RE PEREGRINE INVESTMENTS HOLDINGS LTD. AND ANOTHER

 HCCW 20 & 32 of 1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) PROCEEDINGS NOS. 20 & 32 OF 1998

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REASONS FOR DECISION

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The application

1.  By summons filed on 11 December 2002, the Joint & Several Liquidators of Peregrine Investments Holdings Limited (“PIHL”) and those of Peregrine Derivatives Limited (“PDL”) jointly applied under section 200(3) of the Companies Ordinance for directions on the following questions:

The relevant facts

2.  The background facts giving rise to the application were set out in the Twenty-Fifth Affidavit of David Richard Hague. It can be summarised as follows:

The issues

3.  By Question (1), the liquidators of PIHL and those of PDL sought clarification on whether the Guaranteed Creditors’ right of recovery in respect of the Guaranteed Transactions from the estates of PDL and PIHL is limited to the amount of the Admitted Claim or whether the right extends to their full contractual entitlement under the Guaranteed Transactions, which included the non-provable deferred interest (“the Contractual Claim”).

4.  As at the adjourned hearing of the application, two of the Guaranteed Creditors had confirmed to the liquidators that other than their admitted claims, they did not have any further contractual claims.

5.  For those Guaranteed Creditors who might have further contractual claims, if their right to recover is limited to the amount of the Admitted Claim, the liquidators of PDL and those of PIHL would only pay them such amount from the further interim or final dividend as would render the aggregate amount of dividends received by the Guaranteed Creditors equivalent to the Admitted Claim. If, however, their right to recover were not so limited, they would be entitled to continue receiving dividend payments until the Contractual Claim is satisfied.

6.  Question (2) concerns the liquidators of PIHL. They took the view that the estate of PIHL should have a right of subrogation against the Guaranteed Creditors by reason of the interim dividends paid out of the estate of PIHL. They therefore sought to clarify whether, once the Guaranteed Creditors had obtained full recovery, PIHL could be subrogated to the Guaranteed Creditors’ rights against PDL and become entitled to recover further dividends from PDL, notwithstanding that PIHL had only paid part of the Guaranteed Creditors’ claim.

The Decision

7.  On 10 February 2003, I directed under Question (1) that the liquidators were not prevented from continuing to make a full distribution to the Guaranteed Creditors until the Contractual Claim had been paid in full.  On Question (2), I made no direction as I was not persuaded that the right of subrogation could arise.

8.  I further ordered that the costs of the liquidators of the two companies and the costs of the Official Receiver (assessed on a gross sum basis at $66,000) to be paid out of the assets of PDL and PIHL in equal portions.

9.  I now reduce the reasons into writing.

 Question (1): The Guaranteed Creditors’ right of recovery

10.  The authorities have established that a secured creditor who has both provable and non-provable claims in a bankruptcy is entitled to appropriate security realisations against the non-provable element of his claim if he chooses to do so: Ex p Hunter (1801) 6 Ves Jun 94, 31 ER 955; Bower v. Marris (1841) Cr & Ph 351, 41 ER 525, Re Firth, ex p Schofield (1879) 12 Ch D 337.

11.  The principle was implicitly applied in Joint Stock Discount Company (1869) LR 5 Ch App 86, a creditor who had a right of proof for the same debt against the estates of two companies in liquidation, was held to be entitled to receive dividends from both estates until the full amount of the debt and interest had been satisfied. The creditor in that case was the holder of unpaid bills of exchange. Both the drawer and indorser of the bills were in liquidation. The bills became due after the commencement of the winding-up and consequently no interest had accrued before that. The creditor had proved in and received dividends from both liquidations. It claimed to be entitled to continue to prove against the indorser to the full amount admitted until the post-liquidation interest was satisfied. The Master of the Rolls ordered that it be excluded from participating in further dividends paid to creditors of the indorser. In allowing the appeal, Sir G M Giffard LJ said (at 88) the creditor, if he can obtain payment from other sources, is entitled “to combine and retain all that he can obtain from all those sources until he is paid not only his principal but all his interest, and so the debt is entirely satisfied.” 

12.  In Re Humber Ironworks and Ship building Co (No. 2)  (1869) LR 5 Ch App 88, the English Court of Appeal similarly held that the rule that a creditor is not entitled to dividends towards payment of post-liquidation interest, would not prevent a creditor who held security from receiving dividends to the full amount of the principal and at the same time realising his security until the full amount of the principal and interest had been satisfied.  Referring to the Joint Stock Discount Company case, Sir G M Giffard LJ said (at 92) that for a creditor who has a claim on two or more estates, “he proves against each of those estates for whatever is due up to the date of the bankruptcy or winding-up, so that he may get from each of those estates everything he can until the debt is extinguished in the proper sense of the term.”  

13.  The two decisions were considered and applied in the more recent decision of the Supreme Court of New South Wales in Midland Montagu Australia & Anor v. Harkness (1994) 124 ALR 407.  After quoting from the above passage in Re Humber Ironworks and Ship building Co (No. 2), McLelland CJ added that (at 421): “… when [the 1^st Debtor] and [the 2^nd Debtor] are severally liable to [the Creditor] for a common amount, [the Creditor], although claiming the full amount against both, can retain no more than 100% of his debt. It is clear to my mind both as a matter ofprinciple and authority that the “debt” for this purpose must be taken to be the contractual debt and to include accruing interest, notwithstanding the bankruptcy or winding up of [the 1^st Debtor] or [the 2^nd Debtor] or either of them.”

14.  Although there is no Hong Kong authority on the point, I am of the view that the above English and Australian cases and the principles stated in them should apply here. The rationale being that neither bankruptcy or winding up has the effect of discharging a debtor’s liability for future interest.   Accordingly, on question (1), for the Guaranteed Creditors who had a Contractual Claim, they are entitled to continue to receive dividends from PDL and PIHL until they have recovered the full amount of their Contractual Claim.     

Question (2): Right of subrogation?

15.  On Question (2), the starting point is to note the rule against double proof such that “there is only to be one dividend in respect of what is in substance the same debt”: Oriental Commercial bank, ex p European Bank (1871) LR 7 Ch App 99; see also Polly Peck International plc (in administration) (No. 3) [1996] 1 BCLC 428 at 436H-438G. The object of the rule is to absolve the liquidators from paying out two dividends on what is essentially the same debt: Barclays Bank Ltd v. TOSG Trust Fund Ltd [1984] AC 626, 636B-C. 

16.  Hence in the present situation, while the Guaranteed Creditors are entitled to prove in both liquidations for the full amount of their debts, PIHL could not prove in PDL’s liquidation in competition with the Guaranteed Creditors: see also Westpac Banking Corporation v. Gollin & Co Ltd (In liquidation) [1988] VR 397, 409 (lines 34-40).

17.  As for a surety’s right of subrogation, the English authorities suggest that a surety’s right to be subrogated to the creditor’s rights in respect of the guaranteed debt arises at the moment he has paid in full all that he must pay to the creditor under the guarantee: Re Howe, ex p Brett (1871) 6 Ch App 838. 

18.  There are, on the other hand, Australian decisions to the effect that the right of subrogation may arise notwithstanding that the surety had not himself paid the full debt: A.E. Goodwin Ltd v. A.G. Healing Ltd (1979) 7 ACLR 481; McColl’s Wholesale Pty Ltd v. State Bank (NSW) Ltd (1984) NSWLR 365; see also Russet Pty Ltd (In liquidation) v. Bach (unreported) Supreme Court of New South Wales, 23 June 1988.  These Australian authorities, however, were not dealing with insolvency situation; they are cases in which a surety is seeking to put himself in the position of the creditor in respect of securities in the hands of the creditor.   

19.  The liquidators submitted that the Australian decisions can be extended to insolvency situation, thus PIHL should be subrogated to the position of the Guaranteed Creditors once the Guaranteed Creditors have received 100 percent of their debts.

20.  Mr Beresford who appeared on the instruction of the Official Receiver submitted that the question of subrogation does not arise in the present situation. I agree.

21.  Principally, the dividends paid by PIHL to the Guaranteed Creditors, being post-proof payments, do not have the effect of reducing the debts owed by PDL to them because, as a matter of law, they are not appropriated to the debts. The point was explained by McLelland CJ in Midland Montagu v. Harkness at 416:

“… it is clear that post-proof receipts do not justify reduction in the quantum of the proof (see e.g. Re Amalgamated Investment and Property Co Ltd [1985] Ch 349 at 379-86; Re Joint Stock Discount Co (Warrant Finance Co’s Case) (1869) LR 5 Ch App 86; Re Blakeley; Ex parte Aachener Disconto Gesellschaft (1892) 9 Morr 173), although they may limit the amount of a distribution in respect of that proof in order to prevent double satisfaction. In order for the rule of double satisfaction to operate to preclude [the Creditor] from enforcing payment from [the 1^st Debtor], by reason of the prior receipt by [the Creditor] of a sum from [the 2^nd Debtor], it must be shown that the latter sum or some calculable part of it was received in satisfaction of the common amount. This depends upon the applicable principles of appropriation of payments. However, principles of appropriation applicable to consensual payments, founded upon the express or implied intention of the payer or payee, do not govern payments made in the course of an administration provided for by law.”   

22.  The interim dividends paid by PIHL are only on account of PIHL’s final dividend and do not reduce the quantum of the Guaranteed Creditors’ debts. The liquidators of PDL cannot take into account PIHL’s interim dividends and reduce the dividend to be paid to the Guaranteed Creditors. As and when PDL makes the final dividend on the Guaranteed Creditors’ proof, the account is closed. Further by reason of the rule against double proof, no further claim against the estate of PDL can be admitted. Accordingly, no subrogation can arise. Any surplus that may be held by the Guaranteed Creditors will be held on trust for PIHL.

23.   Given that no subrogation will arise on the facts, no direction needs to be made under Question (2).