RE HSIN CHONG CONSTRUCTION CO LTD

HCCW 239/2018

[2021] HKCFI 3577

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) PROCEEDINGS NO 239 OF 2018

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D E C I S I O N

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1.  This decision concerns the application of the provisional liquidators of Hsin Chong Construction Co Ltd (“Hsin Chong”) by ex parte summons dated 20 October 2020 for the court’s sanction in relation to certain specified legal proceedings. The provisional liquidators were appointed by the court by order dated 18 January 2019 (“Order”) pursuant to section 193 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“Ordinance”). A winding up order was eventually made on 2 November 2020.

2.  Section 193 of the Ordinance provides:

“ (1) Subject to the provisions of this section, the court may appoint a liquidator provisionally at any time after the presentation of a winding-up petition and before the making of a winding-up order in respect of a company.

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(3)  Where a liquidator is provisionally appointed by the court, the court may limit and restrict his powers by the order appointing him.”

3.  The powers of provisional liquidators generally other than the Official Receiver are regulated by section 199B of the Ordinance, which provides:

“ (1) Except as provided in subsection (3), a provisional liquidator holding office by virtue of section 194(1)(aa) may exercise any of the powers specified in Part 1, 2 or 3 of Schedule 25 only with the sanction of the court.

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(6)  The exercise by a provisional liquidator of the powers conferred by this section is subject to the control of the court.”

4.  Item 1 of Part 2 of Schedule 25 is “Bring or defend any action or other legal proceedings in the name and on behalf of the company”.  Item 8 of Part 3 of Schedule 25 is “Employ a solicitor to assist the liquidator in performing the liquidator’s duties”.  These are therefore powers that may be exercised only with the sanction of the court.

5.  In the case of Hsin Chong, as is usual, the order of appointment of the provisional liquidators contains detailed provisions on the powers conferred on them.  In particular, paragraph 4(f) of the Order provides as follows:

“ 4. The powers of the Provisional Liquidators … be limited and restricted to the following acts, that is to say:

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(f)  With the prior sanction of the Court, to bring or defend any action or other proceedings (whether court proceedings, arbitration or otherwise) or to take any steps in existing actions or proceedings, whether within or outside of the jurisdiction, in the name of and on behalf of the Company or to take such other action as may be considered by the Provisional Liquidators to be necessary for the protection of the Assets”

6.  Since their appointment, the provisional liquidators had instituted or engaged in certain legal proceedings without having obtained the prior sanction of the court.  In some cases this was because the provisional liquidators had taken the view that the requirement of the court’s sanction in paragraph 4(f) of the order for their appointment only applied to legal actions outside the winding up proceedings of Hsin Chong (HCCW 239 of 2018).  In an application by the provisional liquidators for directions in the winding up pursuant to section 200(3) of the Ordinance, however, Linda Chan J held on 18 September 2020 that the court’s sanction was required for proceedings to be brought not only in the name of the company but also in the names of the provisional liquidators.[1] Following that decision, an application was made by the provisional liquidators by ex-parte summons dated 20 October 2020 for retrospective sanction from the court in relation to the following proceedings:

(1)  Summons filed by Build King Construction Ltd (“Build King”) in HCCW 239/2018 on 18 January 2019 relating to the disposition of Hsin Chong’s interest in a joint venture with Build King;

(2)  Appeal to the Court of Appeal in CACV 321/2019 filed on 11 July 2019 by Hsin Chong against Build King from the decision of the Court of First Instance on the Summons in (1) above;

(3)  Application for leave to appeal to the Court of Final Appeal in FAMV 152/2020 filed on 31 July 2020 by Hsin Chong against Build King from the decision of the Court of Appeal in the Appeal in (2) above.  As it transpired subsequently, leave to appeal was given by the Appeal Committee of the Court of Final Appeal on 12 November 2020; and the appeal was allowed by the Court of Final Appeal on 13 May 2021.  Under the final costs order, Build King had to pay Hsin Chong’s costs of the appeal to the Court of Final Appeal (including the leave applications), but that there was no order as to costs below in HCCW 239/2018 and in CACV 321/2019;

(4)  Summons filed by Yau Lee Construction Co Ltd (“Yau Lee”) on 4 April 2019 (amended on 28 July 2020) relating to the disposition of Hsin Chong’s interest in a joint venture with Yau Lee;

(5)  Summons filed by Hsin Chong on 24 October 2019 for an order that Yau Lee’s Summons in (4) above be stayed;

(6)  Application by the provisional liquidators against PricewaterhouseCoopers for production of documents pursuant to section 286B of the Ordinance;

(7)  Summons filed by the Mandatory Provident Fund Schemes Authority (“MPFSA”) in HCCW 239/2018 on 19 November 2019 in relation to payments made by four cashier’s orders in discharge of Hsin Chong’s MPF liabilities;

(8)  Summons filed by Samsung C & T Corporation in HCCW 239/2018 on 23 April 2019 for the validation of payments into or out of the bank accounts of the joint venture between Hsin Chong and Samsung;

(9)  Notices of Arbitration issued by Ming Tai Construction Engineering Co Ltd against Hsin Chong (together with its joint venture partners) on 5 March 2019 in relation to a contract for the Express Rail Link project; and

(10)  Notice of Arbitration issued by Orients Project Engineering Ltd on 7 January 2020 in relation to another contract for the Express Rail Link project.

7.  In addition to the 10^th affirmation of Osman Mohammed Arab (one of the provisional liquidators) filed on the same date as the ex-parte summons, the provisional liquidators have filed Mr Arab’s 12^th and 14^th affirmations as well as written submissions by counsel.  The Official Receiver has also, through Mr Sin, helpfully made written submissions to assist the court.

8.  This is my decision on the provisional liquidators’ application save as regards the litigation referred to in Items (1), (2), (3) & (7) in paragraph 6 above which have been dealt with by Harris J, who granted retrospective sanction to the provisional liquidators on 20 August 2021: [2021] HKCFI 2517.

9.  Some of the proceedings involved the provisional liquidators themselves as applicants or respondents in the winding up proceedings and it appears that partly because they had taken the view that in such cases the court’s sanction was not required by paragraph 4(f) of the order for their appointment, they had not obtained sanction prior to their engagement in those proceedings.  As mentioned above, Linda Chan J took a different view. In her reasons for decision dated 18 September 2020, her Ladyship stated:[2]

“ The wordings ‘such other action as may be considered by the [PLs] to be necessary for the protection of the Assets’ cover proceedings brought in the names of the PLs, given that the PLs are prima facie entitled to be indemnified of their costs (including adverse costs payable by them) out of the Company’s assets under Order 62 rule 6(2) of the Rules of the High Court. The purpose of imposing such limit is to ensure that the Company’s assets will not be wasted in pursuing or defending any proceedings unless they are necessary or in the best interests of the Company to do so, as it is generally undesirable for the provisional liquidators to incur costs in litigation at the time when the status of the company has not been determined.”

10.  In a similar vein Harris J stated in his decision on retrospective sanction dated 20 August 2021 as follows:[3]

“ I, accept that simply as a matter of language [4(f)] is arguably open to the construction that ‘action or other proceedings (whether court proceedings, arbitration or otherwise)’ is a reference to proceedings outside the winding up proceedings as the Provisional Liquidators’ solicitors assumed. However, the purpose of the order is to require the Provisional Liquidators to obtain the court’s consent before expending the insolvent company’s money on formal proceedings without the prior of approval of the court and it is difficult to see why the same restriction would not apply to a substantive application commenced within the winding up proceedings such as an unfair preference claim. In my opinion the better reading of [4(f)] is that the reference to ‘proceedings’ is to any application for a substantive order regardless of whether it is brought in the winding proceedings or by way of a new proceedings with a separate action number.”

11.  More recently, the Court of Appeal, on appeal from the decision of Linda Chan J referred to above, considered that paragraph 4(f) does not cover proceedings commenced in the name of the provisional liquidators and that the words “such other action” in paragraph 4(f) referred to an action outside the winding up proceedings.[4]  The Court of Appeal however expressly and specifically confined themselves to an application by the provisional liquidators to the court for directions under section 200(3) of the Ordinance.

12.  In the present case, the Official Receiver submits that the purpose of appointing provisional liquidators prior to the making of a winding up order is to preserve the assets of the company pending determination of the winding up petition.  During provisional liquidation, it is not anticipated that a provisional liquidator will bring or defend proceedings except those he or she considers necessary for the preservation of the assets of the company and with the prior sanction of the court.  The Official Receiver takes the view that, at least on the face of it, paragraph 4(f) should cover any application made within or under the existing winding up proceedings, but that a provisional liquidator may take part in proceedings in his or her official name pursuant to the provisions of the Ordinance such as sections 199(2) and 200(3) without the court’s sanction.

13.  In their written submissions, the provisional liquidators put forward certain grounds for construing paragraph 4(f) as applying to proceedings by or against the company outside the present winding up proceedings, but state that it would not assist the court for them to engage in objections to the Official Receiver’s reasonable attempt to construe that paragraph, and ultimately do not appear to oppose Official Receiver’s construction.

14.  It seems to me significant to note that paragraph 4 of the order is a provision conferring power on the provisional liquidators.  That conferral is itself subject to the requirement of prior sanction of the court.  The question that arises from the alternative construction put forward by the provisional liquidators is that if certain proceedings do not fall within paragraph 4(f), then it is by no means clear that the order for their appointment is to be construed in such a way that they are entirely free to engage in any legal proceedings except those that fall within paragraph 4(f) which thereby require prior court’s sanction.  It should also be noted that paragraph 4(s)(iv)-(v) of the order of appointment provide that the approval of the Companies Judge should be obtained before the provisional liquidators retain solicitors or barristers.

15.  In these circumstances, in dealing with the present summons part of which has been determined by Harris J, it seems to me that I ought to adopt the same approach to paragraph 4(f) as explained by Harris J, subject to the ruling of the Court of Appeal which appears to be consistent with the submissions of the Official Receiver which were made before the Court of Appeal’s decision.

16.  A number of authorities have been cited to me on the general principles guiding the court’s exercise of its discretion to grant sanction,[5] but the principles are not in dispute and there is no need to rehearse them here.  The only apparent disagreement in the submissions I have received is that the provisional liquidators submit that the Official Receiver has erred in suggesting that it is necessary to adduce evidence of the wishes of creditors and contributories in an application for sanction.  It is clear that the court may have regard to the wishes of creditors or contributories but there is no inflexible rule of law requiring such evidence; nor do I understand the Official Receiver to contend to the contrary.  What should be placed before the court is a matter of practice and depends on the circumstances of the individual case.

17.  Turning to the specific proceedings set out in the schedule to the summons, Item (4) is an application by Yau Lee essentially for an order to confirm that its takeover of the joint venture from Hsin Chong did not constitute a disposition of Hsin Chong’s property within the meaning of section 182 of the Ordinance and for an order validating various payments out of a joint venture bank account and other dispositions arising from the takeover.  Item (5) is Hsin Chong’s or the provisional liquidators’ application for a stay of Yau Lee’s summons pending arbitration.  The application for stay has since been heard by Ng J who on 17 May 2021 ordered a stay in favour of Hsin Chong and the provisional liquidators together with costs, whereas the costs relating to Item (4) were reserved: [2021] HKCFI 1295.  Given the outcome, I have no hesitation in giving retrospective sanction in relation to Item (5).  As regards Item (4) the provisional liquidators have been successful in obtaining a stay of further proceedings, and it seems to me sanction should be granted retrospectively for the steps taken prior to the stay.

18.  Item (6) is an intended application under section 286B of the Ordinance against PwC, the former auditors of Hsin Chong and its holding company, for production of documents relating to Hsin Chong or its promotion, formation, trade, dealings, affairs or property.  The Official Receiver takes the view that the court’s sanction is arguably not necessary for the institution of such application, since this is the kind of application that a provisional liquidator may in his own official capacity make under the terms of the statute: see section 286B(2).  But it seems to me that retrospective leave is needed in any event for the engagement of solicitors and counsel for the purpose of the application.  Based on the privileged materials contained in the affirmations of Mr Arab, I am satisfied that it is appropriate to grant sanction, and there will be an order accordingly.

19.  In relation to Item (8), it is to be noted that the provisional liquidators actually failed in opposing Samsung C & T Corporation’s application for validation order.  DHCJ Le Pichon who heard the application in May 2019 said it was a “clear case” for the making of a validation order and commented as follows:[6]

“ The provisional liquidators have had ample notice of the application. They have seen fit not to make known to the court their reasons (if any) for opposing the application which they could have done by way of written submissions. This is no way for officers of the court to be conducting themselves in discharging their duties conscientiously.”

At the end, the judge also refused the provisional liquidators’ application for costs.  There is no reason or basis put forward as to why, despite these adverse comments which were regrettably not drawn specifically to the court’s attention in the affirmations, the court ought now to give retrospective sanction.  This part of the application must therefore be dismissed.

20.  Items (9) and (10) concern construction arbitrations involving Hsin Chong.  By the 14^th affirmation of Mr Arab the application has been narrowed down to one for leave and sanction to engage solicitors and/or counsel to provide advice in respect of the arbitrations, rather than for leave to defend or conduct the arbitrations.  The Official Receiver has raised the question whether it is too early a stage at which two obtain legal advice.  Based on the evidence, I am prepared to give leave for the provisional liquidators to seek such advice as is necessary.

21.  The provisional liquidators would no doubt be aware but I would nevertheless add as a reminder that in relation to the above Items and more generally, the court’s sanction is of course not a carte blanche for office-holders to take whatever steps that may seem to them expedient or desirable regardless of expense.  They are fiduciaries with a duty to account, and need to ensure that any steps undertaken are justified by the standard of “the care and anxiety of a prudent businessman acting in his own affairs at his own costs and risk” (Re Peregrine Investments Holdings Ltd [1998] 2 HKLRD 670, 682F & 686D-E, per Le Pichon J).

22.  For these reasons I shall make an order granting leave and sanction pursuant to paragraphs 1 and 2 of the summons to the extent specified above.  The 10^th, 12^th and 14^th affirmations of Mr Arab shall be sealed and not be inspected without leave of the court.  The costs of this application shall be paid out of the assets of Hsin Chong.