RE MKI CORPORATION LTD

IN THE SUPREME COURT OF HONG KONG

COMPANIES (WINDING-UP) NO. 562 OF 1994

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D E C I S I O N

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1. This is a further application in this petition. This application under S. 182 of the Companies Ordinance is for leave to make specific payments which the company seeks to make. The proposed payments fall into four categories. The first is professional fees, the second is rentals, the third is compromises for claims which are outstanding against the company and the fourth category has been lumped together as other payments.

2. The parties are in substantial agreement as to the law which should be applied. That has been set out in the judgment of Buckley L.J. in the case of In re Gray's Inn Construction Co. Ltd. [1981] 1 WLR 711. Buckley L.J. points out at the beginning of the passage which starts at p. 717 that the basic concept of the law governing liquidation of insolvent estates, whether it is bankruptcy or under the companies legislation, is that the free assets of the insolvent at the commencement of the liquidation shall be distributed rateably amongst the insolvent's creditors. He goes on to consider how that is applied in practice and in particular what payments can be allowed specifically where payments either are going to generate profits or are otherwise beneficial to the company. For example, if the company needs to be kept as a going concern, it is often necessary to incur expenditure in order to enable that to happen.

3. Turning to the present case, as the Official Receiver pointed out, there is of course a doubt as to whether the company is solvent or insolvent. That doubt will never be resolved until the case comes to an end because the question of insolvency, as I understand it, turns very much on whether there can be a sale as a going concern or whether the assets have got to be broken up and sold. There is a distinct risk that the company is insolvent.

4. I turn to the specific amounts which are sought to be paid.

5. In respect of Mr. Coulcher's fees, the parties are in substantial agreement, with which I concur, that his fees can go on being incurred because they are really to keep the company going. In respect of the lawyers' fees and the accountants' fees, I have a great deal of sympathy that the professional advisers should go on receiving fees in so far as they are working towards a rescue package. I have grave doubts as to whether they should receive fees in so far as those are incurred in relation to defending the petition.

6. I do not propose to make any order at this stage because the lawyers have in fact been paid in effect up to the 30th March. They may have to repay that amount or may not depending on what happens hereafter. The reason I do not propose to make any order today is that, as I see it, some of that payment may be in respect of amounts which I would not have allowed had this application been made earlier and therefore, I consider that really at this stage I should leave things as they are and let matters take their own course. In doing so I take into consideration that this matter may be resolved fairly quickly. I do not consider this is a stage where I am asking the lawyers to work for free. If this matter drags on and it is necessary for them to apply again they may do so, in which case I will need a much more detailed breakdown as to how the fees are arrived at. I would also say this that in respect of lawyers' fees the order which I would envisage would be made in normal circumstances would be that those fees would be subject to taxation.

7. With the accountants' fees it appears that much of those fees appear to be past fees which have been incurred and I see little to differentiate the accountants from other creditors. Some of the amount which is sought is said to be sought because the company may need the accountants' continuing professional advice during the rescue. If that is necessary then further application can be made. The fees here are in respect of registrar's costs, audit fees, tax advice and what is referred to as special work.

8. Turning to the next main category which is rentals. This is a category for ongoing rent in new premises at a considerably reduced rent compared with that which the company was paying previously. I consider it appropriate to permit the company to go on spending that and I propose to allow that.

9. In respect of the next category which is compromises, the first is an alleged payment of $2m which is sought to be made to Chesterfield Ltd. The surprising thing is that Chesterfield who is a party to these proceedings, because they are a creditor, are opposed to that payment on the basis that a compromise has not been reached. In those circumstances I do not think it is right to make an order for payment of that sum because there is clearly a danger that $2m could go missing. I am not altogether satisfied, however, that in any event the compromise would necessarily be for the benefit of the creditors as a whole. The $2m is only a part settlement; there are also other transfers of property and so forth which would need to take place in respect of the settlement which is alleged to have been entered. I would have to see the overall picture far more clearly as to the insolvency and the amount of it before I could say that this compromise was for the benefit of all the creditors. The same would be true of the claim by the Bank of China. Again there is an alleged compromise here. Although it might mean that a great deal more is at risk if this compromise is not concluded, I do not think at this stage I should allow payment in view of the uncertain nature of the finances of the company.

10. Under the heading other payments, apart from the first two which relate to hire purchases, the remainder would seem to me to be payments in order to keep the company going; they are comparatively small and I propose to allow those. None of the parties appearing today raised any objection in relation to that. In relation to the hire purchase amounts, Mr. Bradley who appeared on behalf of the Securities and Futures Commission pointed out that the company is in something of a dilemma and it was a question of judgment as to whether those payments should be made or the cars should be sold or repossession should be allowed. My own view is that probably the last of the three courses is the worst and it should be a question of whether the cars are sold or whether the payments are kept going and the company keeps using the cars.

11. I, therefore, propose to allow the 3 categories of the professional fees of Mr. Coulcher, the on-going rentals and the 6 other payments.