CHEN YUNG NGAI KENNETH v. TANG CHUNG WAH ALAN

HCMP 113/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 113 OF 2013

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DECISION

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Introduction

1.  This is a decision on costs in respect of two related matters that came on for hearing on 27 August 2013.  The parties were able to resolve the issues arising save as to costs.  The costs issue was adjourned sine die to enable the parties to continue their negotiations and to be restored for hearing if necessary.

2.  As no agreement could be reached, the issue of costs in both applications and the applications of Shinewing Specialist Advisory Services Ltd (“SWSAS”) for interim payments were fixed for hearing on 29 January 2014.  When the interim payment applications took up the allotted hearing time, the parties were content that the costs issue should be decided on written submissions only.

3.  The first matter (HCMP 113) was an application by Chen Yung Ngai Kenneth (“Mr Chen”), one of two joint and several liquidators of Senrich Industries Ltd (in creditors’ voluntary liquidation), for the removal of Tang Chung Wah Alan (“Mr Tang”) as the other joint and several liquidator of Senrich (“the removal application”).  The second (HCCW 279) was an application by Mr Chen as liquidator of Hempstone Ltd (“Hempstone”) (in compulsory liquidation) for SWSAS to provide the books and records of the Hempstone Group to Mr Chen as liquidator (“the production application”).

Background facts

4.  Mr Chen joined Shinewing CPA on 15 November 2010 and holds 5% of its issued share capital.  Mr Chen was to develop SWSAS (formed in late 2010/early 2011), the insolvency and forensic practice of Shinewing CPA and so indirectly holds 5% of the equity in SWSAS.

5.  Mr Tang is the majority shareholder of SWSAS.

6.  In December 2010 Mr Chen was appointed one of the joint and several provisional liquidators of Hempstone which is the holding company and has about 60 subsidiaries. A number of Hempstone’s subsidiaries are in liquidation. Mr Chen was the lead partner in the Hempstone liquidations.

7.  Mr Tang and Mr Chen were appointed joint and several liquidators of the Senrich (in creditors’ voluntary liquidation and one of the Hempstone subsidiaries) on 4 March 2011.

8.  Collectively, the Hempstone Group is solvent.

9.  By 2012, the Hempstone liquidations had generated substantial liquidation fees, running into many millions.  The liquidations have not yet concluded.

10.  The relationship between Mr Chen and Mr Tang broke down completely in the autumn of 2012.  SWSAS issued a notice of immediate suspension to Mr Chen on 24 October 2012.  A notice of summary dismissal followed on 28 November 2012.

11.  Mr Chen (while maintaining that the dismissal was wrongful) left SWSAS and has since been working at Zhonglei Specialist Advisory Services Ltd.

12.  The falling out between Mr Chen and Mr Tang meant that they no longer had a working relationship.  That led to difficulties on two fronts arising from the fact that:

(1) they were joint and several liquidators of Senrich; and

(2) while Mr Chen was the lead liquidator of the Hempstone liquidations, the books and records of the Hempstone Group remained with SWSAS.

It was in those circumstances that the applications were made.

13.  After the falling out between Mr Tang and Mr Chen, it became increasingly obvious that they could not carry on being joint and several liquidators of Senrich. For the liquidation to go forward, one of them had to step down.

14.  The ultimate owners of the Hempstone Group decided to go with Mr Chen as sole liquidator.  All the shareholders signed a resolution approving the removal of Mr Tang.  Mr Tang refused to step down or to release the books and records of the Hempstone Group, resulting in the removal and production applications. Understandably, the prospect of SWSAS losing what had been a lucrative liquidation assignment was not appealing. In addition, Mr Tang was unhappy that not only were substantial accrued fees outstanding, bills had not been raised for work done in the Hempstone liquidations since July 2011 save in a single instance. Mr Chen as the lead liquidator would have been responsible for raising bills.

15.  At the hearing on 27 August 2013, after lengthy negotiations, the parties agreed terms to settle their various differences arising from the removal application and the production application. It could be said to be an overall settlement of their differences.

16.  On the removal application, Mr Tang agreed to resign voluntarily and to submit his resignation within seven days.  No order was made on the removal summons.

17.  On the production application, the terms agreed were encapsulated in an order of that date which, due to an oversight, was not expressed to be by consent.  That error falls under the slip rule and is to be so amended.

18.  The terms agreed provided for the production of the books and records of Hempstone in SWSAS’ possession, custody or control; the appointment of Eversheds to advise the liquidator in the Hempstone liquidations; a timetable for the provision of bills by SWSAS to the liquidator with a view to the taxation of all outstanding bills; scrutiny of the bills by the liquidator; the scheduling of the taxation hearing and logistics of the same; the prompt payment of taxed bills and the setting aside of sufficient assets for that purpose.

Costs - the removal application

19.  On the question of costs, the difference is narrow.  Mr Tang is willing to pay 100% of the costs on a party and party basis while Mr Chen seeks costs on an indemnity basis.

20.  Where joint and several liquidators are appointed, invariably, they would be members of and/or working at the same firm.  The firm would provide the necessary manpower and services required for the liquidation.  It is also common that one of the joint and several liquidators would be the lead liquidator.

21.  When one of them leaves the firm, it is obviously impracticable for both to continue as liquidators. For reasons of efficiency, logistics and economy in the liquidation, one of them has to step down. It has to be appreciated that the stepping down or resignation in such circumstances does not imply any misconduct or shortcoming on the departing liquidator. It represents the only sensible solution to a practical problem presented by the parting of ways even in cases where the parting is amicable. But the problem becomes wholly intractable where (as here) the parting is less than amicable if one of them does not step down.

22.  As to which of two liquidators should go must depend on the circumstances of the particular case.

23.  As earlier noted, a number of subsidiaries within the Hempstone Group were in liquidation (whether compulsory or creditors’ voluntary). Mr Chen is not only the liquidator in every case, whether as sole liquidator or as one of the joint and several liquidators, he is also the lead liquidator while Mr Tang was a joint and several liquidator of Senrich and of one other Hempstone subsidiary only.

24.  I accept that the views of the creditors and shareholders are not determinative but unless their views are unreasonable, they are a relevant factor to be taken into consideration.  In the present case, the ultimate shareholders have passed a resolution for the removal of Mr Tang.  Lam Charm (“Mr Lam”), one of the ultimate shareholders, has filed an affirmation to explain his reasons for doing so.

25.  Mr Nip (counsel for Mr Tang) submitted that there was no reasonable basis for Mr Lam to “accuse” Mr Tang for expressing his concern that SWSAS had not been paid a substantial amount of fees because, factually, there has been substantial delay in settling SWSAS’ outstanding bills. I do not consider that Mr Lam was making any accusations against Mr Tang.  He was merely relating what had transpired at the meeting he and another ultimate shareholder had with Mr Tang and stated his impression and perception of Mr Tang at the meeting.

26.  As earlier stated, fault or misconduct does not come into the picture.  The situation that had arisen had rendered it impracticable for Mr Tang and Mr Chen to carry on as joint and several liquidators and necessitated the resignation of one of them.  That was a real problem that needed to be addressed.

27.  Looking at the matter objectively and having regard to the considerations mentioned, I am of the firm view that in the present case, if one of the joint and several liquidators had to step down, it had to be Mr Tang and his voluntary resignation as part of the overall settlement of the disputes is a belated recognition of the realities of the situation.  In my view, the removal application should not have been necessary and, in any event, should not have been resisted.

28.  In the present case, all outside creditors have been paid off. The only creditors left are companies within the Hempstone Group.  Mr Maurellet (who appeared for Mr Chen) submitted that any shortfall in costs would fall on the ultimate shareholders and as they are in no way responsible for the situation that had arisen, it would not be a fair result.

29.  On the facts of the removal application, I would agree. It is a special circumstance that would justify an order for indemnity costs and I would so order.

Costs – the production application

30.  On this application, SWSAS is willing to pay 50% of the costs on a party and party basis.  Mr Chen seeks 100% of the costs on an indemnity basis.

31.  If, as is my view, Mr Tang should have stepped down after the parting of ways with Mr Chen in respect of the Hempstone Group liquidations, prima facie, it should follow that the books and records of the Hempstone Group should not have been retained.

32.  But underlying the resistance to handing over the books and records was the fact that there were substantial fees owing to SWSAS for work done in relation to the Hempstone liquidations. In respect of fee notes raised of $15.4m prior to the application, $8m remained outstanding. Save for a fee note for De Rodeo Ltd (one of the Hempstone subsidiaries) for the period from July 2011 to December 2011, the remaining fees notes raised related to time costs up to June 2011 only. According to Mr Tang, another $16.6m or so of SWSAS’ time costs has not yet been billed.

33.  The settlement terms of the production application contained in the order of 27 August 2013 are summarized in §18 above. They reflect a strict timetable, inter alia, for the scrutiny of SWSAS’ bills, the fixing of the taxation hearing “with all due expediency”, the taking of “all reasonable steps” to arrange for payment and the setting aside of sufficient assets to meet the taxed fees. The accrued but unbilled fees relate to work performed from July 2011. Such provisions would not have been necessary had there not been a real need to address SWSAS’ concerns over the significant delay in the billing/taxation/settlement of outstanding fees for work done.

34.  In all the circumstances, I consider it fair that SWSAS bears 100% of the costs but on a party and party basis only and I so order.