RE MF GLOBAL HONG KONG LTD

HCCW 356/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 356 OF 2011

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AND

HCCW 357/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 357 OF 2011

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REASONS FOR DECISION

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1.  On 2 November 2011 I appointed provisional liquidators over MF Global Hong Kong Ltd and MF Global Holdings HK Ltd. I wound up these 2 companies on 11 January 2012. The provisional liquidators continue in office by virtue of section 194(1)(aa) of the Companies Ordinance.

2.  By a summons issued on 20 January 2012 the provisional liquidators seek orders relating to payment of their fees and expenses.  In broad terms they seek the court’s approval for payment of each of the following:

(1) Fees incurred by the companies prior to 2 November in (a) instructing accountants (KPMG) whose staff subsequently became provisional liquidators and (b) instructing solicitors who have subsequently been instructed by the provisional liquidators (Linklaters).

(2) An interim payment in respect of the provisional liquidators’ fees and their expenses incurred in collecting in and dealing with the companies’ clients money.  This payment to be payable out of the clients’ money collected.

(3) An interim payment in respect of the fees and expenses of the provisional liquidators incurred in carrying out their duties (other than those incurred in connection with the collection of clients’ money) as provisional liquidators since 2 November 2011.

3.  The principles that apply to each of these categories are well established.  In the first case what is sought is approval under section 182 of the Companies Ordinance in order to avoid payments made after presentation of the petition being void. The court will grant such approval if it is satisfied that such costs have been incurred in the bona fide interests of the creditors of the company as a whole: Re Legend International Resorts Ltd [2007] 3 HKC 456 – see §§12-13; Re S A & D Wright Ltd, Denney v John Hudson & Co Ltd [1992] BCC 503 – see 504G-505F, 506D; Re  Luen Cheong Tai [2004] 1 HKLRD 735 (per A Cheung J as the Chief Judge then was).

4.  I am satisfied on the evidence before me that it was prudent of the companies’ directors to instruct KPMG and Linklaters when they became aware of their parent company’s problems and that the fees were incurred in the best interest of creditors.  I therefore sanction their payment.

5.  The second payment sought is an interim payment for fees incurred by the provisional liquidators and their agents in dealing with client money, in other words trust money held by MFHK on behalf of its clients in segregated accounts.  The court has the inherent jurisdiction to order that fees incurred in connection with the administration of trust property be paid out of the trust assets: Re TS Wong (Investment & Finance) Co Ltd [2008] 5 HKLRD 469 – see §§14-15, applying Re Berkeley Applegate [1989] Ch 32 – see 51; and Re CA Pacific Finance Limited (No 2) [1999] 2 HKLRD 102 – see §10.  Such an order may include the provisional liquidators’ legal costs and disbursements: Re TS Wong (Investment & Finance) Co Ltd, supra, para 15 and schedule para 2.5(iv).  Consistent with this principle I ordered in my judgment of 15 December 2011 that client money costs be paid out of the client money prior to any final distribution.

6.  The provisional liquidators seek an interim payment of 75% of their fees and disbursements pending their taxation against an undertaking by them and Linklaters to pay back any excess in the event that their respective fees are reduced by more than 30% after taxation.  The reason for seeking an interim payment is that the amount of work undertaken to date had been considerable and that provisional liquidators and Linklaters cannot reasonably be expected to provide their services without at least a sizable payment on account of their fees.  I accept that this is reasonable.  Quite clearly it is unrealistic to expect professionals to carry out significant work without payment within a reasonable time period.  The fact of the matter is that the taxation process does take some time and if the provisional liquidators have to wait for it be completed before they are paid and are able to pay Linklaters this would result in the professionals having to provide de facto financing for the process of collecting in and distributing client money.  This is not their function and it would be unreasonable to impose it on them.  I am satisfied that it is appropriate to order an interim payment of the fees that have been incurred of 70%.

7.  The final category of payment is the fees and disbursements of the provisional liquidators other than those incurred in connection with the collection in and distribution of client money.  The provisional liquidators seek an interim payment of their fees and disbursements, primarily Linklaters fees, pending taxation.  The justification is the same as in the case of the application for an interim payment for work carried out in connection with client money.

8.  There has been, in my experience, large provisional liquidations in which the Companies Court has made orders for interim payment of provisional liquidators’ fees.  However, there was no reported decision approving and explaining the practice until the judgment of Barma J in Lehman Brothers Securities Asia (No. 1) [2010] 1 HKLRD 43.  I would make 2 observations in relation to this practice.  First, that it applies to large provisional liquidations in which provisional liquidators and other professionals are required to undertake a considerable amount of work in a short period of time, alternatively to provisional liquidations, which last for extended periods, because, say a restructuring of debt is to be carried out through provisional liquidation.  Although I have recently had an application for an interim payment in a provisional liquidation, which it seemed to me was not out of the ordinary and which I rejected, generally in my experience it is only in obvious cases that provisional liquidators make such applications.  Secondly, in the normal case I would expect that the provisional liquidators will either have submitted a bill for taxation or be able to confirm to the court that they will shortly do so.  In Re Wing Fai Construction Co Ltd [2003] 1 HKLRD 80, Kwan J rejected an application for an interim payment on the grounds that a bill had not been submitted for taxation.  As will be apparent from my earlier comments I do not think that a failure to submit a bill for taxation is an absolute bar to an interim payment, but the court will generally need to be satisfied that the taxation process is being properly operated.  I would, for example, be reluctant to make an order for a 2^nd interim payment in cases in which a bill had not been submitted for taxation in respect of fees covered by an earlier interim payment.

9.  In the present case I am satisfied that an interim payment of 70% of the fees incurred is justified.

10.  Another point arose in relation to the application for an interim payment in the provisional liquidation and that concerned the taxation of agent’s fees, for example, those of solicitors retained by the provisional liquidators appointed under section 193 of the Companies Ordinance or continuing in office by virtue of section 194(1)(aa) following the making of a winding-up order.

11.  The legislative regime for the taxation of the bills of costs or charges of persons employed by a liquidator, including a solicitor (rules 169-179 of the Companies (Winding-up) Rules (Cap 32H)) does not apply to the costs or charges of persons employed by a provisional liquidator appointed under section 193 or continuing in office by virtue of section 194(1)(aa) following the making of a winding-up order.  Such legislative regime (rules 169-179 of the Companies (Winding-up) Rules) only applies to the bill of costs or charges of persons employed by the Official Receiver or a provisional liquidator appointed by him under s 194(1A): Re Lehman Brothers Securities Asia Ltd (No 2) [2010] 1 HKLRD 58 – see §§38-44 and 47.

12.  Instead of being a matter of statute or subsidiary legislation, the determination of the fees and disbursements of a solicitor or other professional agent employed by a provisional liquidator appointed under section 193 or continuing in office by virtue of section 194(1)(aa) following the making of a winding-up order is governed by common law principles, which in summary are as follows:

(1) an agent has a contractual relationship with a provisional liquidator and the latter is personally bound to pay for the work done unless the contract provides otherwise: Re Peregrine Investment Holdings Ltd & Ors (No 1) [1998] 3 HKC 1 – see 13E-14F; and Re Lehman Brothers Securities Asia Ltd (No 2) (supra) – see §§39 and 44;

(2) creditors or the Official Receiver have a prima facie right to challenge the provisional liquidator’s decisions on the passing of the accounts: Re Independent Insurance Co Ltd (supra) – see 930D-E; Re Peregrine Investment Holdings Ltd & Ors (No 1) (supra) – see 13I; and Re Lehman Brothers Securities Asia Ltd (No 2) (supra) – see §§39, 44 and 47;

(3) the power of the Court in an appropriate case and if the need arises to examine all aspects of the expenses in a provisional liquidation: Re UIC Insurance Company Ltd (In Provisional Liquidation) (No 1) [2007] 2 BCLC 446; and

(4) to the extent that a provisional liquidator is not satisfied with the bills rendered by his agent for whatever reason, a provisional liquidator has the option of either negotiating further with his agent or submitting the bill to taxation pursuant to section 67 of the Legal Practitioners Ordinance (Cap 159): Re Peregrine Investment Holdings Ltd & Ors (No 1) (supra) – see 14C.  Any taxation must be conducted on the basis of the Maxwell Principles: see Lehman Brothers Securities Asia Ltd (No 2) (supra) – see §47.

13.  Mr Maurellet submitted that the position in respect of the determination of the fees and disbursements of agents is, therefore, that provided the Court is satisfied that the provisional liquidator is aware of his duties and obligations to scrutinise the bills of costs or charges of persons employed by him and has taken steps to discharge those duties and obligations, the Court would normally permit a provisional liquidator to determine the agents’ fees himself and to make payment in respect of the same out of the estate without further involvement of the Court save in the circumstances mentioned above.  He points to Barma J’s decision in Lehman Brothers Securities Asia Ltd (No 2) (supra) as demonstrating that this is the correct approach.  In that case, an assessor appointed by the Court under section 53 of the High Court Ordinance (Cap 4) concluded in his interim report dated 22 July 2009, that the decision of the provisional liquidators to appoint agents was reasonable and that they more than adequately scrutinised their agents’ fees.  Taking that interim report into account, the Court allowed the agents to recover (by way of a further interim payment made by an order dated 27 August 2009) the balance of the fees payable to the agents as had been determined by the provisional liquidators themselves without the involvement of the Court.  Such  payment was considered to be a further “interim payment” as opposed to a final payment as the fees were still subject to revision until such time as the provisional liquidators had passed their accounts.

14.  It seems to me that this is to misunderstand the relationship between a provisional liquidator and his agent and the arrangement that the court approved in Lehman Brothers Securities Asia Limited (No. 2).  The court is not concerned with the personal liability of a provisional liquidator to pay an agent, who he engages.  The court is, however, concerned with the payment of costs and expenses out of the assets of an insolvent company.  This is why it was necessary for applications to be made in Lehman Brothers Securities Asia Limited (No. 2) for interim payment of solicitor’s fees out of the assets of the company, and, presumably, why it was thought necessary to do so in the present case.  Although Rules 169‑179 of the Companies (Winding-up) Rules may have no application in the case of a provisional liquidator appointed under section 193 and continuing in office by virtue of 194(1)(aa), the reason for there being such rules applies in the case of provisional liquidators in office by virtue of such sections 193 and 194(1)(aa) and I can see no reason why the court should not require taxation (or possibly some other approval process as was the case in Lehman Brothers Securities Asia Limited (No. 2)) of such expenses.

15.  I am told that the Taxing Masters have read Barma J’s decision as no longer requiring them to tax the fees of agents of provisional liquidators appointed under section 193 or continuing in office by virtue of section 194(1)(aa).  This is incorrect and in future such costs and expenses should be taxed.