RE FAI FIRST PACIFIC INSURANCE CO LTD

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NOS. 337, 338, 339 AND 340 OF 2001

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RULING

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1. On 9 April of this year, the four companies which are the subject of this ruling were placed into provisional liquidation. The companies ('the HIH Group') were part of a large Australian group of insurance companies ('HIH Australia') which had earlier fallen into difficulties and which, I am told, have now been wound up.

2. Other than HIH Holdings (Asia) Limited, the HIH Group were all authorized insurance companies operating in Hong Kong and conducted their business subject to the provisions of the Insurance Companies Ordinance, Cap.41, and the regulations and directions of the Commissioner of Insurance.

3. In light of the grave difficulties faced by HIH Australia, on 2 April of this year the Commissioner of Insurance exercised his powers in terms of section 35(2) of the Insurance Companies Ordinance to appoint two managers to manage the affairs, business and property of the HIH Group. The managers conducted a review and determined that the companies within the HIH Group were insolvent as that term is contemplated in section 42 of the Insurance Companies Ordinance. It was the managers, therefore, who presented the various petitions for winding-up and who have been appointed provisional liquidators.

4. Consequent upon their appointment, the provisional liquidators have been able to determine that the HIH Group has debts of about one billion Hong Kong dollars. However, contingent liabilities unique to the business of insurance make it difficult at this time to estimate with any degree of certainty what the final indebtedness of the HIH Group will be. The provisional liquidators have moved, of course, to collect and preserve the assets of the HIH Group and estimate that to date they have been able to realize some two thirds of the assets, the total estimated assets being in the region of three hundred million Hong Kong dollars.

5. In considering how best to secure the interests of creditors, the provisional liquidators have concluded that a scheme of arrangement should be developed pursuant to section 166 of the Companies Ordinance, Cap.32. In a detailed report dated 5 December of this year, the provisional liquidators have summarized the advantages of a scheme in the following broad terms:

6. Suffice to say that the Commissioner of Insurance has been kept informed of the provisional liquidators' plans to develop a scheme and has no objection to that procedure. In short, on the information presently available, the Commissioner accepts that a scheme may well be in the interests of creditors. It should be said that the Official Receiver too accepts that a scheme of arrangement may well be the best way forward.

7. However, because of the complexity involved, the provisional liquidators anticipate that it will take them approximately six more months to be in a position to present a scheme of arrangement for approval.

8. The matter to be determined in this ruling is whether the companies in the HIH Group should remain in provisional liquidation while the scheme is prepared and then presented for approval or whether they should be placed into liquidation.

9. The provisional liquidators propose that the companies should remain in provisional liquidation. In their opinion, remaining in provisional liquidation will avoid additional administrative procedures which will have to be completed at considerable cost and will in addition avoid the inevitable delays that liquidation will bring about.

10. As for the additional costs of placing the HIH Group into liquidation and thereafter proposing a scheme of arrangement, it is agreed between the parties who have appeared before me that these additional costs will, at the end of the day, come to something like five or six million Hong Kong dollars. When set against estimated realizable assets of some three hundred million dollars, this may not appear to be a material sum. But it must, of course, be considered in the light of the diminution of distribution payments made to creditors. In that light, I believe it is a tangible sum, certainly one worthy, if appropriate, of preserving for the benefit of creditors.

11. In respect of delay, if matters proceed smoothly in the liquidation, I am told that the delay in bringing a scheme of arrangement before the court after the liquidation of the HIH Group need be no more than six weeks or so. Again, in the overall scheme of things the provisional liquidators accept that such a delay may not seem significant. But it is another delay; creditors are to be kept waiting longer in order to receive funds under an anticipated scheme of arrangement which will, whether the Group goes into liquidation or not, remain essentially the same.

12. Should this Court agree to a further six month adjournment, the provisional liquidators estimate the following to be a rational timetable :

13. Of course, the provisional liquidators have no power to make distributions to creditors. For this to be done, either the companies in the Group will have to be in liquidation or a scheme of arrangement will have to be approved. However, the provisional liquidators report that they will not be in a position to begin making distributions until considerable more work is done. Remaining in provisional liquidation will not, therefore, cause prejudice by delay to creditors; indeed, as I have said, the opposite is anticipated.

14. Provisional liquidation is, of course, intended to be a temporary state of affairs. Once in liquidation the wishes of the creditors can be given voice and must be acted upon. But the provisional liquidators emphasise that they have at all times been in consultation with a committee of creditors. In this regard, the report of the 5 December states :

"There were a large number of policyholders and third parties involved in the operations of the Insurers and we have sought to obtain their views and report on the affairs and progress through the formation of an informal consultative committee of significant creditors and interested parties....."

15. On 28 November of this year, the provisional liquidators gave a presentation to the committee of creditors outlining the proposed scheme of arrangement. The report records that there was a 'general consensus' that such a scheme would be more beneficial than the traditional path. On-going consultations with the committee of creditors is an informal arrangement. Nevertheless it is of significance, in my view, that creditors have been given a voice, if only in limited numbers and informally.

16. On 21 November of this year, the provisional liquidators met with the Commissioner of Insurance. In the result, the Commissioner has raised no objection to a six month extension of the provisional liquidations : a matter confirmed by the Commissioner's counsel at the hearing.

17. While the Official Receiver is concerned that a further lengthy extension of the provisional liquidations will offend the intent and spirit of the statutory scheme for company liquidations, it does not actively oppose the proposals for an extension. In substance, as I understand it, the Official Receiver is concerned, however, that a continuation of the provisional appointments, while constituting a departure from the procedure contemplated by the statutory scheme and perhaps setting an unfortunate precedent, may offer little material benefit to creditors.

18. As to the benefits of a continuation of the provisional appointments, I am satisfied, for the reasons already given, that there will be a tangible saving in costs and some saving in time. Both those savings will benefit creditors.

19. I accept that in the ordinary course of events prolonged periods of provisional liquidation are not to be encouraged. But flexibility is built into the statutory regime and there must be occasions when the employment of that flexibility will benefit creditors.

20. In the present case, I can divine no prejudice to creditors. The time requested is finite and rational given the complexity of the task facing the provisional liquidators. I also take into account the specialized business of the HIH Group and the constraints that places upon the provisional liquidators.

21. Mr Harris, on behalf of the provisional liquidators, has referred me to the fact that in other jurisdictions ---- in respect of insurance companies ---- the procedures contemplated by the provisional liquidators have received the endorsement of the courts. In this regard, Mr Harris has made reference to the work of Gabriel Moss QC, Cross Frontier Insolvency Companies, where on page 11 the author says:

22. In Re English & American Insurance Co. Ltd [1994] 1 BCLC 649, Harman J said of the appointment of provisional liquidators:

"That is all part of the developing practice of the Court of using a petition by the Company for its own winding-up as the basis for the appointment of provisional liquidators. That practice has been developed to mitigate the difficulties caused by the fact that administration procedures are not available in respect of insurance companies .... It seems to me a useful practice and I do not wish in any way to cast doubt or discredit upon it. It is a good system in particular .... where there is hope that there will be a scheme of arrangement under Section 425 of the Companies Act 1985 in the future."

23. The 'administration procedures' referred to by Harman J are not available in Hong Kong in respect of companies whatever the nature of their business. In respect of insurance companies, therefore, both England and Hong Kong must look to mitigate the difficulties that such absence may cause.

24. More recently, in Re Hawk Insurance Company Ltd [2001] 2 BCLC 480 the English Court of Appeal acknowledged that the procedure approved of by Harman J was a simple, inexpensive and expeditious way of winding up the company without resorting to a formal liquidation.

25. It is apparent, therefore, that the procedures which the provisional liquidators in the present case seek to employ have been tested in other jurisdictions and found acceptable; they are not making an untried leap into the dark.

26. In all the circumstances, I am satisfied that a further adjournment of six months should be granted. There will be an order to that effect.