XCHRX RE AKAI HOLDINGS LTD. (FORMERLY KNOWN AS SEMI-TECH (GLOBAL) CO. LTD.)

HCCW49/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO.49 OF 2000

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J U D G M E N T

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1. This is an application by the Official Receiver and Provisional Liquidator ("the Official Receiver") of Kong Wah Holdings Limited ("Kong Wah") and Akai Holdings Limited ("Akai") (collectively "the Companies") for the appointment of special managers pursuant to section 216 of the Companies Ordinance. The hearings have been held in chambers. The reasons for my decision to adjourn the application into court are twofold : first, issues of law arise; second, the creditors should be apprised of developments in the liquidation.

Background facts

2. The application arises out of winding-up orders in respect of the Companies made on 23 August 2000. Reasons for the making of those orders were handed down on 11 September 2000. In summary, the debts underlying the creditors' petition were undisputed and despite several adjournments granted to enable the Companies to put forward a restructuring proposal that had the requisite in-principle support, they were unable to do so and upon a further application for an adjournment being refused on 23 August, winding-up orders were made.

3. As appears from the Reasons, the petitioning creditors had taken out a summons for the appointment of Damien Hodgkinson and Fan Wai-keung of Nelson Wheeler Corporate Advisory Services Limited ("Nelson Wheeler") as provisional liquidators. Much of the evidence filed by the petitioning creditors was germane to that application which in the event was abandoned. It transpired that Nelson Wheeler had been retained by the petitioning creditors and the Standard Chartered Bank ("SCB"), a supporting creditor to ferret out information and, it would appear, they had been responsible for supplying much of the material which formed the basis of serious allegations of misconduct made against the Companies and Toyo (which had taken over the management of the Companies) to support the case for the appointment of provisional liquidators. As that application did not proceed, it did not become necessary to consider whether those allegations were well-founded. The evidence filed explained that principals in Nelson Wheeler had been selected because none of the partners from the "Big 5" accounting firms was in a position to accept an appointment due to conflict problems.

4. By reason of section 194(1)(a), the Official Receiver became the provisional liquidator.

The application

5. The application was an ex parte paper application which reached me on the morning of 25 August. The Report of the Official Receiver and the Provisional Liquidator in support of an application for the appointment of special managers was dated 25 August 2000 ("the 1st Report"). The Official Receiver applied to have Stephen Wong Tak-man and Fan Wai-keung ("the proposed special managers"), partners of Nelson Wheeler appointed as special managers. Coincidentally, it would appear, Nelson Wheeler was the next firm available on the roster system. The Panel A list consists of 14 member firms only, including the "Big 5" and each member firm in turn had principals who (as individuals) were also Panel A members. As will appear below, the appointment is of individuals but the roster operates by reference to member firms.

6. In the 1st Report, the Official Receiver confirmed the conflict of interest of the "Big 5". He stated that he was satisfied that the proposed special managers have the capacity to carry out the assignment. Further, it was proposed that instead of "standard" powers and duties, the special managers be given extremely wide powers. In effect, inter alia, what was contemplated was a wholesale delegation by the court to the Official Receiver of its powers of sanction under section 199(1) of Cap.32.

7. Annexed to the 1st Report was an appendix listing some 80 subsidiaries and affiliates known to the petitioning creditors. A quick perusal showed that those companies operated in many different jurisdictions. Apart from Hong Kong, North America, Europe, Japan and the PRC appeared to have the largest concentration of subsidiaries and affiliates.

Preliminary hearing : 25 August

9. After perusing the papers, and in view of my absence from Hong Kong the following week, I scheduled a preliminary hearing in chambers for that afternoon so that I could convey to the Official Receiver my preliminary views concerning his application which was far from routine. Conflict of interest considerations apart, the size and global nature of the liquidations indicated that principals from one of the "Big 5" should be appointed as special managers.

10. At the hearing, it was explained to the Official Receiver that the circumstances of the liquidations were such that it was not a question of simply appointing insolvency practitioners from the firm next on the list according to the Panel A roster operated by his Office; rather, as the "Big 5" were conflicted out, one needed to 'survey the field' out of what was left to identify the best candidates for the job. It was necessary to consider the comparative resources and capabilities of the remaining firms (numbering no more than nine) on the Panel A list as well as the profile of its principals who were insolvency practitioners. It was also a consideration that anyone appointed special manager was likely to become liquidator in due course. Given the liquidations in question, one would look for highly experienced insolvency practitioners with sufficient exposure to large and complex liquidations. In other words, they should be persons of standing. With no disrespect to the proposed special managers, their names would not have immediately sprung to mind. The court also intimated that if need be, partners of an international firm of solicitors experienced in insolvency work should be considered.

11. Objections were put forward by the Official Receiver on the grounds that any departure from the roster system would excite ICAC interest and that the Official Receiver felt himself bound by the Panel A scheme. Quite apart from not crediting the ICAC with ordinary common sense, the Official Receiver appeared to overlook the fact that the appointment would be made by the court rather than the Official Receiver. The court's concern was that persons best qualified should be appointed given that this was hardly a run-of-the-mill liquidation. It appeared to the court that the interests of the creditors in this case may require and justify a departure from the Panel A scheme.

12. It was at that point that the court was informed that Standard Chartered Bank ("SCB"), one of the supporting creditors wished to appoint Nelson Wheeler and for that purpose was willing to put up $10 million as an investigation fund forthwith. (Pausing here, under the current law, there is no question of a 'firm' being appointed as liquidator or special manager. The appointment is of an individual although that individual is a partner/principal of an accounting firm. To approach the appointment in terms of the firm is simply wrong.) But quite when the proposed funding first arose is unclear. In any event, the proposed funding did not appear to be sufficient reason to justify an immediate appointment since it did not address the fundamental issue arising which was to identify the persons best suited to take up the appointment. The need to take stock of who was available and to identify the candidates best suited was reiterated and the Official Receiver was asked to provide the relevant information in order to assist the court. I also intimated that I would deal with the application on my return on 4 September.

13. The hearing was followed by specific directions given by letter the following morning in these terms :

"The Official Receiver do provide to the court a report of such of the firms of Panel A (other than the firms listed in paragraph 55 of the 4th Affidavit of Andrew James Sheppard filed on 22nd August 2000) as have overseas offices and/or connections with particular reference to the size of the relevant firm, and the profile of the most experienced insolvency practitioners."

The second hearing : 5 September

15. Pursuant to the directions given on 26 August, the Official Receiver filed a Second Report dated 2 September ("the 2nd Report"). It transpired that there was much activity during the intervening week.

16. After the Hong Kong winding-up orders were made, the petitioning creditors petitioned to wind up the Companies in Bermuda where they were incorporated. On 28 August, they succeeded in procuring the appointment of one Craig Christensen to be the provisional liquidator of the Bermudan Companies. The basis of the applications is not known. In any event, Mr Christensen lost no time in appointing Mr Hodgkinson and Mr Fan of Nelson Wheeler as his agents the same day (i.e. 28 August). Then on 1 September, Mr Christensen applied to the Bermudan court for the extension of the appointment of provisional liquidator of the Bermudan Companies to Messrs Hodgkinson and Fan. It would appear that through this tactical move, the petitioning creditors (and SCB) who together hold less than 7% of the overall indebtedness were able to achieve the appointment of provisional liquidators of their choice in the state of incorporation of the Companies. Under the law as it stands, the Bermudan provisional liquidators have jurisdiction over all the assets of the Companies outside Hong Kong. Quite what powers were conferred on them has not been disclosed. Be that as it may, the fact that provisional liquidators have been appointed in Bermuda is unlikely to cause this court to make an appointment that it would otherwise not be disposed to make. (As to the relationship between the Bermudan and Hong Kong liquidations, reference should be made to the section headed 'The nationality (by incorporation) principle' below.)

17. Meanwhile, the letters despatched by the Official Receiver pursuant to the 26 August directions elicited responses from insolvency practitioners from the other nine Panel A member firms ("the remaining firms") all of whom expressed interest in the appointment. So far as resources and capability were concerned, reading the material submitted, it was far from obvious that Nelson Wheeler was the front runner. As regards the profile of the insolvency practitioners, in terms of depth of insolvency experience and exposure to large liquidations, the proposed special managers were hardly in the running. Although qualified as accountants for upwards of 15 years, their insolvency experience is no more than 6 years each having started the insolvency department in Lai & Fan, Sothertons in 1994. This firm merged with Nelson Wheeler in 1999. Judging from the requirements for admission to the Administration Panel of Insolvency Practitioners for Court Winding-up (APIPCW), it would have taken each of them three years at a minimum to acquire the necessary experience for admission. It emerged in other proceedings that Mr Wong has only been a Panel A member for two years. It was therefore questionable that they possessed the necessary standing and depth of experience. Since the person appointed would have the carriage of the liquidation, it is he rather than his firm who must manage and direct the liquidations, take the necessary decisions and prioritize (if necessary) the tasks at hand. The appointee must necessarily have a "hands-on" approach. Hence the relevance and importance of his standing and experience.

18. The responses from the remaining firms had in a sense been overtaken by events which appeared to render the appointment a little less urgent. As one of the responses was not to be available in full until 4 September, the second hearing was scheduled to take place the following day.

19. The 2nd Report dealt, inter alia, with the subject of "funding". The court was informed that SCB had indicated that it was prepared to provide funding if Nelson Wheeler was appointed as special managers. The 2nd Report read :

"10. ... the offer of funding was made with the intention that Nelson Wheeler would act as special managers. I am informed that, if someone other than Nelson is appointed as special managers, Standard Chartered bank will review its offer of funding.

...

12. It appears therefore that ... the Official Receiver is not in a position to apply for any other Panel A member to be appointed as special managers to the companies as the Official Receiver as provisional liquidator would be unable to pay the fees of the special managers from the estates of either company and there would be no certainty that the special managers would receive funding from creditors."

The Official Receiver was accordingly asked to advise the court of the terms of the offer of funding. Shortly before the hearing, the court received from the Official Receiver a draft of a Funding Agreement which is of some complexity. Due to time constraints, the court did not have the opportunity of reviewing it in detail prior to the hearing. What was immediately clear was the fact that contrary to the impression gained at the preliminary hearing, funding was not to be "free" in that monies to be advanced by SCB would attract interest at prime plus 2%. In other words, the creditors would have to bear the cost of funding if sufficient assets were realized.

20. The 2nd Report further raised the point as to the court's jurisdiction under section 216 to appoint a special manager of its own choice irrespective of the application made by the Official Receiver.

21. At the hearing, the court sought clarification on the following matters :

(i) SCB's decision to fund the special managers;

(ii) whether SCB will be seeking to recover funding costs out of the estate;

(iii) why was SCB only prepared to fund Nelson Wheeler and not another firm.

The answer to (ii) was to be found in the draft Funding Agreement. The answers to the other points were not then available. It was left that the relevant explanations would be provided in due course. Moreover, given the length and complexity of the draft Funding Agreement, the Official Receiver who would be party to it if the funding went ahead, was asked to provide a 'road map' of the salient provisions.

22. During the hearing, the court was informed that on the previous day, the Steering Committee held a meeting and six out of the eight banks that formed the Steering Committee had orally indicated that they were willing in principle to contribute to the funding of the liquidation. The court was also informed that the Official Receiver had seized documents from the offices of the Companies and that amongst them were documents that gave rise to grave concerns. The court was presented with a bundle of documents but as the Official Receiver himself had not had enough time to fully digest the documents, no coherent much less cogent case was presented. The court was therefore not in a position to assess whether the concerns expressed (relating to the transfer of the management of the listed company, the whereabouts of some HK$2 billion and suggestions of fraud) were well-founded. It appeared to the court that perhaps conclusions were being drawn too hastily and without due consideration.

23. By letter dated 6 September, the Official Receiver sought to provide answers to the queries raised which explanations the court did not find entirely satisfactory. A 'road map' was provided but that was prepared not by the Official Receiver's Office but by Lovells, solicitors representing SCB. By then it had become apparent that the draft Funding Agreement contained highly unusual provisions designed to give SCB (who holds 1% of the overall indebtedness) total control over who was to be special manager/liquidator, inter alia, in the Hong Kong liquidations for the duration of the Funding Agreement. An event of default would arise under that Agreement unless Mr Wong and/or Mr Fan and/or any other person reasonably acceptable to SCB was the relevant office holder. In other words SCB would in that event be at liberty to withdraw funding. As noted above, SCB only holds 1% of the overall indebtedness and the funding costs would ultimately be borne not by SCB alone but by all the creditors save to the extent that the assets realized in the liquidations prove to be insufficient. That type of provision is likely to deter any creditor from seeking to remove Mr Wong and Mr Fan as special managers/ liquidators even if for cause and so have the effect of entrenching them in office come what may. Further, if such an application were made, the court would find itself in an invidious position as removal might result in the drying up of funds.

24. It is hardly surprising that this aspect of the draft Funding Agreement caused the court to approach the application with even more circumspection. Would SCB stand to derive some advantage or benefit from such an arrangement? Why else would it to go to such lengths not only to secure but also to entrench the appointment of the proposed special managers? The fact that SCB expressed itself wholly satisfied with work done by Nelson Wheeler relating to the liquidations is no sufficient answer. The winding-up orders made did not turn on the allegations as to misconduct based on research provided by Nelson Wheeler. In this connection, it is to be noted that as a result the petitioning creditors and SCB had adopted a very aggressive stance on the misconduct issues. In the normal case, the liquidator/special manager would come in and investigate the allegations with an open and impartial mind and the petitioning and supporting creditors drop out of the picture. It would not be the case here.

25. By letter dated 7 September, the Official Receiver was directed to advise the court :

(a) whether it was the SCB's position that it was not prepared to fund special managers if they are from a firm other than Nelson Wheeler; and

(b) whether the banks who attended the meeting on 4 September who have indicated a willingness to contribute to the funding share that position.

The following directions were also given :

"The Official Receiver do forthwith :

(1) advise Panel A members who have responded to the Official Receiver's letter of 28 August 2000 of -

(a) the appointment of Craig Christensen as provisional liquidator of AHL and KWHL in Bermuda ("the Bermudan companies") by the High Court of Bermuda on 28 August 2000 pursuant to petitions filed by the petitioning creditors to wind up the Bermudan companies;

(b) the appointment of Damien Hodgkinson and Joseph Fan of Nelson Wheeler in Hong Kong by the Bermudan provisional liquidator as his agents in relation to the assets of the companies outside Bermuda; and

(c) the extension by the High Court of Bermuda of the appointment of provisional liquidators of the Bermudan companies to Damien Hodgkinson and Joseph Fan on 1 September on the application of Craig Christensen;

(2) advise such members that minimal assets have so far been recovered by the Official Receiver who as provisional liquidator of the Hong Kong companies would not be able to fund the fees of the special managers from the estates of either of the Hong Kong companies;

(3) advise such members that there would be no certainty that if appointed special managers, they would receive funding from creditors; and

(4) inquire of such members whether, in view of the matters set out in (1), (2) and (3), any of them has any interest in taking up an appointment as special managers of the Hong Kong liquidations."

26. In addition, having by then perused the draft Funding Agreement, the Official Receiver was advised that :

"It contains provisions (such as clause 7.1.4) to which creditors may legitimately object. Therefore any Funding Agreement has to be subject to creditors' approval. Accordingly, if the Official Receiver is minded to be party to such an agreement prior to receiving creditors' approval (to be determined by reference to the value of debt held), he may only do so by making the agreement subject to a condition subsequent, i.e. the approval of the creditors at the first or any subsequent meeting of creditors and if such approval is not forthcoming, the agreement must cease to have effect."

Quite apart from the entrenching provisions referred to above which could be rendered unobjectionable only with creditor approval, it was not entirely clear if an event of default would accelerate the repayment obligation which would be objectionable even if creditor consent were forthcoming. There were also drafting issues that needed to be clarified. Accordingly, a further chambers hearing was scheduled for the following morning.

The third hearing : 8 September

28. At that hearing, the Official Receiver was unable to give the clarification sought, apparently because he had not read the agreement in detail. This was somewhat surprising since it was an agreement he was prepared to execute. Be that as it may, the Official Receiver was informed that because of the somewhat unusual provisions of the draft Funding Agreement, if he was minded to be party to it, he should only do so by making the draft Funding Agreement subject to the approval of the creditors as a condition subsequent. If the creditors' approval was not forthcoming, it would have to come to an end. The court also intimated that so far as the proposed "extraordinary" powers to be conferred on the special managers were concerned, the court would need to be satisfied that such "extraordinary" powers were justified and as matters then stood, it was not apparent why a wholesale delegation of the court's discretion to the Official Receiver was considered appropriate.

29. The Official Receiver then submitted that because of the high public interest in this liquidation, his office might come under pressure to issue a public statement about the status of the application which had been with the court for two weeks. For that reason he submitted that an order had to be made that day.

30. I did not and do not accept that it would be right for the court to make a decision on the application when relevant information was still outstanding. In that connection, the recipients of the letters sent out by the Official Receiver that morning pursuant to the court's directions of 7 September had not yet had time to respond. In the event of any Panel A member better qualified than the proposed special managers coming forward and willing to take up the appointment without up-front funding, that would be beneficial from the point of view of the general body of creditors. It would be a factor that would weigh with the court. That apart, the unusual entrenching provision gave rise to a sense of unease : for an office holder to be beholden to a particular creditor was a situation that was highly undesirable. All this coupled with the court's reservations as to the ability of the proposed special managers to lead and conduct this liquidation with unquestioned impartiality led to my refusal to take a decision at that point.

The fourth hearing - 12 September

32. On 11 September, the Official Receiver requested a further hearing which was fixed for the following day. A Third Report was filed shortly before the hearing which exhibited replies that had been received to the letter sent to the remaining Panel A firms on 8 September ("the 3rd Report").

33. The first part of the hearing dealt with matters arising from the draft Funding Agreement. For that purpose, Mr Bannister of Lovells who had drafted the document attended that part of the hearing. Lovells are the solicitors for SCB. For reasons which were not explained, they were also the Official Solicitor's agent "for certain purposes".

34. Mr Bannister accepted that from a drafting point of view, certain revisions were required. Mr Bannister further confirmed that as drafted, SCB would have total discretion over who the "Appointee" (broadly speaking the office holder in the liquidation) is to be. He stated that if someone from a firm other than Nelson Wheeler were appointed at any stage, SCB would have the right to withdraw funding. Nevertheless, it was Mr Bannister's understanding that SCB was not saying that it will not fund if a member of another firm is appointed. It was left that the matters clarified at the hearing would be confirmed in writing. It was also made clear that if the Funding Agreement were to go forward, containing as it does the entrenching provisions, it had to be made subject to creditors' approval.

35. So far as the powers sought were concerned, it transpired that they were not even drafted by the Official Receiver's Office. In their original form as presented to the Official Receiver's Office, presumably by those sought to be appointed special managers or on their behalf, the powers were to be exercisable without reference to either the Official Receiver or the court. I find it extraordinary and disturbing that the Official Receiver should align himself so readily with the wishes and interests of those anxious to promote the proposed appointments. The court reiterated its position that the wholesale delegation proposed was not acceptable.

36. The court then enquired as to the position of the other banks. Notwithstanding the oral indication from six of them as to their willingness, in principle, to contribute, no confirmation in writing had been forthcoming. The Official Receiver had no indication whether they also 'insist' on the proposed special managers being appointed. At any rate, it would not appear that the Official Receiver had taken any steps to ascertain their stance notwithstanding the terms of the court's letter dated 7 September.

37. Turning to the responses from Panel A members received as at 12 September, it was plain that three of the four firms who responded were not prepared to take up the appointment without the certainty of funding. As to the fourth, its position was not entirely clear and the Official Receiver was asked to clarify the position. The hearing was then adjourned sine die with liberty to restore.

38. So at the conclusion of the fourth hearing, a written confirmation relating to the issues arising from the draft Funding Agreement and clarification of the response from one of the Panel A members remained outstanding. Neither of those matters would have taken long to resolve.

39. Unexpectedly, nothing was heard for some two weeks. Then on 25 September the court received the Fourth Report ("the 4th Report").

The 4th Report

40. On 25 September, two weeks after the fourth hearing, the Official Receiver filed the 4th Report (erroneously intituled as the Fifth Report). It is necessary to quote this report in extenso :

"2. The current position in these matters is that 4 weeks have passed since the making of the Winding Up Order on 23rd August 2000, but no Special Managers have yet been appointed.

3. In my reports, and in my submissions before the Court, I have endeavoured to make it clear that I regard these matters as urgent. Akai is a listed company and Kong Wah has considerable business interests. There are also grave suspicions of asset stripping (which may be ongoing). Both cases are large and complex. It is important that the position is regularised in Hong Kong given that the primary listing of Akai and the places of business of both companies are located here. It is therefore in the interests of both the creditors and also the Public Interest that Special Managers be appointed at the earliest opportunity.

4. As was stated in the 2nd Report, paragraph 35, the ORO is neither staffed nor resourced to undertake the administration of these liquidations taking into account their size, complexity and multi-jurisdictional aspects."

Paragraphs 5 and 6 dealt with the "suitability" of the proposed special managers. Paragraph 7 dealt, inter alia, with two incidents concerning one of the directors of Nelson Wheeler (not being one of the proposed special managers) in his capacity as liquidator which I will deal with later. There followed the following paragraphs :

"8. I submit that the role of the Official Receiver under Section 216, Companies Ordinance, is to propose who should be appointed as Special Manager. The role of the Court is either to confirm such appointment (which should normally be a formality) or to refuse to do so, giving reasons for such refusal based on the evidence before the Court.

9. I submit that Section 216 confers on the Court no power to substitute another choice of Special Managers, nor to appoint anyone as Special Manager except on the application of the Official Receiver. While the Court does have the power under Section 216 to refuse to appoint the candidate selected by the Official Receiver, any such refusal must be made on judicial grounds:-

(1) giving due weight to the fact that the Official Receiver has made the application; and

(2) having given to the candidates concerned the opportunity to correct any misapprehension and if necessary to refute by evidence allegations which may affect them; and

(3) subject to appeal.

10. Any such refusal must be given in the form of a written decision together with reasons.

11. I sought such reasons at the hearings on 25th August 2000 and 8th September 2000. The latter request was followed by the Court's letter of the same date reminding me that it was 'incumbent on you to explain ... why your application is still under consideration by the Court'.

12. The Court will appreciate that the Official Receiver as the Public Officer charged with the supervision of matters relating to corporate insolvency, and operating a Government approved scheme, cannot conduct the duties of the office unless a reasoned decision based on the evidence before the Court is handed down.

13. I respectfully request the Court now give written reasons:-

(1) for its decision for or against my application to appoint Nelson Wheeler or practitioners of that firm as Special Managers in these cases; or, failing that

(2) for its decisions to adjourn these proceedings on 25th August 2000, 5th September 2000, 8th September and 12th September 2000."

Exception could well be taken to an officer of the court who is subject to its supervision and control rendering a report to the court in those terms. The implication that the court might act otherwise than on judicial grounds is discourteous and little short of an affront, unbefitting the holder of the office of Official Receiver. But I let that pass. The real issue which arises is one of law i.e. the scope of the court's jurisdiction when an application is made under section 216.

The court's jurisdiction

42. Section 216(1) reads :

" (1) Where the Official Receiver becomes the liquidator of a company, whether provisionally or otherwise, he may, if satisfied that the nature of the estate or business of the company, or the interests of the creditors or contributories generally or there are other grounds therefor, require the appointment of a special manager of the estate or business of the company other than himself, apply to the court, and the court may on such application, appoint a special manager of the said estate or business to act during such time as the court may direct, with such powers, including any of the powers of a receiver or manager, as may be entrusted to him by the court."

Even when read literally, section 216(1) does not have the meaning which the Official Receiver ascribes to it. I accept that unless and until an application is made by the Official Receiver for the appointment of a special manager, the court's jurisdiction under section 216 is not engaged. The application is for the appointment of "a special manager". In such applications, it is usual for the Official Receiver to put forward the name of the proposed office holder. The court's power under section 216(1) is to appoint "a special manager" on such an application being made. It is to be noted that the Ordinance does not seek to circumscribe the discretion vested in the court. It does not provide, for example, that the appointment, if made, could only be of the person proposed by the Official Receiver. As a matter of construction, it is not permissible to read into the provision the restriction suggested by the Official Receiver. The court's discretion is untrammelled so that if the person proposed was not suitable for whatever reason, some other suitable candidate could be appointed.

43. Even if I were wrong in the construction of section 216, the court has inherent jurisdiction to make such an appointment. This arises from the fact that supervision of the conduct of a liquidation rests with the court : that is the statutory scheme contemplated by the Companies Ordinance. If warranted by the circumstances of the case, the court may exercise its inherent jurisdiction to appoint someone other than the person proposed by the Official Receiver. For example, where the person proposed is unsuitable and the Official Receiver's Office does not have the resources to undertake the administration of the liquidations because of their "size, complexity and multi-jurisdictional aspects", the Official Receiver may not simply "withdraw" his application as was suggested in his 2nd Report : the interests of the creditors would require that someone suitable be appointed. In this connection, I do not consider that once an application has been made, it can be withdrawn without the leave of the court. The reason is that once the court's jurisdiction is engaged, then unless it is satisfied that any withdrawal would not adversely affect those who are interested in the liquidations, e.g. the creditors and/or contributories, to allow the withdrawal of the application would be an abnegation of judicial responsibility.

Paragraph 9(2) of the 4th Report

45. The suggestion that a practitioner whom the Official Receiver has nominated for appointment as special manager should have some locus to address the court is flawed. Such a practitioner has no standing to demand any such privilege. It is for the Official Receiver to make such application as he sees fit together with any information or submissions that are appropriate. If he fails to satisfy the court that a particular appointment is appropriate, no one else has any right to demand appointment. If there is any misapprehension, it would be as a result of failure to inform the court of relevant matters.

Paragraph 7 of the 4th Report

47. Quite why the Official Receiver saw fit in paragraph 7 of the 4th Report to refer to two incidents relating to one of the directors of Nelson Wheeler who is not one of the proposed special managers is unclear. Those incidents are irrelevant so far as the present application is concerned and it is unnecessary to say more about them save that the remarks made relating in particular to CWU No.655 of 1997 (Tai Hing (Engineers & Builders) Ltd) do not accurately portray what actually took place in that case, nor the issue which arose.

Conclusion

49. Although more than two weeks have elapsed since the fourth hearing, the Official Receiver has not provided the clarification sought in the 4th Report recently filed, or updated the court as to whether or not there have been further developments in the interim, for example, further responses from the remaining Panel A members, or clarified the stance of the other banks regarding the proposed special managers. For these reasons, I regard the application as still pending.

Panel A

50. The present liquidations have brought into sharp focus the deficiencies in the present administrative scheme. Why liquidation work involving companies with assets over $200,000 should be the preserve of a privileged few is difficult to fathom. The scheme as currently operated ensures that insolvency practitioners on the Panel A list (who come from a total of 14 firms) and no one else are appointed liquidators and special managers. That cannot be in the public interest.

51. As a matter of principle, I cannot see that an experienced solicitor is not qualified to take on the work. If I am not mistaken, the Official Receiver is himself a qualified solicitor. As a general rule, competition is likely to drive down costs and simultaneously raise standards. Where, as in most cases, accountancy services are required, the office holder would instruct accountants for that purpose in much the same way as currently solicitors are retained to advise on specific or general aspects of a liquidation. It is high time that this 'monopoly' is reviewed.

The 'nationality (by incorporation) principle'

52. It is perhaps timely for me to comment on what is sometimes known as the nationality (by incorporation) principle.

53. Hong Kong law following English law defers to the law of the place of incorporation of foreign companies as governing the attributes of a corporation. The nationality of a company is determined by its state of incorporation. Under this nationality (by incorporation) principle, the Companies are not Hong Kong companies but 'foreign' companies notwithstanding that their principal activities are not in the state of incorporation but in Hong Kong. In contrast, as explained in Ho on Public Companies and Their Equity Securities at 1051, under French law, the nationality of a company depends on the actual, not declared, situs of its siege social or executive head offices. In other words, the place of incorporation is not determinative of the company's nationality and governing law.

54. As is common knowledge, the majority of companies listed in Hong Kong are "foreign" companies. As at 31 December 1997, 3% of listed companies were incorporated overseas and truly foreign. 5.9% were incorporated on the mainland and 60.3% of companies listed on the SEHK were incorporated overseas but whose principal activities were in Hong Kong : see SEHK, Stock Exchange Fact Book 1997, at 126 cited in Ho on Public Companies and Their Equity Securities at 1005. Such companies (incorporated elsewhere but conducting its principal business in Hong Kong) are rightly described as "pseudo-foreign companies". By selecting the place of incorporation, local law can be avoided. Nevertheless, under the existing law applicable in Hong Kong, where a foreign company is being wound up in the place of incorporation, that foreign winding-up is "normally" regarded as the principal winding-up and the local winding-up as merely ancillary thereto. See Re Bank of Credit & Commerce International SA (No.10) [1997] Ch 213 at 246C. Applying that principle to the present facts, the Hong Kong liquidation would "normally" be regarded as ancillary to the Bermudan winding-up.

55. This raises the question whether it continues to be desirable for the "normal" rule referred to in the BCCI case to apply to such pseudo-foreign companies. Unlike the siege social approach, the nationality (by incorporation) principle does not reflect reality. Is it not time for legislative reform? See generally Ho on Public Companies and Their Equity Securities at 1055-6.

The Official Receiver

56. It is a matter of regret that I feel compelled to comment on the Official Receiver's conduct in this case.

57. The Official Receiver did not seem able to approach this application from a wholly impartial standpoint. Implicit from the rigid adherence to the Panel A roster is a reluctance to acknowledge the simple fact that not all Panel A members have the same insolvency experience or ability. Whilst they have all clocked up the necessary hours to qualify for admission to Panel A, it does not follow that they are all equally able. The circumstances of this case required a different approach.

58. Whilst the need for prompt action is appreciated and indeed the history shows that the Official Receiver's reports have received prompt attention in the form of immediate hearings, that need should not result in applications being made to court to approve appointments which would entail those responsible for the supervision of liquidation in signing documents the contents of which they are ignorant. Still less does it justify the Official Receiver on two occasions demanding that appointments be made immediately when the concerns of the court had not been addressed or answered.

Generally

59. The reasons for the present impasse appear from the account of the history of and developments in this application. SCB as well as such of the banks as are minded to contribute to the proposed funding should be invited to reassess their respective positions as regards their apparent preference for the proposed special managers.