HCK CHINA INVESTMENTS LTD. AND ANOTHER v. WAH NAM GROUP LTD.

HCCW 166/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 166 OF 2000

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REASONS FOR DECISION

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1. I have before me an application for the appointment of a committee of inspection of Wah Nam Group Limited ("the Company"), which has been ordered to be wound up on 26 July 2000, there being disagreement among the creditors as to whether a committee should be appointed and how the committee should be constituted. Initially, the application was made by the petitioning creditors, HCK China Investments Limited ("HCK") and Investment Austasia Limited ("IAL"). At the hearing of the application, the joint and several liquidators also joined in the application.

2. The application is supported by a group of six creditors, being Mr. Terence Ho, Mr. Samson Chen and their companies, Solar Honest Limited, Unbeatable Assets Limited, Excel Noble Development Limited, Empire Harvest Development Limited and Stamford Star Finance Limited. These creditors are represented by Messrs. Horvath & Giles. I shall refer to them as "the H&G clients". Three other creditors also support the formation of a committee but have not appeared at the hearing.

3. The application is opposed by Mr. William Chan, whose solicitor has attended the hearing. Ten other creditors, who are former employees of the Company with the exception of one of them, are opposed to the formation of a committee for fear that this might delay the progress of the liquidation. They have not appeared at the hearing.

4. At the conclusion of the hearing, I made an order for a committee of inspection to be appointed and directed that it should be made up of six members, two from the representatives nominated by HCK and IAL, two from the representatives of the H&G clients and two from the other three creditors who have indicated their willingness to participate in the committee. These are the reasons for my decision.

The background

5. On 27 July 2000, the day after I made an order to wind up the Company, I ordered that special managers were to be appointed to assist the Official Receiver, who had been constituted the provisional liquidator of the Company, as the affairs of the Company were complex. The majority of its assets are held by subsidiaries, of which the most valuable asset is an investment held through a subsidiary, Wah Nam Infrastructure Investment Limited ("WNII"), in three joint venture operations in toll roads and bridges in China. The other asset of significant value is the listed status of the Company in the Hong Kong Stock Exchange. The Company's shares were suspended from trading on 20 July 2000, and as the de-listing process had begun, there was a need to act expeditiously to comply with the procedures of the Stock Exchange if it was intended to have a restructure of the Company with new investors and to apply for resumption of trading of the Company's shares.

6. On the application of the Official Receiver, I made an order on 26 September 2000 that the Official Receiver was at liberty to convene only the first meeting of creditors for the purpose of considering the appointment of liquidators and a committee of inspection. This took place on 24 October 2000. Resolutions were passed by a majority in value of the creditors for the appointment of liquidators and a committee of inspection made up of five members, two from HCK and IAL and three from the H&G clients.

7. On 14 November 2000, a Notice of Motion was taken out by Mr. William Chan and Wah Nam Holdings Company Limited under rule 199 of the Companies (Winding-up) Rules to appeal from certain acts or decisions of the Official Receiver at the first meeting of creditors. Relief was sought to declare invalid the resolutions passed. It was alleged that the Official Receiver's decisions to admit the full claims of HCK and IAL for voting were erroneous in that those claims were highly inflated. The Official Receiver's decisions to admit in full or at all the claims of three of the H&G clients were challenged, as were his decisions to refuse to admit for voting the claims of various subsidiaries of the Company. The Notice of Motion was adjourned for argument on 30 November 2000 after directions were given for the filing of evidence.

8. On 10 January 2001, the Official Receiver sought directions from the court as no progress was made in the appointment of liquidators for the Company in view of the dispute between Mr. William Chan and the other creditors as to voting values and the choice of liquidators. The Official Receiver proposed as a compromise that Mr. John Robert Lees and Mr. Desmond Chung Seng Chiong of Ferrier Hodgson be appointed as liquidators as it would be in the interests of all creditors that an appointment was made as soon as possible. As there appeared to be no provision under section 194 or any other provision in the Ordinance that would empower the court to appoint liquidators that had not been nominated by the first meetings of contributories or creditors, the Official Receiver later sought a regulating order under section 227A so that liquidators may be appointed under section 227B on the application of the Official Receiver.

9. On 27 January 2001, I made a regulating order in this winding-up under section 227A(1) and on the application of the Official Receiver, I ordered that (1) the summoning of the first meeting of creditors and the first meeting of the contributories be dispensed with under section 227B(1)(a); (2) Mr. Lees and Mr. Chiong be appointed joint and several liquidators of the Company under section 227B(1)(b); (3) there be no order as to the appointment of a committee of inspection under section 227B(1)(c) but the liquidators do have liberty to apply; (4) the Notice of Motion of 14 November 2000, which had been set down for hearing, be adjourned sine die; and (5) the special managers be discharged.

10. Since the liquidators took office, they have actively taken steps to realize the assets of the Company and to invite offers of investors to acquire the valuable assets being the interest of WNII in the joint ventures in China and the listed status of the Company. HCK, IAL and the H&G clients were dissatisfied with some of the measures taken by the liquidators as well as measures not taken, which have been ventilated extensively in the correspondence exchanged between their solicitors and the liquidators, the details of which I do not propose to go into. Because of this, HCK, IAL and the H&G clients wished to have a committee of inspection appointed to work with the liquidators so that there would be greater transparency and consultation in the conduct of the liquidation. As there were differences in the constitution of the committee and whether HCK, IAL and the H&G clients should have greater representation on the committee or be limited to two representatives (one for HCK and IAL and one for the H&G clients collectively), HCK and IAL took out the present application on 11 February 2002.

The application

11. The summons was issued under section 200(5) of the Ordinance, which provides that if any person is aggrieved by any act or decision of the liquidator, that person may apply to the court and the court may confirm, reverse or modify the act or decision complained of and make such order as it thinks just. In addition, the inherent jurisdiction of the court was invoked. In correspondence, the liquidators have taken the point that it might not be appropriate for the petitioning creditors to apply for the appointment of a committee of inspection, as a regulating order has been made in this instance, citing Re Guangnan (KK) Supermarket Ltd. [2002] 1 HKC 188. In that case, the provisional liquidators applied for a regulating order under section 227A and the appointment of liquidators and a committee of inspection under section 227B. Yuen J. queried the locus standi of the provisional liquidators to apply for orders under section 227B(1) as it is provided in that section that the court may make certain orders "on the application of the Official Receiver" and no other possible applicant is mentioned, unlike section 227A(1). As a result, a joint application was made by the Official Receiver and the provisional liquidators and the court made the orders sought under section 227B(1) on that basis.

12. In the present case, various orders under section 227B(1) had been made in January 2001 on the application of the Official Receiver. As regards the appointment of a committee of inspection, the order I made on 27 January 2001 was that there would be no order in that respect but the liquidators were given liberty to apply for the appointment of a committee. Under section 227A(4), it is provided that where any order made under, inter alia, section 227B prescribes any procedure it shall be deemed to be in substitution for the procedure which would be required by the Ordinance but for the making of such order. Mr. Cameron Scott, who appeared for the liquidators, informed me at the hearing that the liquidators have decided to join in the application of HCK and IAL for the appointment of a committee, although the liquidators would seek a different order regarding the composition of the committee. I am satisfied that the application, made jointly by HCK, IAL and the liquidators, is made on a proper procedural basis.

Whether a committee of inspection should be appointed

13. In opposing the application, Mr. David Lo, who appeared for Mr. William Chan, submitted that on 27 January 2001 the court made no order on the appointment of a committee although the liquidators were given liberty to apply. He argued that there is no material change in circumstances to warrant the appointment of a committee at this stage. Proposals for the restructure of the Company are being implemented with the objective of seeking resumption in trading of the shares of the Company. Unless the restructuring of the Company has fallen through and the Company then proceeds to liquidation, there is no need to form a committee. It was further submitted that if the court should decide on the formation of a committee, the appointment of the committee should be voted on by the creditors of the Company.

14. The appointment of a committee of inspection is a matter for the discretion of this court. Under section 227B(2), it is provided that where under subsection (1) the court makes any appointment of a committee, it shall not be necessary to ascertain the wishes of the creditors or contributories, and the provisions of section 206(1) and (2) shall cease to apply. There had been a first meeting of the creditors called by the Official Receiver on 24 October 2000, with the result that the resolution passed was challenged in an application taken out by Mr. William Chan and another.

15. I have had regard to the correspondence exchanged between the liquidators and the solicitors for the various creditors seeking appointment of a committee. It seems to me that although the liquidators have held informal meetings with these creditors to address their concerns about the restructuring proposals and the valuation of the Company's assets relating to those proposals, communication could be improved. These creditors do have the resources to make a meaningful contribution to the work in the liquidation and they are willing to give their time and input. If they were to be provided with information in a timely manner and on a regular basis, they should be able to make useful and constructive contribution instead of negative criticism after the event. Hopefully, this may dispel some of their dissatisfaction in the way the liquidators have handled certain matters. There is no evidence and no suggestion that these creditors who are vocal about their concerns do not have in mind the best interest of the general body of creditors, which is to ensure that the liquidation is carried out expeditiously and effectively with the maximum assets realized for the benefit of all the creditors.

16. I should mention that a committee is more than just a consultative body for the liquidators, as the liquidators would appear to suggest in their affidavit. Under section 200(1), it is provided that the liquidator of a company which is being wound up by the court shall, in the administration of the assets of the company and in the distribution thereof among its creditors, "have regard to any directions that may be given by resolution of the creditors or contributories at any general meeting, or by the committee of inspection, and any directions given by the creditors or contributories at any general meeting shall in case of conflict be deemed to override any directions given by the committee of inspection." The function of the committee is to assist the court in its supervisory role over the liquidators, and avoid the need for time-consuming and costly applications to the court (Re Goodway Ltd. [1999] 1 HKC 141 at 148E).

17. I am of the view that the appointment of a committee of inspection would facilitate the progress of this liquidation. I reject the submissions that a committee would delay or hinder the liquidators' work. I therefore order that a committee of inspection is to be appointed for the Company.

The constitution of the committee

18. Mr. Anthony Chan, who appeared for HCK and IAL, submitted that his clients should have two representatives in a committee of five members. Mr. Ling Chun Wai, who appeared for the H&G clients, likewise submitted that his clients should be represented by two members in a committee of five. Mr. Lo submitted on behalf of Mr. William Chan that HCK, IAL and the H&G clients should not be represented in the committee at all because their claims are disputed by Mr. Chan. Mr. Scott, for the liquidators, accepted that HCK, IAL and the H&G clients should be represented but their representation should be limited to one member for each of the two camps. He submitted that in a committee of five, the other three members should be the other three creditors who have expressed interest in serving on the committee so as to give a more balanced representation of all the creditors.

19. Firstly, it seems to me there is no question of excluding HCK, IAL and the H&G clients from the committee. This is hardly a realistic proposition. The combined claims of HCK, IAL and the H&G clients represent a total of 65.62% of the value of the known claims, whether disputed or not (19.88% for the H&G clients and 45.74% for HCK and IAL). If one takes into account the amount of the disputed claims for these creditors according to a preliminary review of the liquidators, the total undisputed claims for these creditors would range from 31.52% (17.09% for the H&G clients and 14.43% for HCK and IAL) to 22.5% (6.18% for the H&G clients and 16.32% for HCK and IAL). On any view, these creditors are substantial creditors and they should be represented on the committee.

20. Secondly, there is consensus of all counsel that the size of the committee should not be too big, as that may prove unwieldy. In Re Guangnan (KK) Supermarket Ltd., supra., it was held that a committee of eleven was too large and the court reduced the members to seven, having regard to the unreported decision of Re BCCI Finance International Ltd and Re Bank of Credit and Commerce Hong Kong Ltd. (1992) CWU No. 217 and 218 of 1991 and the English Insolvency Rules which provide that the committee of inspection should be between three and five persons.

21. Thirdly, it is not disputed that there should be balanced representation of the creditors on the committee so that it would be fairly representative of the general body of creditors. What is in dispute is how that balance should be achieved. Mr. Scott submitted that the other three creditors who have expressed interest in serving on the committee (Online Credit Ltd., Corporate Link Ltd., and Karison Travel Ltd.) should all be appointed with two members representing HCK, IAL and the H&G clients so that the committee would not be controlled or influenced by a specific group of creditors. He referred me to the unreported decision of Yuen J. in CA Pacific Finance Ltd., HCCW No. 36 of 1998, 16 December 1999, in which the court made an order under section 227B for three vacancies in the committee of inspection to be filled and a minor creditor who had expressed a keen interest in the liquidation was appointed as "it would also be fair that parties or creditors with small amounts of claims should also be represented so that the liquidation would take into account a wide spectrum of parties involved."

22. Mr. Chan and Mr. Ling submitted that their respective clients should be represented by two members for each camp instead of one each to achieve a fair representation. They are without doubt significant creditors. The combined claims of the other three creditors who have expressed interest in serving are just 4%, if one takes the most generous view and maximum percentages calculated by the liquidators, and only 1.7% on the least favourable scenario. As the decisions of the committee are made by a majority vote of its members and not by the size of their claims (see section 207 (3)), unlike a meeting of creditors (see section 287(2)), the three minor creditors would have a controlling voice in the proceedings of the committee. This would create an imbalance in the sense that the representation is not truly reflective of the creditor's interest in the liquidation. Further, a minor creditor who has fewer resources at his disposal and less interest at stake in the liquidation is unlikely to devote as much time and energy to the affairs in the liquidation and the CA Pacific Finance case is an example of members losing interest so that the court had to make an order to fill vacancies after half of the members resigned. I agree with these submissions.

23. In my view, it would be appropriate in these circumstances to allow the respective clients of Mr. Chan and Mr. Ling to have two representatives each on the committee. To achieve a proper balance so that the interests of the minor creditors would be properly reflected and looked after, I have decided that they too should have two representatives on the committee, making it a total of six members.

Orders

24. I order that a committee of inspection be appointed for the Company and it is to be made up of six members, comprising two from the representatives nominated by HCK and IAL (Mr. Bernard Tam and Mr. Raymond Ng), two from the representatives of the H&G clients (Mr. Terence Ho and Mr. Samson Chen), one from Online Credit Ltd. (Mr. Fai H. Chan) and a duly authorised representative from Corporate Link Ltd.

25. I further order that the costs in this application of the clients represented by Mr. Chan and Mr. Ling and the costs of the liquidators be taxed and paid out of the Company's assets and that the costs of the liquidators be treated as costs in the liquidation.