that summary cases are often grouped together for efficient disposal, by the very nature of the minimal assets typical in such liquidations, and if remuneration were fixed on the percentage basis, this would act as a disincentive to private practitioners.

(4) There would be an anomaly if the time cost basis for a provisional liquidator appointed by the Official Receiver under section 194(1A) in the tender process under the Panel T Scheme would have to revert to a percentage basis once appointed as liquidator in a summary procedure order, unless an ad hoc application is made to the court by the liquidator.

(5) It is accepted that the remuneration of an office holder in each case is to be considered by reference to the particular circumstances of the case.  This principle can be observed and protected in the quantum assessment process.  It does not require the basis of remuneration to remain open-ended, where there exists a central feature common to all summary cases, namely they are of low or negligible assets.

(6) The common factual position of summary cases as a whole, that they are cases of minimal assets for which a simplified and cost-effective process of liquidation has been devised by legislation and under the Panel T Scheme, weighs in favour of an early determination of the basis of remuneration of the liquidator, at the time when the summary procedure order is made.  Otherwise, a liquidator will not know what his position is, until an application is made at or near the end of the process of liquidation.  Private practitioners in the Panel T Scheme will find it unsatisfactory to incur expense without knowing whether they will be remunerated or what the basis of remuneration will be.

38.  There are good practical reasons in support of the Official Receiver’s stance that the discretion of the court should be exercised in favour of the time cost basis for the remuneration of liquidators in summary cases and that there should be a practice of providing for this basis of remuneration when a summary procedure order is made to avoid the need for a subsequent ad hoc application.  This is consistent with the spirit of section 227F in minimising costs and simplifying procedure in summary cases.  I would determine the Issue in this manner:

(1) As a matter of construction of section 196(2) and rule 146(2), the court has an unfettered discretion to determine the appropriate basis of remuneration of a liquidator in a summary case.  The percentage basis applicable to the Official Receiver as liquidator, being that pursuant to the Companies (Fees and Percentages) Order, should not be applied as the ‘default’ basis of the remuneration.  There is no need to show special circumstances in a summary case to adopt the time cost basis of remuneration.

(2) As a matter of practice, the time cost basis should be adopted as the basis of remuneration in a summary case.  It would be appropriate to provide for this basis of remuneration upon the making of the summary procedure order.

39.  I have reserved the costs of an earlier hearing before me on 23 March 2006.  I direct the Official Receiver and those who have taken part in the present hearing to inform the court by letter within 7 days what order as to costs they would seek in the hearings.

Schedule  of  Cases