THE JOINT AND SEVERAL LIQUIDATORS OF HONG KONG UNIVERSAL JEWELLERY LTD v. FU HAP ENTERPRISES LTD AND OTHERS

HCMP 807/2020

[2022] HKCFI 1062

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 807 OF 2020

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D E C I S I O N

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Introduction

1.  The Applicants are the Liquidators of Hong Kong Universal Jewellery Limited (“Company”), which is in members’ voluntary liquidation.  The Company previously carried on business trading and manufacturing high-end jewellery.  At the time it was put into liquidation it had substantial inventory, owned some real property and had significant cash. It has four members, who each own 25% of the Company’s shares and had a representative on the board.  They hold differing views on the best way of dividing the Company’s assets.  The 1^st and 2^nd Respondents having one common view.  The 3^rd and 4^th Respondents another common view.  On 9 June 2020 the Liquidators issued an originating summons pursuant to section 255 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap. 32 (“Ordinance”) with a view to obtaining the court’s assistance in deciding how the differences should be resolved.  The principle paragraphs of the originating summons are in the following terms:

“…the Applicant seeks the directions of the Court as to the following matters:-

1. The manner in which the valuable ornaments (as particularised in Schedule 1 hereto) and ordinary inventories (as particularised in Schedule 2 hereto) of the Company should be realised or distributed to the 1^st to 4^th Respondents;

2. The manner in which the property of the Company situated at 5/F, Lyndhurst Building, No. 25-41 Lyndhurst Terrace, Hong Kong should be realised or distributed to the 1^st to 4^th Respondents;

3. Whether (and, if so, the extent to which, i.e. after appropriate sums have been set aside for expenses) the cash balance of the Company in the sum of HK$65,179,692.72 (as at 24 April 2020, subject to variations as at the date of judgment or order to be made herein) should be distributed to the 1^st to 4^th Respondents.”

2.  This is not an appropriate way in which to frame an application for directions pursuant to section 255.  For reasons I explain below the originating summons should state precisely what directions the court is being asked to make.  This it fails to do.  I could not, for example, make an order in the terms of the originating summons.  What the Liquidators ask the court to order emerges from the supporting affirmation of one of the Liquidators, Chan Leung Lee, and the skeleton argument filed by counsel.  In the skeleton argument orders in the following terms are sought:

(1)  The Applicants be at liberty to distribute the Valuable Ornaments and Ordinary Inventories to the 1^st to 4^th Respondents in specie by putting them together, dividing them into four equal parcels (or as equal as possible) according to 26% of their tag prices, and distributing the four parcels to the 1^st to 4^th Respondents by ballot.

(2)  The Applicants be at liberty reallocate the items in different parcels in order to minimise any difference in value between the parcels.  Any remaining difference will be compensated by appropriate adjustment to the final distribution of the cash balances of the Company.

(3)  The Applicants be at liberty not to make an interim distribution of the cash balance of the Company of HK$60,801,269.85 or to make no order as to the distribution of the said cash balance.

3.  The Valuable Ornaments are identified by a photograph in Schedule 1 to the Originating Summons, in the case of the more valuable items, and by description in the lengthy Schedule 2.  The Liquidators’ position in respect of the real property is unclear.  All that is said in their skeleton argument is this: “In respect of the Real Property Issue, R3/R4’s original proposal (i.e. distributing the Real Property, plus 3 other properties held by other companies that were owned in equal shares by Rs, by ballot to Rs) raises the question of whether it was legal and/or proper for the Applicants to deal with assets not belonging to the Company during the liquidation”.

4.  The 1^st and 2^nd Respondents contend that:

(1)  No order should be made in respect of the Valuable Ornaments.

(2)  Interests in real property be assigned to the Respondents as tenants in common.

(3)  There should be no distribution of cash.

5.  The 3^rd and 4^th Respondents contend that:

(1)  There should be no distribution of the Valuable Ornaments, alternatively a proposal for how they should be divided up.

(2)  The interests in real property be assigned to the Respondents as tenants in common.

(3)  There should be no distribution of cash.

It is puzzling why after the Applicant’s skeleton argument had been filed the parties could not agree the way forward.

6.  As I have already indicated the way in which the application has been formulated its misconceived as is the way to which it has been responded.  The following relevant principles appear to have been overlooked.

The circumstances in which a liquidator can seek the court’s directions

7.  Section 251 contains the powers and duties of a liquidator in a voluntary liquidation.  Sub-section 251(1)(b) allows a liquidator in a voluntary liquidation to exercise all the powers of a liquidator in a compulsory liquidation other than those specified in Part 1 of Schedule 25 without sanction.  Schedule 25 Part 3, paragraph 1 allows a liquidator to “Sell the real and personal property and things in action of the company by public auction or private contract, with power to transfer the whole of the property and things in action to any person or company, or to sell them in parcels.”

8.  Section 255(1) and (2) provides:

“(1) The liquidator or any contributory or creditor may apply to the court to determine any question arising in the winding up of a company, or to exercise, as respects the enforcing of calls, or any other matter, all or any of the powers which the court might exercise if the company were being wound up by the court.

(2) The court, if satisfied that the determination of the question or the required exercise of power will be just and beneficial, may accede wholly or partially to the application on such terms and conditions as it thinks fit, or may make such other order on the application as it thinks just.”

9.  In [19]–[24] of Re A Company (Liquidators: Cowley and Lui)[1] I explain that a liquidator cannot use section 255 to seek the endorsement of the court to a proposed course of action simply because he is uncertain about its appropriateness:

“19. Although the Ordinance gives a liquidator the right to seek directions from the court, this does not mean that the liquidator can ask the court to approve any decision he is contemplating because the liquidator is uncertain about its appropriateness. Schedule 25 sets out those powers that a liquidator may exercise. The extent to which they require prior sanction by a committee of inspection or the court varies depending on whether the liquidation is compulsory or voluntary, but at least in the case of Part 3, a liquidator in both types of winding-up may exercise the extensive powers without having to obtain prior approval [2]. This demonstrates (as does ss200(4)) that the liquidator is to conduct a liquidation exercising their own professional expertise and judgment. It is clear from the authorities that, for example, a liquidator cannot properly seek a direction, which involves asking the court to approve what is largely a matter of commercial judgment. The principal reason for this is that judges are generally not well placed to make judgments about what is in somebody else’s best commercial interests. As Street CJ observes in Re Mineral Securities Asia Ltd (in liq) [3].

‘When the court is required to pronounce upon the commercial prudence of a transaction it enters upon a slippery and uncertain field. Apart from the lawyers, disclaimer of expert qualifications in matters of business prudence, the very process of litigation and the necessary limitations upon the scope of admissible evidence, restrict the available material to far less than is necessary for the making of a commercial decision.’

20. This echoes the oft quoted observation of Lindley LJ in a different, but analogous, context in Re English Scottish & Australian Chartered Bank [4]that creditors acting on sufficient information and with sufficient time to consider a decision are much better judges of what is to their own commercial interest than a court can be.

21. The extent to which it is the intention of modern common law insolvency regimes that liquidators are so far as possible left to conduct liquidations without close supervision by the court is demonstrated by the court’s approach to attempts to interfere with a liquidator’s decision. The court will not do so unless it can be demonstrated that the liquidator has not acted in good faith, made an error of law or principle or the decision is perverse in the sense of falling outside the range of decisions a liquidator having proper regard to the relevant principles might make [5]. A liquidator’s decision is broad and intentionally so. It follows from this that a decision which comes within this broad discretion, particularly if the decision is commercial in character, not only does not require the approval of the court, but also generally will not be amenable to a direction approving it.

22. A direction must require something other than a general endorsement of a proposed course of action. Normally, it will require the formulation of a precise issue. The issue will commonly be legal and of significance. Even if the issue is not purely a question of law it must call for the exercise of some legal judgment [6]. If it does not, then it will be a matter which a liquidator is able to decide himself and a court will be in no better position to express a view. In Re The Bell Group Ltd (in liq) [7] Hasluck J (citing Re Newtronics Pty Ltd; Ex parte Steward)[8] explains that it is role of the court to grant or deny approval to a liquidator’s proposal. I would put it slightly differently. The role of the court is to determine the issue raised by the direction that is sought. Hasluck J goes on:

‘57. The principles applicable to an application under s 477(2B) were reviewed by Gordon J in Re Newtronics Pty Ltd; Ex parte Stewart [9]. The role of the court is to grant or deny approval to the liquidator’s proposal. Its role is not to develop some alternative proposal which might seem preferable. Further, the task of the court is not to reconsider all of the issues which have been weighed up by the liquidator but simply to review the liquidator’s proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself that there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the expeditious and beneficial administration of the winding up.

58. It was said further in that case that the court’s approval is not an endorsement of the proposed agreement but is merely a permission of the liquidator to exercise his or own commercial judgment in the matter. It follows from these precepts that, in my view, as indicated by the reasoning in Brown v DML Resources Pty (in liq) (No 7) [10], it is not necessary for notice of the present ex parte application to be given to the defendant banks or other actual or prospective creditors, with a view to affording them an opportunity to be heard, because the directions and orders applied for do not purport to determine the matters in issue. The effect of the directions procedure is to protect the liquidator against any possible allegations of breach of duty: McPherson: The Law of Company Liquidation (4^th ed) at 352 to 355.’

23. I agree that it is not for the court to develop alternative proposals if unhappy with what is proposed by the liquidator, but depending on the issue it may be appropriate for the court to suggest changes to a proposed course of action, which would change what the court might take the view is problematic into something acceptable. In so far as the final sentence of the passage I have quoted tends to suggest that the court can be asked to review generally a proposed cause of action, I would, with respect, differ. As I have explained in the previous paragraph, in my view what is necessary is the formulation of an issue or issues, which require a legal judgment. This does not mean that by identifying within a broad issue a legal component a liquidator can legitimately ask the court to determine the broad issue if for the most part it has no legal component. For example, in the present case the direction as originally framed asked the court whether it was appropriate for the Company to enter the 47-page funding agreement and to approve the agreement. Even if within that broad issue it was possible to identify a legal issue, it was not an appropriate way to formulate the relief. What was required was the identification of, for example, a provision within the agreement about which the liquidators had some concerns and wanted the court’s view as to whether it was, for example, lawful. As it transpired the issue that required determination was whether or not it was necessary to obtain the court’s sanction before causing the Company to enter the funding agreement. That clearly was a legal issue and suitable for consideration by the court.

24. I would anticipate that formulating directions in the manner I have described will help focus minds on what the real issues of concern are, which will be helpful to liquidators and assist the court in helping them resolve those concerns.”

10.  None of the counsel before me have cited this authority.  If a liquidator wishes to seek a direction from the court it should be clearly formulated in the originating summons and arise from an issue that satisfies the criteria explained in Re A Company.  The Liquidators cannot ask for advice, particularly on what is a commercial matter, or ask the court to resolve a difference of opinion between the liquidator and contributories.  The originating summons is clearly defective.  There is justification for simply dismissing it.

Weight to be given the liquidator’s views

11.  The other principle that is relevant is that the court is slow to interfere with a liquidator’s decision.  This is referred to in [21] of the above quote from Re A Company.  Additional local authority is to be found in the judgment of Cheung JA in Allied Ever Holdings Limited v Li Shu Chung[11]:

“5.2(4) In reviewing the liquidators’ exercise of their discretion under section 200(5) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), the court will interfere only in two categories of case. ‘[First] to bring itself within this sub‑section, an applicant has to show exceptional behaviour e.g. that the liquidator “has not exercised his powers in good faith or has acted in a way in which no reasonable liquidator could have acted” … The second category arises when in the course of his administration the liquidator is called upon to give a ruling or to make a decision which directly affects a party’s rights. … They include such matters as decisions upon the voting rights of creditors or contributories and upon the admission and rejection of proofs. It is significant that when considering and ruling upon such matters the liquidator must act even‑handedly as an impartial neutral’ (Eagle Queen Co Ltd v First Bangkok City Finance Ltd [1989] 2 HKLR 71 (CA), per Hunter JA [74]). In considering whether to review a decision of a liquidator a court must bear in mind the fact that it is well established that the commercial decisions of liquidators are accorded great weight (McPherson & Keay, [9‑115, 9‑116]; Judd v Brown [1999] 1 FLR 1191 (CA), 1198).”

12.  I note that section 200(5), which allows a person with adequate interest to apply to court to reverse a decision made by a liquidator, is in Division 2 of Part 5 of the Ordinance, which applies to a winding up by the court.  However, these principles are of general application to any consideration of a liquidator’s decision or conduct.  It follows that a contributory cannot interfere with a bona fide decision, which falls within the range of decisions that a liquidator might make.  The fact that the contributory thinks there is a better decision that might be made is not a ground for challenging a liquidator’s decision.

The consequences of these principles

13.  The consequence of these principles are that:

(1)  A liquidator must when seeking a direction pursuant to section 255 formulate a proposed decision or question, which the court is asked to approve or determine.  It is not permissible or appropriate to simply ask for unspecified directions.

(2)  If what is sought, is the court’s endorsement of a proposed course of action the court will approve it unless it is demonstrated that it has not been made bona fide or that it is one that no reasonable liquidator should make after proper consideration of the relevant facts and matters.

(3)  An application of the present sort is not an opportunity for the different contributories to argue for an alternative course of action.  They should only actively participate (as opposed to stating that they agree or are neutral) if they are objecting and that should only be done if there are grounds to challenge the liquidators’ bona fides or the rationality of the decision.  Section 255 applications are not an opportunity for a contributory or creditor to lobby the court for a different decision.

14.  As I have said it is unfortunate that none of the parties seem to have been alive to these principles and their implications. The 1^st and 2^nd Respondents have simply argued for an alternative course to that proposed by the Liquidators.

Determination

15.  It appears that none of the members currently want the Valuable Ornaments disposed off or the cash distributed.  They do, however, agree that the real property should be distributed equally to them as tenants in common.  It is not clear from the Liquidators’ skeleton what they propose.

16.  In the circumstances I will adjourn the originating summons in order for the Liquidators to determine what, if any, any order they now need.  As I have explained to the extent that the Liquidators’ views differ from the Respondents the court will defer to the Liquidators unless the criteria explained above are satisfied, which in practice means I do not expect the Respondents to contest any directions that are required in respect of outstanding matters.  So far as the costs are concerned it seems to me that as the application has not been thought through properly the appropriate order is to make a costs order nisi that there be no order as to the costs of the originating summons up to and including 1 April 2022.