RE PEREGRINE INVESTMENTS HOLDINGS LTD.

HCCW20, 22 and 32/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

(COMPANIES WINDING-UP NO.20, 22 AND 32 OF 1998)

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J U D G M E N T

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Le Pichon, J.:

1. This application concerns the remuneration of provisional liquidators and, in particular, the principles that apply in fixing that remuneration. Whilst it is a matter close to the heart of insolvency practitioners, it is no less the case for creditors of insolvent companies. For, in any insolvency, what is paid to provisional liquidators by way of fees or disbursements out of an insolvent company's assets will not be available for distribution to the creditors. Given the recent spate of large insolvencies and the absence of any Hong Kong decisions on the subject, it would be appropriate to adjourn the hearing into open court so that this judgment is made public.

Background

2. The Provisional Liquidators were appointed provisional liquidators of Peregrine Investments Holdings Limited ("PIHL") and Peregrine Derivatives Limited ("PDL") on 13 January 1998 and of Peregrine Fixed Income Limited ("PFIL") on 16 January 1998. On 13 March 1998, the Provisional Liquidators submitted to the court for its approval, their fees from the respective dates of their appointment as Provisional Liquidators of PIHL, PDL and PFIL, up to and including 15 February 1998, as well as the fees of Deacons, Graham & James up to and including 15 February 1998 and Clifford Chance up to and including 14 February 1998, being the two firms of solicitors employed by the Provisional Liquidators to assist them in the liquidation. The fees sought were of a considerable magnitude : in round terms, the fees of the Provisional Liquidators (for approximately 34 days of work) were of the order of $27 million, Deacons' fees were approximately $13 million and Clifford Chance's fees were approximately $7 million, totalling $47 million. I found the level of fees alarming.

3. At a preliminary hearing in chambers on 19 March 1998, I raised with the Provisional Liquidators the question whether or not they accepted that the principles enunciated by Ferris J in Mirror Group Newspapers Plc v. Maxwell & Others [1998] BCC 324 apply to the fixing of their remuneration. Maxwell concerned applications by court-appointed receivers of the estate of the late Robert Maxwell for directions as to (i) the manner in which their remuneration was to be fixed; (ii) the authorization of certain disbursements; and (iii) the payment of a substantial sum on account of remuneration and disbursements in advance of the final quantification of those matters. As will become apparent, it is a decision of seminal importance in the context of the charges of office-holders. In the last of the 1997 Company Lawyer lectures delivered by Lightman J, subsequently published as an article, he described the Maxwell judgment as "illuminating" and "far-reaching", providing "an answer (if not the answer) to the problem of costs in insolvency cases" : see Lightman, Office-holders' charges : cost control and transparency (1998) 19 Company Lawyer 72 at 73.

4. In view of the position taken by the Provisional Liquidators that Maxwell is distinguishable, it was imperative that there be an adjourned hearing at which the matter could be properly ventilated and argued. Whilst an ex parte application by provisional liquidators for fees by its nature meets with no opposition, making the application inter partes was not a solution since it was unlikely that any creditor would wish to take on that task. Moreover, the matter was of considerable public concern, affecting, as it does, insolvencies generally and given the public perception that liquidations can have 'all the appearance of "party-time" for the professionals involved'. As Lightman J remarked in an earlier speech he delivered, published in (1996) JBL 113, 115-6, the problem as he saw it was :

"... the perceived lack of professional concern and lack of control over fees and costs in corporate insolvencies (and in particular in cases of receiverships). There is perceived to be a particular mindframe towards costs referable to the open unguarded pocket from which the costs are paid and the absence of effective monitoring - a mindframe careless of the consequences for unsecured creditors and others."

5. In those circumstances, it seemed desirable for an amicus to be appointed to assist the court under its inherent jurisdiction and I so intimated. This met with considerable resistance on the part of the Provisional Liquidators as well as Clifford Chance and Deacons who considered it both 'unprecedented' and 'conceptually inappropriate' because, in their view the role of that amicus would be to take an adversarial position against the professionals involved. That objection was misplaced since an amicus does not have an adversarial role. Rather, his role is to assist the court's deliberation by bringing up facts or law not known to the judge and he is independent of the parties to the proceedings.

6. Maxwell apart, the bills caused me some disquiet on several fronts : one was the possibility of 'overmanning'; the other was the sheer number of billable hours involved, translating in many cases into individuals achieving significant billable hours on a sustained basis of over 30 days. By definition, 'billable' hours represent that part of the working day that is properly chargeable to clients. Of necessity, they represent but a percentage, albeit possibly a significant percentage, of the day that is spent 'working'. In my experience, it is well-nigh impossible for the average mortal to maintain a high number of billable hours on a daily basis much beyond a few days if one is absolutely meticulous and honest about it. Yet, in many instances in the present case, the daily billable average is in double digits and, in some cases, well into them. I have to say that I view such apparent marathon feats with a considerable degree of scepticism, enhanced by the absence of any mechanism in the system for checking and control.

7. The bills also appeared to be insufficiently particularized. Since a winding-up order of each of the three companies had been made the day before the preliminary hearing, i.e. on 18 March, I directed that fully detailed and particularized bills be prepared down to 17 March. As an interim measure, upon the application of the Provisional Liquidators, I allowed a payment on account of 25% of the fees sought.

The adjourned hearing

8. The main purpose of the adjourned hearing was therefore to clarify the principles that apply on an application by provisional liquidators for -

a) payment of their fees out of the assets of the company in liquidation; and

b) recoupment or reimbursement to them of professional fees incurred by them out of the assets in their hands.

9. On 27 April 1998, the following material was lodged with the court :

(i) the fees and expenses of Price Waterhouse for the relevant period as separately billed to PIHL, PDL and PFIL together with a covering letter dated 25 April 1998 concerning the preparation and presentation of the bill and the supporting documentation;

(ii) the fees and disbursements of Clifford Chance with regard to the work undertaken on the instructions of the Provisional Liquidators of PIHL, PDL and PFIL together with two letters dated 16 April 1998 from Clifford Chance to the Provisional Liquidators regarding the bills;

(iii) three letters from Price Waterhouse to the court dated 24 April 1998 explaining the basis on which they have undertaken a detailed review of Clifford Chance's three separate bills together with confirmation that subject to certain deductions agreed with Clifford Chance, the bills were approved for payment in the form in which they were presented to the court.

10. On 1 May 1998, Deacons lodged their debit note as well as a breakdown of their time costs and a detailed description of the work done with the court.

11. Conspicuously missing from the material submitted were disbursements such as counsel's fees and the fees of foreign lawyers. As a result of inquiries made by the court, details of those disbursements were made available shortly before the hearing on 27 May 1998.

12. Fees (based on time costs) as well as fees after specific write-offs and/or negotiated reductions (considered in greater detail later) and disbursements (in HK$ and rounded where necessary) are summarized in the table below :

The two categories of disbursements reflect how these have been presented to the court. Category (2) comprises disbursements by way of counsel's fees and fees of foreign lawyers. The figures are compiled from the summary prepared by counsel for the Provisional Liquidators. All other disbursements such as photocopying charges, courier and fax charges and employment of security guards come within category (1).

13. For reasons difficult to fathom, whilst it is clear from the summary provided to the court who was responsible for instructing counsel or the foreign lawyers concerned in any particular matter, the role of reviewing the reasonableness of the fees was apparently undertaken by Deacons who negotiated reductions in relation to the invoices for the PRC lawyers and the German lawyers, being two out of a total of forty invoices. In their letter of 25 May 1998, the Provisional Liquidators were informed by Deacons that :

"... pursuing and negotiating fees with overseas counsel is of itself a timely (and potentially costly) exercise and we have sought to achieve a balance between the cost saving benefits of such an exercise and running up further costs."

14. The aggregate amount of fees and disbursements for which approval is sought is of the order of $76 million for the period of 9 weeks or 63 days which elapsed between the provisional liquidation and the winding-up orders. I am greatly troubled by the amount involved.

15. Mr Benjamin Yu, SC, appeared as amicus curiae at the adjourned hearing and I am grateful to Mr Yu for his submissions.

Remuneration of provisional liquidators

Under the Companies Ordinance

16. Section 193 of the Companies Ordinance which authorizes the appointment of provisional liquidators after the presentation of the winding-up petition is silent on the question of remuneration. Where the Official Receiver acts as provisional liquidator, he is allowed such amount as the court "may consider reasonable" in respect of the services of the official receiver as provisional liquidator : see rule 6 and Schedule 3, Table B, para.II of the Companies (Fees and Percentages) Order.

17. Although rule 28(3) of the Companies (Winding-up) Rules provides for the payment of costs, charges and expenses properly incurred by a provisional liquidator, including such sum as is or would be payable under the scale of fees in force for the time being where the Official Receiver is appointed provisional liquidator, it is limited to cases where no winding-up order is made upon the petition, or such order as made for the winding-up of the company is rescinded, or the proceedings are stayed. It does not apply where a winding-up order is made on the petition as in the present case.

18. Under English law, the position is very different. It is governed by rule 4.30 of The Insolvency Rules 1986 which provides :

"Rule 4.30 Remuneration

(1) The remuneration of the provisional liquidator (other than the official receiver) shall be fixed by the court from time to time on his application.

(2) In fixing his remuneration, the court shall take into account-

(a) the time properly given by him (as provisional liquidator) and his staff in attending to the company's affairs;

(b) the complexity (or otherwise) of the case;

(c) any respects in which, in connection with the company's affairs, there falls on the provisional liquidator any responsibility of an exceptional kind or degree;

(d) the effectiveness with which the provisional liquidator appears to be carrying out, or to have carried out, his duties, and

(e) the value and nature of the property with which he has to deal."

There is no corresponding Hong Kong provision.

19. It is common ground that the court has power when it appoints provisional liquidators to make an order specifying how they are to be remunerated. Even where no provision has been made in the order appointing the provisional liquidators for remuneration, the court nevertheless has inherent jurisdiction to allow a liquidator to retain his proper remuneration and expenses out of the assets he has administered. See In re Berkeley Applegate Limited [1989] 1 Ch 32 and Snell's Equity, 29th Ed. 254.

Express provision on appointment

20. In the present case, the order made express provision for remuneration. The terms upon which the Provisional Liquidators were appointed are identical. The relevant provision reads :

"IT IS FURTHER ORDERED that the remuneration of the Provisional Liquidators of the Company be calculated according to the standard hourly rates charged by Price Waterhouse for the services of the Provisional Liquidators and other grades of staff employed by them"

21. Counsel for the Provisional Liquidators did not seek to argue that the fee notes of the Provisional Liquidators are conclusive as to the amount to which they are entitled by reason of the terms of their appointment. As will become apparent, such an argument would be wholly untenable. Mr Fok submitted that given the express terms of the appointment, the time basis of assessment "should be the starting point in any determination of the method by which the outstanding fees of the Provisional Liquidators should be quantified" and that the observations of Ferris J in Maxwell should be read in the light of that important fact.

The Maxwell principles

22. Maxwell establishes (at 333E-334F) that :

(1) Administrators, liquidators, receivers, trustees in bankruptcy or other officers ("office-holders") are fiduciaries charged with the duty of protecting, getting in, realizing and ultimately passing on to others assets and properties which belong not to themselves but to creditors or beneficiaries of one kind or another. They are appointed because of their professional skills and experience and they are expected to exercise proper commercial judgment in the carrying out of their duties. Their fundamental obligation is a duty to account, both for the way in which they exercise their powers and for the property which they deal with.

(2) The allowance of remuneration to officer-holders represents an exception to the rule that a trustee must not profit from his trust which rule applies to all kinds of person who are in a fiduciary position. This exception inevitably involves a conflict between the interests of the fiduciary who is to receive such remuneration and the interests of those to whom the fiduciary duties are owed, who will bear whatever remuneration is allowed.

(3) It is for the office-holder who wishes to be remunerated at a particular level to justify his claim :

(a) Office-holders must give full particulars to justify the amount of any claim for remuneration. Where they seek to be remunerated upon the basis of time spent, they must do significantly more than list the total number of hours spent by them or other fee earning members of their staff and multiply this total by a sum claimed to be the charging rate of the individual whose time was spent. They must explain the nature of each main task undertaken, the considerations which led them to embark upon that task or to persevere in it. The time spent must be linked to this explanation so that it can be seen what time was devoted to each task.

(b) Office-holders must keep proper records of what they have done and why they have done it. Without contemporaneous records of this kind, they will be in difficulty in discharging their duty to account. Retrospective reconstructions are unlikely to be as reliable as contemporaneous records. Office-holders whose records are inadequate are liable to find that doubts are resolved against them because they are unable to fulfill their duty to account for what they have received and to justify their claim to retain part of it for themselves by way of remuneration.

(c) The test is whether a reasonably prudent man, faced with the same circumstances in relation to his own affairs, would lay out or hazard his own money in doing what the office-holders have done. It is not sufficient for office-holders to say that what they have done is within the scope of the duties or powers conferred upon them. They are expected to deploy commercial judgment, not to act regardless of expense. Transactions carried out at a high cost in relation to the benefit received will be subject to close scrutiny.

23. Mr Yu submitted that as a corollary, a provisional liquidator is not entitled to remuneration in respect of work which a reasonably prudent man faced with the same circumstances in relation to his own affairs would not have laid out his own money. Costs and expenses incurred unnecessarily should be disallowed. Re Kal Assay Southern Cross Pty Limited (in Liquidation) [1992] 9 ACSR 245, 262-3 and In re Silver Valley Mines (1882) 21 Ch D 381, 392. Further, a provisional liquidator should also be deprived of costs occasioned by a want of reasonable skill on his part. Equally, he should not be entitled to remuneration for services rendered in breach of his duties. Re Kal Assay Southern Cross Pty Limited (in Liquidation) (supra) at 263

24. As I understand it, Mr Fok, counsel for the Provisional Liquidators, accepts the general principles set out above save in the following respects :

25. First, Mr Fok takes issue with the suggestion that a failure to keep contemporaneous records would disentitle the Provisional Liquidators to remuneration. He submitted that one should approach the matter with 'practical realism', that the purpose of the exercise is not to apply bureaucratic red tape to make recovery impossible so that doubts ought not be resolved against the Provisional Liquidators, at least not until after they have been afforded an opportunity to explain.

26. On a proper reading, I do not accept that the judgment of Ferris J goes anywhere near to saying that office-holders who do not keep contemporaneous records are disentitled to remuneration. The burden is upon them to justify the remuneration claimed. They may do so by means other than contemporaneous records although, as Ferris J pointed out, contemporaneous records are likely to be a more reliable form of proof.

27. Second, as to the need to justify every dollar claimed, it was submitted that in taxation, the underlying acceptance is that what a solicitor says he has done was done. Therefore the court should accept the word of the Provisional Liquidators at face value and be very slow to disbelieve them or question the integrity of their assertions.

28. I have some difficulty in accepting this last proposition for the reason that a clear conflict of interest exists. A similar argument was put forward in Maxwell which was rejected by Ferris J (at 338H-339C) :

" A particular argument against assessment of remuneration by a taxing officer which was presented by Mr. Purle is that the Receivers in this case are insolvency practitioners unused to taxation procedures, and that although they have records of the amount of time spent in the receivership by them and their employees these records do not show, as the records of a solicitor would do, how much time was spent by any particular individual on a particular task. The suggestion was that it would be unreasonable for insolvency practitioners to be required to justify their charges in the same way that a solicitor would have to justify his charges on the taxation of costs.

I have to say that I find this argument wholly unacceptable. Although court-appointed receivers are officers of the court and, in the absence of positive misconduct on their part, are entitled to support and protection from the court, when they seek to have their remuneration fixed they must, as I have already indicated, justify their claim. In the present case this claim is based exclusively on time expended charged at hourly rates. The evaluation of this claim inevitably involves consideration of two main questions, namely (i) whether the time charged for was reasonably and properly expended in the course of the receivership having regard to the other material factors which I have mentioned and (ii) if it was, what is the appropriate hourly or other charge. Mr. Purle's argument appeared to me to come close to saying that the court cannot investigate the first of these matters, but must accept the Receivers' account of the time they have spent, because the Receivers may be in difficulty in showing what they or their employees did during the time they have recorded as being spent on the receivership. If this were indeed the case it would show, I think, that the Receivers have not properly understood their fiduciary position."

As Mr Yu pointed out, the court cannot take the Provisional Liquidators' say so at face value since it is not the court's money that is in issue but somebody else's money. The effect of any approval is to allow the Provisional Liquidators to take money away from their principals. It is for that reason that office-holders are required to attain the same high standard that fiduciaries are required to attain when they charge remuneration.

29. Third, Mr Fok does not accept that transactions carried out at high cost in relation to the benefit received should attract a different kind of scrutiny.

30. But it is not a corollary that transactions carried out at low cost attract little or no scrutiny. The basis for the objection is difficult to follow : for one thing, the high cost when juxtaposed to the amount recovered might conceivably raise questions as to the reasonableness of the action taken.

31. As noted above, it is not now suggested that the Maxwell principles do not apply where express provision has been made for remuneration to be on a time basis. This is because the basis of remuneration does not alter the fundamental principle that provisional liquidators, like other office-holders, are fiduciaries and have an obligation to account.

32. In the course of their submissions, both counsel for the Provisional Liquidators and the Official Receiver suggested that as the matters to which the court is to have regard under rule 4.30 of the Insolvency Rules are matters of common sense, the court can somehow be guided by the considerations set out thereunder, such as the complexity of the Peregrine liquidation, the exceptional kinds or degrees of responsibility that did fall upon the Provisional Liquidators due to the complexity of the tasks, the time pressures involved, the value of the assets and the high profile nature of the liquidations in a particularly sensitive economic climate as well as the effectiveness of the action taken in preserving and realizing property of the companies in question even though rule 4.30 is not part of the law of Hong Kong. It was also suggested by the Official Receiver that rule 4.30 could be adopted into the Hong Kong system either by way of a Practice Direction or by incorporating those principles in a judgment.

33. Mr Yu submitted, correctly, in my view, that where remuneration has been ordered to be on a time basis, it would be inconsistent then to bring all the other factors back into consideration. The basis of remuneration could have been on one of several bases : a time basis, a realization basis, or the all encompassing test under rule 4.30. Once one basis has been selected, it would not be consistent with the order to apply a basis which has effectively been rejected.

34. Both Mr Fok and the Official Receiver appeared to have difficulty with the so-called test of the reasonably prudent businessman. The test is not what a reasonable businessman would do but as Lightman J explained :

"I would summarise the essential lesson to be derived from the Maxwell case as follows: that in all his decision-making an office-holder must transparently display the care and anxiety of a prudent businessman acting in his own affairs at his own costs and risk."

([1998] 19 Company Lawyer at 74)

35. In my judgment, the Maxwell principles set out above apply without being qualified in the manner suggested by the Provisional Liquidators.

Solicitors' bills

36. The treatment of the bills of the solicitors employed by office-holders in Maxwell was also a major aspect of Ferris J's judgment. The main features (at 344B-F) are summarized below :

(1) An office-holder's own claim for remuneration and the bills of solicitors employed by them are governed by different principles.

(2) As between the office-holder and his solicitors, there is a contract and the office-holder is personally bound to pay to the solicitors their proper charges for work done in accordance with that contract.

(3) As between the office-holder and the estate which he was appointed to administer, the question is whether and to what extent sums which the office-holder is obliged to pay his solicitors are allowable as disbursements in settling the office-holder's accounts.

(4) Sums payable to solicitors engaged by office-holders are in no different position from any other disbursements.

(5) As regards each bill, two questions arise : what is the proper amount payable by the office-holder as clients, and how much of the amount so payable is to be allowed as payment out of the estate.

37. As to (5), in the first instance, it is for the office-holders as the paying party to decide whether or not they accept their solicitors' accounts in full. If, the accounts are accepted and paid, the office-holders' conduct may subsequently be attacked on the ground that the charges were excessive and should have been reduced by negotiation or taxation. If such an attack were successful, it would necessarily affect the amount that falls to be satisfied out of the estate with the consequence that the office-holders will have to absorb the shortfall.

38. Ferris J went on (at 344G-H) to consider the steps open to office-holders who were not willing to run the risk to avoid or reduce it :

"At the very least they must subject the bills to critical scrutiny. If they simply pay them without such scrutiny they will obviously be vulnerable. They may be able to negotiate certain reductions, thus facilitating an argument that the negotiated reductions are preferable to the possibility of obtaining greater reductions at greater costs ... Finally they can require the bills to be taxed ... A taxation will, of course, put beyond doubt the amount that the [office-holders] are liable to pay their solicitors. This result is, however, achievable only at a significant cost in terms of the fees payable on taxation and, unless at least one-fifth of the bill is taxed off, the costs of taxation. Moreover, even the taxation of the bill will not dispose of all the issues which may arise ... there may, for example, be a question whether the solicitors should have been retained to do a particular work." (emphasis supplied)

39. What is made abundantly clear in Ferris J's judgment is that it is not an acceptable attitude for office-holders to leave it to the court to decide to what extent their solicitors' bills are to be paid out of the estate. This is because it suggests a degree of flexibility and if there is flexibility, the bills should be reduced by negotiation to the level the solicitors are prepared to accept. It is the minimum duty of office-holders to subject the bills to critical scrutiny : it simply will not do to pass on the bills to the court without comment. Moreover, it is to be noted that the court has no means other than taxation to scrutinize bills of large scope and for large amounts.

Other unpaid disbursements

40. No meaningful distinction exists between solicitors' bills and other unpaid disbursements save those that cannot be quantified by an independent process because there does not exist a process similar to taxation as regards those disbursements.

41. Where the court has not been asked for prior authority to incur particular liability, it cannot be right for the court to be asked whether or not a liability incurred without such authority should be discharged. As Ferris J noted (at 345H) :

"[Office-holders] are appointed in the expectation that they will use their commercial judgment without continually referring matters to the court. The court will be generally supportive of them in dealing with the consequences to the estate of particular exercises of that judgment. Nevertheless the question of the allowance of disbursements made out of the estate as the result of the exercise of that judgment remains a separate question from that of the liability of the [office-holders] to pay that disbursement."

42. What emerges very clearly from Maxwell is that the onus is upon the office-holder to scrutinize the bills and then pay the bills before they come to court for reimbursement.

43. I now turn to consider how the Maxwell principles are to be applied to the fee applications before me.

Fees of the Provisional Liquidators

44. The critical issue is whether the Provisional Liquidators have discharged the burden on them of showing that the fees they wish sanctioned by the court were justified applying the test enunciated by Ferris J in Maxwell. Mr Yu has helpfully summarized the questions which the court should ask :

- have the Provisional Liquidators adduced sufficient evidence to explain the nature of each task undertaken and the considerations which led them to embark upon that task?

- have the Provisional Liquidators linked the time spent to the explanation?

- is the court satisfied that a reasonably prudent man faced with the same circumstances in relation to his own affairs, would have laid out or hazarded his own money in doing what the Provisional Liquidators have done?

- have the Provisional Liquidators produced contemporaneous records of what they have done and why they did it?

- have they produced contemporaneous records of all items of expenditure and of services rendered, how they were calculated and how they were justified?

- should the fees for any item of work be disallowed as being unnecessarily incurred?

- should the fees for any item of work be disallowed as being incurred in breach of duties?

45. The bills and supporting schedules of the Provisional Liquidators have to be examined in that light.

46. The supporting schedules list the tasks and sub-tasks, identify the personnel involved, their grade and rate and the total number of hours spent by each named individual on that particular task or sub-task during the period from 16 January to 17 March 1998. In this connection, it is a complete mystery why, in respect of PIHL and PDL, the period should only run from 16 January rather than 13 January, the date the Provisional Liquidators were appointed for PIHL and PDL when the bills themselves are expressed to be for services rendered from 13 January. There is no breakdown to show when each individual spent time on any particular task and what he did as opposed to the sum total of hours spent by him during the whole period in question.

47. The covering letter from the Provisional Liquidators to the court dated 25 April 1998 explains how the schedules in support of the bills came into being :

"- Detailed listing of major activities undertaken. Price Waterhouse does not have a timekeeping system (like the systems most law firms have) whereby fee earners input their time and a brief description of tasks performed such that at a later date the information can be 'sorted' into a form of billing. ..... we did our best to modify our internal billing system to incorporate Activity Codes for major tasks undertaken to which staff would input their time. Thus, instead of charging all of their time for a given day to a main 'Peregrine' billing code, our fee earners' time was/is allocated to various Activity Codes such as 'Job Administration', 'Employee Issues', 'Compliance and Legal Issues' etc. It is important to note that we have modified these Activity Codes as we have progressed in this matter as appropriate categories have cropped up.

- Detailed description of each task undertaken in each Activity Code. As mentioned above, our time and billing system does not enable our fee earners to input a contemporaneous task for each hour or portion of an hour billed. Thus, whilst each fee earner has accounted for his time by placing it into an appropriate Activity Code, within each Activity Code we have had to list out manually the various tasks undertaken, and have had to apportion each fee earner's time to the various tasks. For example, we have identified 9 major tasks undertaken relating to the 'Compliance and Legal Issues' Activity Code. Each fee earner who charged time to the 'Compliance and Legal Issues' Activity Code was subsequently asked to apportion his total time to one or more of the 9 tasks.

- Total hours and fees incurred for each task and Activity Code. We have broken down the total hours incurred and the total fee charged for each task within each Activity Code and for each Activity Code itself. ....." (emphasis added)

48. Two matters call for specific comment : first, I find it an astounding admission that the Provisional Liquidators do not have a time and billing system that enables fee earners to input a contemporaneous task for each unit of time spent. After all, they asked to be remunerated on a time basis : the provision for remuneration contained in the Order appointing them gave effect to that request. Although there was a belated attempt (in the form of Clifford Chance's letter of 9 June 1998) to salvage the situation, the fact is that the system maintained does not cater for a time input and a contemporaneous brief description of tasks performed.

49. In this connection, I have to say that in my experience (limited though it may be), the time basis appears to be the preferred basis of remuneration of provisional liquidators generally. This might conceivably stem from a misconception that if X hours were spent on a particular task, then the Provisional Liquidators would get X times the appropriate hourly rate. That of course is not the case. If such a misconception does exist amongst insolvency practitioners, the sooner they are disabused of it, the better. The office-holder has to show that a reasonably prudent man would have laid out or hazarded his own monies on the particular task, that it was reasonable to spend X hours doing it and there is evidence that X hours were actually expended.

50. This matter throws into question whether remuneration on a time basis whilst popular with practitioners is a satisfactory solution. In future, office-holders who seek remuneration on that basis will have to satisfy the court that they do have internal office systems that would render such a basis workable. Where such a system is not in place, remuneration on a time basis is plainly out of the question. Even where such a system is in place, the court is likely to consider whether other bases of remuneration would be appropriate, and in particular, the all encompassing test under rule 4.30 of the Insolvency Rules. The deficiencies of the time basis were identified some 75 years ago by P.O. Lawrence J in Re Carton Ltd. (1923) 39 TLR 194, 197 in a passage cited in Maxwell (at 336G) :

"... Even the best accountant may spend hours over unproductive work, let alone his more or less efficient staff of clerks. Moreover it is quite impossible to check charges based on such a system and to gauge the value of odd hours said to have been spent on the affairs of the company."

51. Second, the supporting schedules are subsequent reconstructions and not contemporaneous records.

52. At the hearing, it emerged that each employee at Price Waterhouse is required to fill a time sheet on a bi-monthly basis. Mr Fok gave an explanation of the procedures within Price Waterhouse and how the bi-monthly time sheets which effectively constituted the raw data for compiling the total number of hours expended by any individual on any particular task during the relevant period. Unlike the solicitors, the Provisional Liquidators do not work to the usual 6-minute units. Moreover, from the single example that I have seen which relates to Mr Osborne, one of the Provisional Liquidators, time sheets entries are expressed in units of hours and half-hours only. This of itself is a matter of some concern since billing rates range from $2,800 to $4,000 per hour for senior managers and $4,200 to $5,400 per hour for partners.

53. Subsequent to the hearing, in their letter dated 9 June 1998, Clifford Chance stated that in Price Waterhouse's corporate recovery department, it is "the almost invariable practice to complete time sheets on a daily basis". This, of course, is somewhat different from the impression conveyed to the court at the hearing. Be that as it may, there is no contemporaneous record of what was done on any particular day other than under a general heading. Inarguably, the apportionment of time spent by any individual to the sub-tasks comprised in any one task was an ex post facto exercise.

54. In any event, there is no evidence as such before the court regarding Price Waterhouse's internal procedures, as well as details (including the dates) the 'activity codes' came to be refined and when and how the ex post facto exercise took place. It would be most unsatisfactory for the court to proceed in the absence of such evidence.

55. In relation to PIHL, the Provisional Liquidators have written-off $2,225,225 in fees "as we have recognized that it would be inappropriate to seek to recover from the estate certain time charged by certain individuals". This amount represents 8.91% of the total fees recorded in the internal timekeeping system. They also recognize that it is likely that they have not 'caught' or identified all such inappropriate cases and are therefore prepared to write-off an additional 1.09% or $272,529, making the total write-off 10%. In addition, they are 'volunteering' a write-off of 50% of time costs incurred relating to the court approval process of the BNP transaction, namely HK$340,885 having regard to criticism of their conduct made by Rogers JA and by me. However, I note that in the summary of fees attached to their letter of 25 April 1998 to the court relating to PIHL, the BNP write-off is of a different amount, i.e. $307,690. Quite, apart from this unexplained discrepancy, it is wholly unclear how the BNP transaction costs are apportioned between the court approval process and the transaction itself. It is certainly not apparent from the face of the schedule relating to the BNP costs.

56. In relation to PDL, an amount of $99,030 or 3.66% of the total charge were written off as being 'inappropriate'. A further 1.34% or $36,407 was written off, in recognition that the Provisional Liquidators may not have 'caught' or identified all such inappropriate cases making the total write-off 5%.

57. Finally, in the case of PFIL, $273,230 or 2.43% of the total charged was written off as being 'inappropriate' and an additional 2.57% or $289,698 was written off, again to cater for inappropriate cases that have not been 'caught' or identified, making the total write-off 5%.

58. No explanation has been given as to the "certain time charged by certain individuals" which the Provisional Liquidators recognize as inappropriate to recover from the estate. In any event, such write-offs are not write-offs in any true sense in that the Provisional Liquidators are plainly not entitled to be paid time costs that even they concede cannot be justified.

59. As noted above, the Provisional Liquidators have written off 50% of the costs of the court approval process for the BNP transaction. No doubt this specific write-off was engendered by the adverse criticisms made of the conduct of the Provisional Liquidators concerning that application. Quite apart from that transaction, there are several others that come to mind where applications were brought on prematurely at a time when the Provisional Liquidators were not in a position to deal with the matters raised by the court thereby causing unnecessary adjournments and incurring unnecessary costs. There are also other instances where it is at least questionable whether certain applications should have been made at all. It would not be satisfactory to deal with these matters piece-meal and a separate chambers hearing will be scheduled to deal with such outstanding matters at one go. Obviously, any adverse conclusion reached by the court could also impact upon the legal costs incurred.

60. At the hearing, I intimated that I did not consider that the Maxwell test has been satisfied. I confirm that view.

The bills of Deacons and Clifford Chance

61. The Provisional Liquidators' attitude to the solicitors' bills is precisely that which Ferris J disapproved of in Maxwell. On 5 May 1998, the Provisional Liquidators wrote to the court in the following terms :

"Deacons' total time costs for this period amount to HK$20,941,300 and their out-of-pocket expenses amount to HK$567,543. As discussed below, with respect to Deacons' professional fees, we recommend approval of payment of HK$18,438,937. We recommend all out-of-pocket expenses be approved for payment."

Pausing here, it is to be noted that the letter appears to ignore or leave out of account altogether the category (2) disbursements. The letter goes on to describe the review procedures undertaken by the Provisional Liquidators :

"We reviewed the time charges for each fee earner in each activity for appropriateness. In so doing, we had the Price Waterhouse professional who had the most interaction with the activity in question undertake the review. ...

As a result of our review, we identified various areas that required further clarification from Deacons. For example, we might query why certain research needed to be performed or what was 'prepared' when they stated they were preparing for a meeting. Deacons would clarify the queries raised and in most cases we were satisfied with their clarifications. However, in some cases, we mutually agreed that it would be inappropriate to charge the estate for certain time charges of certain individuals. In addition, we agreed that due to the (necessary) size of certain legal teams assigned to various tasks and the total number of hours charged by certain individuals, inefficiencies may have resulted and certain time charges may have been duplicative.

..... In connection with this, we negotiated with Deacons a 10% reduction in their time costs for each activity category (save two where specific write-offs in excess of this percentage were taken). This percentage took into account the less identifiable but possible duplications of efforts and inefficiencies as well as the specific instances in which we felt it would be inappropriate to charge the estate. In total, this amounted to HK$1,970,841, the vast majority of which is not attributable to our specific enquiries. Please note that this 10% discount is not inclusive of the specific write-offs as discussed below."

62. So, it was submitted, Deacons' bill had been subjected to critical scrutiny. As a result, negotiated reductions were achieved. But of course, the letter is wholly unspecific as to which areas required further clarification and which were the cases in which it was mutually agreed that it would be inappropriate to charge the estate.

63. So far as the two specific write-offs are concerned, they relate to 'voluntary' deductions in respect of Deacons' fees for the BNP transaction in so far as it related to the court approval process and to the application relating to employees' remuneration. The specific write-offs amount to approximately $530,000. The 10% negotiated reduction is not inclusive of the specific write-offs. What is also clear beyond peradventure is that the Provisional Liquidators have not sought to scrutinize category (2) disbursements by Deacons at all. Rather, they appear to rely on Deacons' own assessment of the reasonableness of those costs.

64. The Provisional Liquidators adopted a similar approach as regards Clifford Chance's professional fees. They 'recommended' approval of Clifford Chance's professional fees which reflected a 5% discount on the full time charges as well as category (1) disbursements. Category (2) disbursements did not feature at all in the covering letter of the Provisional Liquidators. For the reasons already given in relation to Deacons' bill, that is not an acceptable attitude.

65. Again, the Provisional Liquidators had the Price Waterhouse professional who had the most interaction with the activity in question to undertake the review of Clifford Chance's fees. In their letter dated 24 April 1998 to the court in relation to PIHL, the Provisional Liquidators state :

"... Whilst it would have been impossible for us to verify forensically that each, for example, telephone conversation recorded took place, we did review such entries with an eye towards confirming that such communications were necessary for the activity identified, and that the time allocated seemed reasonable in the circumstances.

As a result of our review, we identified various areas that required further clarification from Clifford Chance. For example, we might query why certain documents required review or what was 'perused' when they simply stated they were 'perusing documents'. Clifford Chance have clarified the queries raised and in most cases we were satisfied with their clarifications. However, in some cases, we mutually agreed that it would be inappropriate to charge the estate for certain time charges of certain individuals. In addition, we agreed that due to the size of certain legal teams assigned to various tasks and the total number of hours charged by certain individuals, inefficiencies undoubtedly would have resulted and certain time charges likely may have been duplicative, for example, where there has been a change of personnel. We must say that it was difficult to isolate all such cases from the hundreds of individual time entries. As a result, we ultimately agreed that to account for the specific instances in which we felt it would be inappropriate to charge the estate, and for the less identifiable but likely duplications of efforts and inefficiencies, Clifford Chance should discount their total billed by 5% or HK$176,545. Thus, our recommendation above, which has been accepted by Clifford Chance."

Letters in similar terms were written in relation to Clifford Chance's fees for PDL and PFIL. It would appear that there were 'specific instances' where it was 'inappropriate' to charge the relevant estate and that there were also 'less identifiable' but likely duplications of efforts and inefficiencies. No details of these appear in the letters from the Provisional Liquidators.

66. There is one baffling feature of the Clifford Chance bills that deserve mention. It would not appear that Clifford Chance work to 6-minute units. For example, I find recorded time expressed as "0.13", "0.08" and "0.52" hours which appear to translate into 7 minutes 48 seconds, 4 minutes 48 seconds and 31 minutes and 12 seconds respectively. If I have not wholly misunderstood the entries, I can only express amazement at the charging basis and question how such entries can really be accurate. In any event, a great deal of time must have been spent calculating the time spent on any task for which I hope the client is not being charged.

67. Have the bills been subjected to critical or serious scrutiny? The answer is definitely 'no'. It is not enough to pay lip-service to the requirement of critical or serious scrutiny. The review undertaken appeared to be both cursory, superficial and lacking in particularity. The impression given is that it is altogether too cosy an arrangement. I do not accept that the bills can possibly have been subject to critical scrutiny. Take Clifford Chance's entries for PIHL for 12 February 1998 : partner A recorded time spent (0.47) on discussions with partner B. Partner C recorded a telephone call to partner B (0.25). Partner B's entries do not reflect any discussion/telephone conversation with either partners A and/or C. Although what is in issue here is 0.72 of an hour, it is not a trifling amount since partners' rates for that firm range from $3,800 to $4,500 per hour. Under Deacons' Schedule for Co-ordination, Project Management and General Insolvency Issues there is an entry by a partner for 16 February 1998 for 1.4 hours. The charging rate is $4,400 per hour. The description of work done is "Prayers". What is the court to make of that? Then there are entries reflecting telephone calls to my clerk regarding hearings, done at the top end of partners' rates.

68. The Provisional Liquidators have not paid their solicitors' bills. They say they do not have the resources to do so. They are leaving it to the court to decide to what extent the solicitors' bills are to be paid out of the estate and as Ferris J had very clearly pointed out, that is not an acceptable attitude.

69. Mr Yu has correctly pointed out that it remains unclear whether the negotiated discounts are binding on the Provisional Liquidators. Recommending acceptance by the court is not equivalent to their having accepted this liability as a matter of legal obligation.

70. If the Provisional Liquidators find themselves in a conundrum, there is the taxation procedure which will put beyond doubt the amount that they are liable to pay their solicitors. I note that to-date, there has been a clear reluctance on their part to avail themselves of this procedure which, incidentally, is also available in respect of some of the category (2) disbursements.

71. I do not accept for one moment that the solicitors' bills have been scrutinized to the degree required. But of course this is ultimately a matter for the Provisional Liquidators. If they are satisfied that the bills have been properly scrutinized, they can then pay those bills and apply to the court for recoupment. Until they do so, it is premature for this court to be considering approval of the extent to which disbursements (which solicitors' fees are) may be recouped out of the estate. If the Provisional Liquidators feel that there is nothing else they can do about scrutinizing these bills but are unwilling to take the risk of a shortfall, a taxation is the only solution. From the material before me, it would not appear that the Provisional Liquidators have any proper grasp of what is required of them and it may well be that there is no real alternative to a taxation.

72. In that connection, the court was informed that taxation would incur further substantial costs, estimated to be in the region of $750,000 for Clifford Chance's bills and $700,000 for Deacons' bills. No doubt taxation will give rise to further substantial costs, but whether they would have to be borne by the Provisional Liquidators rather than by the firm of solicitors concerned would depend on the outcome of the taxation. In so far as the fees that have to be paid for the taxation process, under the High Court Fees Rules, Cap.4, the Registrar has power under rule 2(2) to remit or defer payment. I understand that that discretion has recently been exercised in relation to the fees of one of the longest civil cases in recent years.

73. It would appear to be the position of Clifford Chance and Deacons that the reductions would be written back into the bills if a taxation were undertaken. This much appears in Mr Fok's written submissions. I confess I have some difficulty in understanding how fees that have mutually been agreed as 'inappropriate' which made up the bulk of the reductions can properly be written back into the bills.

74. Should the Provisional Liquidators decide to have those bills taxed (and it seems to be unavoidable unless they are willing to absorb any shortfall), application should be made by the firms concerned to defer or remit payment of the taxation fees. If further interim payments on account are desired, skeleton bills should be lodged as soon as practicable in any event before any such application.

Further conduct

75. To proceed further with their application for their own fees, the Provisional Liquidators will have to file evidence to justify their claim as explained in Maxwell. The Provisional Liquidators must prove that they or their staff have expended time. In this connection, the evidence will need to identify those who have inputted their time on a daily basis and those who did not. The internal system will need to be explained identifying the person whose approval is required as envisaged by the time sheets, a sample of which I have seen, and whether, if time is inputted directly, how such approval would be given. Each individual will have to show how that time was spent. So far as this constituted an ex post facto reconstruction, details will have to be given on when that was done, how the activity codes came to be refined, etc. The Provisional Liquidators will also need to prove that they reached a properly considered and prudent decision to undertake the particular exercise on which time was expended and to carry it out using the resources that they did. To the extent that the records are not contemporaneous, the Provisional Liquidators and their staff must do the best that they can in the circumstances.

76. Revised bills should be produced to reflect the effect of any costs that the court may disallow in the forthcoming hearing 'omnibus' on costs.

77. The next question is who is to undertake the task of fixing the Provisional Liquidators' remuneration. There are essentially two possibilities :

(1) Order 36, rule 1 of the Rules of the High Court provides as follows :

"1. Trial before, and inquiry by, master (O.36, r.1)

In any cause or matter other than a criminal proceeding by the Crown, the Court may, with the consent of the parties, order that the cause or matter, or any question or issue of fact arising therein, be tried before a master or that the master do inquire and report thereon and, in the case of inquiry and report, giving consequential directions."

This rule is applicable in the winding-up context by reason of rule 210 of the Companies (Winding-Up) Rules. The master undertakes the task of inquiring into a particular matter and reports back to the court. Thus, the court retains the overriding power of control over the fixing of remuneration. However, to proceed under this rule requires the consent of the Provisional Liquidators.

(2) The alternative is to proceed under rule 6 of the Companies (Winding-Up) Rules :

"6. Applications in Chambers

Subject to the provisions of the Ordinance and Rules:

(a) the Registrar may, under the general or special directions of a judge, hear and determine any application or matter which, under the Ordinance or Rules, may be heard and determined in chambers."

The task is effectively delegated to the Registrar. This rule does not require the consent of the Provisional Liquidators.

78. There is a third possibility which was mentioned but doubted in Maxwell. It was suggested that an expert might be appointed to assist the judge in carrying out the task. Ferris J doubted the power to appoint a court expert under Order 40 (at 339F). I share that view.

79. The Provisional Liquidators are at liberty to make representations as to their preference (if any) in this regard.

Generally

80. The problem of high costs that insolvencies seem to generate is not a phenomenon peculiar to Hong Kong. Following Ferris J's judgment in Maxwell, a working party was appointed in England to review this difficult question. The report of the working party is due to be released shortly. It may contain recommendations that would resolve some of the problems and which Hong Kong may wish to consider and adopt if appropriate.

81. Whilst it may be thought that the court is requiring an exacting standard, I am in the unenviable position of being the guardian of funds that belong to the creditors out of which the fees and disbursements are to be paid. Approval for payment can only be made in accordance with the law.

82. I should add that the principles set out in this judgment are equally applicable to the liquidation after the date of the winding-up order except that their enforcement is a matter for the committee of inspection and, ultimately, the creditors.

Interim payments

83. At the hearing, I allowed an interim payment on account of 25% of the fees submitted by the Provisional Liquidators, Deacons and Clifford Chance for approval, such sum to be released to the Provisional Liquidators to be distributed by them. This amount was topped-up by all category (1) disbursements which again represents a payment on account and not approval of the individual items.

84. I am prepared to allow a further interim payment on account to bring the total percentage up to 33% of the fees.

85. So far as the fees of Deacons and Clifford Chance are concerned, I have already indicated what steps should be taken if further applications for interim payment are to be made.