THE JOINT AND SEVERAL LIQUIDATORS OF STARBAY INTERNATIONAL LTD (IN CREDITORS’ VOLUNTARY LIQUIDATION) v. THE OFFICIAL RECEIVER

HCMP 248/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 248 OF 2011

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BETWEEN

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J U D G M E N T

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1.  This is an application by the Joint and Several Liquidators of Starbay International Limited (“the Company”), pursuant to section 255 of the Companies Ordinance, seeking the Court’s determination of the question whether certain ad valorem fee is payable to the Official Receiver pursuant to the Companies (Fees and Percentages) Order (“the Fees Order”) in respect of the realisation of the Company’s assets prior to 15 July 2010.

Background

2.  The resolution of this matter will essentially turn upon the interpretation of the provisions of the Companies Ordinance (“the Ordinance”).  Before I deal with the relevant provisions, it may be convenient first to set out the background leading to the present application.

3.  The petition to wind-up the Company was first filed by a contributory on 28 October 2009.  This was subsequently followed by another petition by a creditor of the Company.  Provisional liquidators were appointed on 3 November 2009. 

4.  Following their appointment, the provisional liquidators took steps to dispose of certain core assets of the Company.  The Court’s sanction was obtained on 5 January 2010 for the realisation of the assets and eventually their disposal had brought in a significant sum of $12 million in the Company’s liquidation.

5.  On 25 February 2010, the Court ordered the winding-up of the Company.

6.  On 1 April 2010, the provisional liquidators filed an application, pursuant to section 209A of the Ordinance, for an order that the compulsory liquidation of the Company be henceforth conducted as a creditors’ voluntary winding-up.  (For convenience, it will be referred to as an application for conversion.)  The purpose of the application, as was explained in the supporting affidavit, was to avoid payment to the Official Receiver of the scale fees otherwise exigible pursuant to the Fees Order. Paragraph 16 of the supporting affidavit explained the purpose as follows:

“16. The Application is made because, by converting to a creditors’ voluntary winding-up, the Company can avoid payment to the Official Receiver of the scale fees set out in the Companies (Fees and Percentages) Order. Given the size of realisations in this matter, such a payment to the Official Receiver would lead to a significant reduction of approximately HK$637,120 in the funds available for distribution to the creditors of the Company. Allowing the Application will lead to an increased dividend, which is clearly in the interest of the creditors. In addition to the sum of HK$12,000,000 already realised, the future realisations are expected to be in the range of HK$3,105,105 being accounts receivable due from associated companies.”

7.  As is provided in section 209A(7), the Official Receiver has a right to be heard on the application and may support or oppose it.  Quite properly, the provisional liquidators had served the application and supporting documents on the Official Receiver. 

8.  In the meantime, the provisional liquidators were appointed as the joint and several liquidators of the Company (“the Liquidators”) on 7 June 2010.

9.  Just over a week before the hearing, the Official Receiver filed a report in response to the application.  In the report, the Official Receiver specifically referred to the $12 million collected by the Liquidators on realisation of the Company’s assets.  Apart from the observation that the sum was required to be deposited by the Liquidators into the Companies Liquidation Account, the Official Receiver had expressed no other substantive comments on the application for conversion to a creditors’ voluntary winding-up.  It is noteworthy that the Official Receiver did not raise any issue as to the purpose of the application, namely, the saving of the scale fees otherwise payable to the Official Receiver.

10.  Shortly before the hearing, the Liquidators also sent their written submissions to the Official Receiver, which again contained an explanation that the purpose of the application was to save on the fees otherwise payable to the Official Receiver.  The submissions similarly mentioned that the fees estimated to be saved would likely exceed $637,000.

11.  The Official Receiver indicated again that he had no comment on the application.

12.  On 15 July 2010, the Court granted the Liquidators’ application for conversion. 

13.  There is no dispute before me that one of the consequences of the conversion is that any assets realised after 15 July 2010 would not attract payment of the scale fees under the Fees Order.  However, the Liquidators and the Official Receiver are divided on the question whether the Official Receiver is entitled to the fees relating to the pre-conversion realisations.

The ad valorem fees

14.  Section 209B provides for the consequences of the making of an order to convert a compulsory liquidation into a creditors’ voluntary winding-up.  Sub-paragraph (d) of section 209B provides that:

“(d) ...... any charges or expenses due and payable under section 296 ...... up to the date of the order made under section 209A shall be paid forthwith out of the assets of the company in priority to all other claims” (emphasis added)

15.  For the present purpose, the relevant charges or expenses payable under section 296 are those which the Chief Justice, by virtue of section 296(3), had directed to be payable under the Fees Order.  In particular, paragraph 7(2) of the Fees Order provides that:

“(2) The percentages prescribed in number I of Table B of Schedule 3 shall be paid by a liquidator upon submission of his accounts to the Official Receiver under section 203, ......” (emphasis added)

The said Table B in turn prescribes the level of fees payable in respect of the amount of assets realised, which is a descending scale of percentages beginning with the highest rate of 10% on the first $500,000 (or fraction thereof) to the lowest of 1% in respect of any amount exceeding the $50 million bracket.

16.  In the present application, Mr. Maurellet (appearing for the Liquidators) emphasised that the ad valorem fee was, according to paragraph 7(2) of the Fees Order, only payable upon submission of the Liquidators’ accounts under section 203.  Section 203 of the Ordinance and rule 162 of the Companies (Winding-up) Rules are respectively in the following terms:

“203 (1) Every liquidator ...... of a company which is being wound up by the court shall, at such times as may be prescribed but not less than twice in each year during his tenure of office, send to the Official Receiver, an account of his receipts and payments as liquidator.”

“162 (1) The liquidator shall, at the expiration of 6 months from the date of the winding up order, and at the expiration of every succeeding 6 months thereafter until his release, transmit to the Official Receiver a copy of the Cash Book for such period in duplicate, together with the necessary vouchers and copies of the certificates of audit by the committee of inspection. ...... the liquidator shall also at the end of every 6 months forward to the Official Receiver, with his accounts, a report upon the position of the liquidation of the company in such form as the official Receiver may direct.”

17.  Mr. Maurellet argued that since the date of the winding-up in this case was 25 February 2010, if there had not been a conversion to creditors’ voluntary liquidation, the Liquidators would only be required to submit their accounts to the Official Receiver 6 months thereafter, that is, 24 August 2010.  It follows, so the argument goes, that when the Court granted the conversion order on 15 July 2010, the payment mechanism stipulated in sub-paragraph 7(2) of the Fees Order was yet not triggered in respect of any pre-conversion realisations.  Mr. Maurellet further submitted that the use of the words “charges or expenses due and payable” rather than “charges and expenses accrued” in section 209B(d) makes it clear that the draftsman did not intend for accrued ad valorem fees which had not become due and payable to be paid on the making of a conversion order.

18.  I see some attraction in the simplicity of Mr. Maurellet’s argument.  However, on further reflection, I do not think that the simplistic approach offers the correct interpretation to the various provisions of the Ordinance and the Fees Order. 

19.  The background leading to the enactment of section 209B is set out in the Sixth Report of the Standing Committee on Company Law Reform prepared in 1989.  The Official Receiver had identified a few difficulties with the working of the then section 209A, which was a section in relatively simple terms.  One of the main concerns was the adverse impact on the finance of the Official Receiver’s Office resulting from such conversions.  It was thought that because in most cases the Official Receiver would only be remunerated by way of percentages of the recovered assets at the end of the liquidation when much of the work would have already been carried out, the financing of his office would be seriously prejudiced if applications for a section 209A conversion were made at the final stages of the liquidation with the consequence of denying the Official Receiver of his remuneration.  Even though in such situations, the Official Receiver could still have recovered his costs on a time-cost basis, the Official Receiver considered that the introduction of a time-costing system in every liquidation to cater for the eventuality of a late conversion would be an onerous and unwelcome administrative burden.

20.  To address that concern, a 3-month time limit was imposed under the 1990 amendments on the making of applications for section 209A conversion.  Section 209B(d) was also enacted to make it clear that any charges and expenses due and payable up to the date of the conversion (which would include charges provided in the Fees Order) would not be defeated. 

21.  Are the fees prescribed in Table B of Schedule 3 of the Fees Order due and payable at or before the date of the conversion order?  I think they are.

22.  Section 296(3) begins with the words “There shall be paid ...... such fees ..... etc.”  By the same section, the Chief Justice was empowered to specify the nature of the fees to be paid, the persons to whom the liability attaches and the manner of collection of such fees.  In my view, section 296(3) serves both the purpose of imposing the liability to pay the relevant fees as well as being the source of the Chief Justice’s rule-making power.

23.  Paragraph 7 of the Fees Order, on the other hand, is the resultant direction from the Chief Justice.  Sub-paragraph (1) provides that the relevant fees are to be taken in money, and sub-paragraph (2) identifies the person on whom the liability for payment is imposed (that is, the liquidator) and the manner in which such fees are to be paid (that is, when the accounts are submitted under section 203).  It is clear, in its proper context, that sub-paragraph (2) is concerned with the timing of the payment of the fees, which is essentially a matter of the mechanics of the collection of such fees.

24.  I agree with the submissions of Mr. Bartlett (appearing for the Official Receiver) that as soon as the assets of the Company are realised, the liability to pay the scale fees arises under section 296(3).  It would be wrong to elevate the collection and timing mechanism set out in paragraph 7(2) of the Fees Order as if that provision were the primary source of obligation for payment with the result that no liability to pay the relevant fees would arise until submission of the liquidators’ accounts. 

25.  Mr. Bartlett further drew attention to section 202(1) and (2) which impose an obligation on liquidators to pay the monies realised in the winding-up into the Companies Liquidation Account (the Account being under the control of the Official Receiver by virtue of section 293) either forthwith upon receipt (save in the case of small liquidations) or as directed by the Official Receiver.  The obvious intention is that the Official Receiver should have immediate control over the monies so realised and in the circumstances the realisation would immediately attract the ad valorem fees under section 296(3) and the Fees Order.  I do not see any compelling reason to ascribe to the legislature an intention to defer the imposition of liability for the scale fees until the submission of the section 203 accounts. 

26.  Furthermore, the heavy reliance by the Liquidators on the words “upon submission of his accounts .... under section 203” in paragraph 7(2) of the Fees Order does not really assist them.  While it is true that the combined effect of section 203 of the Ordinance and rule 162(1) of the Winding-up Rules would normally allow the liquidators 6 months after the winding-up order to submit their accounts, it does not necessarily follow that the timing could not be accelerated in special circumstances.  Indeed, as pointed out by Mr. Bartlett, there are provisions in the Ordinance and the Rules providing for acceleration of submission of accounts: see section 203(3) and (3A) of the Ordinance, and rules 162(2) and 167(1) of the Winding-up Rules. 

27.  In this connection, as Mr. Bartlett submitted, it would make little sense to require final accounts to be prepared in advance of the hearing for conversion, not knowing whether the Court would in fact grant the application.  Also, monies from realisations could still come in any time before conversion is granted.  Practically, therefore, final accounts in cases of conversion would only be produced post-conversion.  It would be inconceivable that the legislature intended that the conversion would have the effect of obviating the liquidators’ duty to submit final accounts.  To the contrary, accounts made up to the date of the order should be prepared: see section 209B(e). 

28.  In short, I do not find any support for the Liquidators’ argument that the scale fees did not become payable because of the intervention of a section 209A conversion before the expiry of the 6-month period allowed for rendering final accounts. 

29.  My view of the construction of the relevant provisions is reinforced by the observation of Le Pichon J. (as her Ladyship then was) in Re Peregrine Fixed Income Ltd. (in liq) [1999] 2 HKLRD 653. That case concerned how the list of factors under section 209A(2) should be considered in a conversion application.  In the course of her judgment, the learned judge said at p.655:

“In addition, there is a fee payable on the aggregate amount of assets realised which is based on a sliding scale. As at 17 July 1998, a total of $2,174,490,832 have been realised, and fees on this amount have already been incurred under Sched.3, Table B. ......” (emphasis added)

Legitimate Expectation

30.  As I understand Mr. Maurellet’s argument, the Liquidators accept that the present application is not a judicial review and they are not contending that the Official Receiver should be precluded from claiming the ad valorem fee by application of the principles of legitimate expectation.  Instead, the Liquidators contended that the circumstances of the present case are such that they had a legitimate expectation that the Official Receiver would share their view that no ad valorem fee would be payable, and that fairness would require the Official Receiver to give effect to that expectation by exercising his discretion to reduce or waive the fees under paragraph 9 of the Fees Order which provides:

“(9) ..... where for any ..... reason the Official Receiver satisfies the court that the fees or percentages in Table B in Schedule 3 would be excessive, such reduction may be made in the said fees or percentages as may, on the application of the Official Receiver, be sanctioned by the court.”

31.  It was argued that the lack of any substantive objection to the application for conversion when the Official Receiver was clearly told that the purpose of the application was to save on the ad valorem fee payable to the Official Receiver gave rise to the legitimate expectation as contended.

32.  I would accept that if the supporting affidavit had been considered and analysed carefully, it ought to have been apparent to the Official Receiver that the expected future realisation of some $3.1 million could not have yielded a saving of some $600,000 in fees (given that the maximum percentage on the sliding scale was only 10% of the amount realised).  The Official Receiver should have noticed that the purported savings could not be referable solely to the expected post-conversion realisations.  There is no explanation as to why the handling officer at the Official Receiver Office had not sought clarification.  In the circumstances, the lack of any substantive objection from the Official Receiver would, justifiably in my view, lead the Liquidators to believe that the Official Receiver also shared their view that fees relating to pre-conversion realisations could be saved and made available for distribution. 

33.  That said, however, I see no basis for the Court to compel or even invite the Official Receiver to exercise his discretion as contended.  Despite the views I have expressed in the preceding paragraph, the discretion whether or not to ask the Court to sanction a reduction of the fees remains with the Official Receiver and I do not believe it is right for me to usurp the powers of the Official Receiver. 

Conclusion

34.  For the foregoing reasons, my answer to the question posed in the Originating Summons is that the ad valorem fee in respect of the realisation of the assets of the Company up to 14 July 2010 is payable to the Official Receiver. 

35.  I would make an order nisi that the costs of and occasioned by this application be treated as costs and expenses in the liquidation of the Company.