ADVANCED EPI TECHNOLOGY CORPORATION v. VITELIC (HONG KONG) LTD AND OTHERS

HCCW130/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 130 OF 2006

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D E C I S I O N

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1. This is an application by Messrs Cordells (“Cordells”), by summons dated 18 May 2007, seeking a retrospective validation order pursuant to section 182 of the Companies Ordinance (Cap. 32) in respect of fees paid to them by Vitelic (Hong Kong) Limited (“the company”), which was wound up on 24 July 2006 on a creditors’ petition presented on 13 March 2006.  Cordells were the former solicitors of the Company.  The fess in respect of which the validation order is sought relate to work done by them for the company between January and July 2006, prior to the winding-up order being made. 

2. The work in question related to the intended transfer of a long-term lease held by the company at the Tai Po Industrial Estate to a company called A&W Food Services Limited.  The lease had been granted by the Hong Kong Industrial Estates Corporation, which had by 2006 become known as the Hong Kong Science and Technology Parks Corporation. 

3. By January 2006 the company’s business had apparently effectively ceased.  The lease and the company’s assets at the leased property were among its only significant assets, and it was considered that the only way in which the Company could realise any value from the lease and the assets at the property was by arranging for the transfer of the lease to a transferee who was prepared to pay a fair price for it.  In order to effect the transfer of the lease, however, the consent of the lessor was required.

4. Upon being instructed, Cordells examined the terms of the lease and identified the need to obtain the lessor’s consent.  They took steps to liaise with the lessor with a view to obtaining such consent.  Steps were also taken to prepare documentation for the transfer of the lease to A&W.   However, shortly before the documentation with A&W, which took the form of a memorandum of understanding, was executed, the petition was presented against the company.  Cordells were not, it seems, immediately aware of this, not being told about it until about the beginning of April 2006.

5. On becoming aware of the presentation of the petition, Cordells sought the company’s instructions as to whether or not to proceed with the planned transfer to A&W and were asked to continue with it.  The company’s thinking was that the transfer of the lease, if successfully implemented, was likely to produce a substantial surplus for the company which might enable it to discharge all of its debts, or which, even if it did not, would lead to a substantially greater amount of assets being available for distribution to its creditors.  The agreed consideration for the transfer of the lease was some HK$17 million.  It was envisaged that a premium of some HK$10 million would have to be paid to the lessor if its consent were forthcoming, leaving some HK$7 million available for payment of the company’s debts.

6. Cordells then advised the company that a validation order would be required in respect of the disposal of the lease under the Memorandum of Understanding and were instructed to make an application for such a validation order.  An application was duly made and although it was opposed by the petitioner, a validation order was granted by Deputy High Court Judge To on 12 May 2006.

7. Unfortunately for the company, the lessor eventually declined to grant its consent to the transfer of the lease to A&W.  The company, with Cordells’ assistance, made further representations to the lessor but these did not take matters any further.  In the light of the fact that the transaction could not go through, the company concluded that there was no point in continuing to resist the petition and the winding-up order was eventually made, unopposed, on 24 July 2006.

8. Although it appears that Cordells were also instructed to represent the company in relation to the winding-up petition generally, the fees which are the subject matter of this application relate only to work done in relation to the proposed transfer of the lease and the validation order obtained in connection with it.  Cordells’ fees for this work were billed on a regular basis between March and July 2006 prior to the Winding-up Order being made.  Payments totalling some $389,930.84 were made between 18 April 2006 and 21 July 2006.  All the payments were therefore made after the presentation of the petition and also after Cordells had become aware of it, but before the making of the winding-up order.

9. Cordell’s application is opposed by the liquidators of the company.  The principles on which the court acts in considering whether or not to grant a validation order are well established.  They are summarised in the judgment of Fox LJ in Denney v John Hudson & Co Ltd [1992] BCLC 901, and I do not propose to set them out again in this judgment as they are well known.

10. So far as validation orders in respect of legal fees are concerned, the position has been considered in a number of cases, most recently by Kwan J, in Re Legend International Resorts Limited (unreported, CFI, 28 March 2007, HCCW 1139/2004).  In that case, Kwan J considered whether or not, objectively speaking, the fees incurred had been incurred for the benefit of the company and its creditors as a whole.  In that case, what was sought to be validated were fees relating to two applications that had been made – one an application for the appointment of provisional liquidators against the company, which was resisted successfully by the company, and the other an application by the company to strike out the petition on the basis that the petitioning creditor was not, in fact, the creditor of the company, an application which was unsuccessful. 

11. In the event, Kwan J came to the view that the resistance to the application for provisional liquidators was something that could be said to be for the benefit of the company and its creditors as a whole and, accordingly, granted a retrospective validation order in respect of payment of fees for that application.  However, as the application to strike out was unsuccessful, Kwan J concluded that the application had not been made in the best interests of the creditors and, therefore, declined to make a validation order in respect of that part of the fees for which a validation order was sought.

12. In this case, the liquidators submit that the application should be refused because:

(1)	Cordells were aware of the winding-up petition when the payments were made;
(2)	No adequate reason has been given for departing from the general rule regarding pari passu distribution in a winding-up;
(3)	Cordells should not be placed in a better position than other general creditors, who are expected to receive only a dividend in the liquidation;
(4)	As the intended assignment did not in fact go through, there was no benefit to the creditors or the company from the transaction;
(5)	In any event, the bills should be subjected to taxation, particularly since the court, in granting the validation order in May 2006, ordered that the costs of that application should be in the petition.

13. In my view, the fact that Cordells were aware of the winding-up petition at the time that the payments were made is not fatal to their application.  So much is clear from the decisions of this court in Re Luen Cehong Tai Construction Company Limited [2004] 1 HKLRD 735 and also from Re LegendInternational Resorts Limited (supra).  While the absence of knowledge of the presentation of a petition is regarded as a powerful factor in favour of an applicant for a validation order, it does not follow, in my view, that the existence of such knowledge is necessarily such a powerful factor against him.  Each case must, I think, be judged in the light of its own facts.

14. In the present case, it seems to me that good reason has been shown for the making of a validation order.  The services rendered by Cordells, which were largely rendered after the presentation of the petition although part of them were provided before the petition was presented, were, I think, when viewed objectively, to be regarded as for the benefit of the company and its creditors as a whole, particularly when viewed in the light of the circumstances pertaining at the time that the work was done and the application for validation order in respect of the proposed transfer of the lease was made. 

15. At that time, although there was uncertainty as to whether or not the lessor’s consent would be forthcoming and, indeed, there might have been some suggestion at the time that the lessor’s consent might not in fact be forthcoming, it was thought - and I think it was thought on genuine grounds - that a successful transfer of the lease would generate a substantial benefit for the company and its creditors.  This was because, as I have stated, the consideration for the transfer was HK$17 million and it was hoped that the lessor would agree to assign a transfer of the lease on payment of a premium of some HK$10 million-odd, leaving a substantial surplus available for the company to use to repay its debts either fully or by way of an enhanced dividend in its liquidation.

16. It is true that the transaction ultimately fell through and that it therefore did not actually produce a benefit for the company or its creditors at the end of the day.  However, it seems to me that to take this into account would be to view the matter with the benefit of hindsight.  In any case in which a prospective validation order is granted, whether of the sort that was obtained from Deputy Judge To in this case, relating to a particular transaction which a company proposes to enter into, or of the sort authorising a company to carry on business in a general way, where it is trading at the time the petition is presented, there can, I think, be no certainty that there will ultimately accrue any benefit to the creditors.  However, that is not to say that the making of the application will not have been made in good faith with a view to benefiting the creditors.  This, it seems to me, is perhaps the more important criteria in cases of this sort.  In all of the circumstances, therefore, I am satisfied that the fees that were paid were paid in good faith in what was believed to be the best interests of the company and the creditors at the time.  This is, I think, a factor that carries real weight in the applicant’s favour.

17. Thus, although the effect of granting a validation order would be to permit Cordells to retain payment for their fees in full where other creditors will obtain only a dividend in respect of the debts owed to them, I am satisfied that in the circumstances of this case it would be appropriate to grant the validation order sought and I shall, therefore, exercise my discretion accordingly.

18. Finally, I should deal briefly with the suggestion that the bills should be subjected to taxation.  As the bills were delivered to the company, an application for taxation as between solicitor and own client should have been made within one month of the delivery of the bills, failing which special circumstances would have to be shown before a taxation will be ordered.  (See section 67 of the Legal Practitioners Ordinance, Cap. 159, of the Laws of Hong Kong).  Here, no such special circumstances have been suggested and there does not appear to be any reason to suggest that the bills are in any way excessive.

19. I do not think that the argument based on the fact that Deputy Judge To ordered the costs of the validation order application that was before him to be costs in the cause of the petition renders the costs of that application part of the costs of the petition which must be taxed pursuant to Rule 179 of the Companies Winding-up Rules.  All that that order for costs did was to decide that as between the company and the petitioner, the incidence of the costs of the validation order application would depend on the outcome of the petition; so that if the petition were ultimately successful, the company would have to pay the costs of the validation order petition in the normal way, whereas if the petition were unsuccessful, the company would be entitled to recover the costs of the application for the validation order, which would have been proved to have been unnecessary, from the petitioner who had necessitated the making of the application by his presentation of the petition in the first place.  I do not think that this made the costs of the application for a validation order part of the costs of the petition itself when they were, in my view, clearly a discrete set of costs distinct from the costs involved in the petition proceedings themselves.

20. For all those reasons, therefore, I shall make a validation order in the terms sought by the summons of 18 May 2007.