IN RE SETAFFA INVESTMENTS LTD. (in liquidation)

HCMP2469/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.2469 OF 1998

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J U D G M E N T

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1. This is a summons by the liquidators of Setaffa Investments Limited ("the Company") for the determination of the question whether section 264A of the Companies Ordinance, Cap.32 applies to the winding-up of a company commenced before the section came into force on 10 February 1997 and if so, whether interest payable on debts proved in the winding-up is payable at simple interest, compound interest or simple or compound interest as the liquidator considers fair and reasonable.

Background

2. On 11 April 1983, the Company passed an extraordinary resolution to go into voluntary liquidation. The creditors' proofs were satisfied in full by November 1991. The cash surplus arising from the sale of the Company's main asset which was a property in Stanley, stands at approximately $9.5 million after making provision for costs, charges and expenses of the liquidation and legal fees. The liquidators have been advised that it is not entirely clear whether section 264A is to take effect prospectively, retrospectively, or in some other manner. The summons was taken out to have this uncertainty resolved. Pursuant to the directions of the court, the creditors were advised of the hearing and that they were at liberty to attend and participate but no creditor appeared.

3. There are currently two other liquidations which have thrown up a considerable surplus. So the same question arises in those liquidations. The Official Receiver applied for and obtained the leave of the court to appear as amicus, that being the most economical and expeditious way to have the question determined generally. Provision has been made for his costs out of the funds of those two liquidations.

The issue

4. Does section 264A of the Ordinance apply where the liquidation commenced before the effective date i.e. the coming into operation of the action?

5. Section 264A reads as follows :

"264A. Interest on debts

(1) In the winding up of a company, not being an insolvent company, interest is payable in accordance with this section on any debt proved in the winding up, including so much of any such debt as represents interest on the remainder.

(2) Any surplus remaining after the payment of debts proved in a winding up referred to in subsection (1) shall, before being applied for any other purpose, be applied in paying interest on those debts in respect of the period during which the debt has been outstanding, in the case of-

(a) a winding up by court-

(i) where the company has by special resolution resolved that the company be wound up, since the date of the resolution; and

(ii) in any other case, since the date of the winding-up order; and

(b) a voluntary winding up, since the commencement of the winding up (which must be construed having regard to section 228A(3)(a) or 230, as may be appropriate).

(3) All interest under this section ranks equally, whether or not the debts on which it is payable rank equally.

(4) The rate of interest payable under this section in respect of any debt is whichever is the greater of the following-

(a) the rate specified under section 49(1)(b) of the Supreme Court Ordinance (Cap.4); and

(b) the rate applicable to that debt apart from the winding up.

[cf.1986 c.45 s.189 U.K.]"

The section which was added to Cap.32 by section 43 of the Companies (Amendment) Ordinance 1997 (Ord.3 of 1997) came into operation on 10 February 1997. LN 56 of 1997.

6. It is common ground that the section is modelled on section 189 of the Insolvency Act 1986. The main difference with section 189 is in subsection (2). In the English provision, interest is payable "since the company went into liquidation". In the Hong Kong provision, this is spelt out : in a winding-up by the court, it would depend on whether any special resolution was passed resolving the company be wound up, and in the case of a voluntary winding-up, it would depend on whether a statutory declaration is delivered to the Registrar pursuant to section 228A(3)(a). As appears from the Legislative Council Brief dated 17 April 1996 (para.24), it is clear that the proposal that in the event of any surplus in a winding-up, interest should be payable at the judgment rate or the contractual rate whichever is higher "follows the provision in the U.K. Insolvency Act 1986".

7. Prior to the introduction of section 264A of the Ordinance, creditors of a company which was insolvent at the commencement of a winding-up but which later realized a surplus had no right to prove for or to recover interest on their claims in the absence of any express contractual agreement between the company and the creditor. Where there was a contractual entitlement to interest, the creditor was entitled to post-liquidation interest in the event of a surplus. That rule or exception is explained in In re Humber Ironworks and Shipbuilding Co. (1869) 4 Ch App 643 at 647.

8. In In re Rolls-Royce Ltd. [1974] 1 WLR 1584 the applicants were creditors of the company which went into a creditors' liquidation. Subsequently, a new company acquired the company which left the liquidators with surplus assets. The applicants claimed interest from the date of the winding-up on the company's total indebtedness to them to be paid out of the surplus assets. It had no contractual entitlement to interest so it was not within the special rule or exception. The question before that court was whether section 33 (a) of the Bankruptcy Act 1914 which provided for the payment of interest out of the surplus in a bankruptcy applied by virtue of section 317 of the Companies Act 1948 so that interest was payable on the debts from the date of the winding-up. The rationale behind the bankruptcy rule was that a creditor should be compensated for being kept out of his money during the period of administration. Pennycuick V-C concluded (at 1591D-E) that :

"...on the proper construction of the statutory provision, and quite apart from authority, section 317 of the Companies Act 1948 has no application once the liquidation throws up a surplus, whatever may have been the position at the commencement of the winding up."

9. To remedy the perceived injustice, section 93 of the Insolvency Act 1985 made provision for the payment of interest where a surplus is thrown up irrespective of any contractual entitlement. Section 189 of the Insolvency Act 1986 reproduces the provisions of section 93.

10. Unlike the U.K. legislation, there are no transitional provisions for section 264A. Under the English legislation, it is made clear beyond peradventure that the section corresponding to section 264A only applies to liquidations commencing after coming into effect of the section. Although section 264A has in square brackets after it a reference to the U.K. legislation, such reference does not have any legislative effect : see section 18 of the Interpretation and General Clauses Ordinance, Cap.1.

11. The liquidators have obtained an opinion from leading counsel in London who has opined that there are three possible interpretations of section 264A, viz. that it takes effect (a) retrospectively; or (b) partially retrospectively in the sense that it only affects assets that remain in the hands of the liquidators and therefore which have not been distributed; or (c) prospectively.

The contributories' position

12. Mr Scott SC, for the contributories, submitted that section 264A should be prospective only and not retrospective. His submissions in summary are that that section was not part of any codifying legislation : rather, by virtue of section 19 of Cap.1, it is deemed to be remedial, i.e. to alter the position as it stood on the effective date. If retrospective effect were to be given to that section, it would take away existing rights.

13. Mr Scott relied on the general principle of bankruptcy law which governs payment of interest that :

"...the debts of the bankrupt are treated as having been ascertained and his assets simultaneously distributed among his creditors on the bankruptcy date..."

See per Lord Hoffmann in Stein v. Blake [1995] BCC 543 at 546B. This followed the general rule expressed in In re Savin (1872) LR 7 Ch App 760 where James LJ said :

"...the theory in bankruptcy is to stop all things at the date of the bankruptcy, and to divide the wreck of the man's property as it stood at that time."

In similar vein is the judgment of Selwyn LJ in In re Humber Ironworks and Shipbuilding Co. (supra) at 646 :

"...I think the tree must lie as it falls; that it must be ascertained what are the debts as they exist at the date of the winding up, and that all dividends in the case of an insolvent estate must be declared in respect of the debts so ascertained."

These passages were cited with approval by the Court of Appeal in In re Dynamics Corporation of America (In Liquidation) [1976] 1 WLR 757 at 762.

14. There is therefore a notional crystallization of all claims against the estate as at the date of liquidation and save for the special rule or exception mentioned earlier, nothing is allowed for interest. That was the position prior to the new section. On this basis, Mr Scott argued that the contributory had a vested right or expectation to receive that surplus free from interest claims. Those rights are not to be interfered with in interpreting a statute unless there are clear words which take away such rights. Thus, if the creditors' right to receive interest crystallizes at the commencement of the liquidation (subject only to the special rule that applies where a creditor may claim post-liquidation interest if there is a surplus), where the creditors' right ceases, the contributories' right arises. For the contributories are entitled to what does not have to be paid out to the creditors.

15. Counsel for the contributories placed considerable reliance on one of the fundamental rules of statutory interpretation which is stated in 23 Halsbury's Laws of Hong Kong [365.087] as follows :

"The general rule is that all statutes are prima facie prospective, and retrospective effect is not to be given to them unless, by express words or necessary implication, it appears that this was the intention of the legislature. Similarly, the courts will construe a provision as conferring power to act retrospectively only when clear words are used. At the same time, if the words of the statute are clear and unambiguous, the courts should not do violence to the natural meaning of the words in order to avoid a retrospective effect. The presumption is bound up with that of preventing a statute from operating to cause unfairness.

By virtue of the presumption, provisions in which a contrary intention does not appear have been held neither to impose new liabilities in respect of events taking place before their commencement, nor to relieve persons from liabilities then existing."

To similar effect is the following statement of the law in Maxwell on the Interpretation of Statutes (12th Edition 1969) page 215, cited and approved by Eveleigh LJ in Cardshops Limited v. John Lewis Properties Limited [1982] 3 All ER 746 at 756D :

" Upon the presumption that the legislature does not intend what is unjust rests the leaning against giving certain statutes a retrospective operation. They are construed as operating only in cases or on facts which come into existence after the statutes were passed unless a retrospective effect is clearly intended. It is a fundamental rule of English law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication."

16. As noted above, the Companies (Amendment) Ordinance which added section 264A to the Ordinance did not contain any express transitional provisions. In such a case, it is stated in 23 Halsbury's Laws of Hong Kong [365.097] that :

"...the court is required to draw such inferences as to the intended transitional arrangements as, in the light of the interpretative criteria, it considers the legislature to have intended."

It was submitted that the presumption against retrospection is part of the relevant 'interpretative criteria'.

The Official Receiver's position

17. I now turn to consider the submissions made by the Official Receiver as amicus who considered that his role was best served by advancing the case of the creditors who have no contractual entitlement to interest. The submissions of Mr Fitzpatrick who appeared for the Official Receiver may be summarized as follows.

18. The absence of transitional provisions rendered the effect of section 264A ambiguous. In order to resolve this ambiguity, the policy underlying the change in the law may be taken into account. That policy was the recognition of injustice suffered by creditors who were not entitled under the contract with the company to interest. Mr Fitzpatrick referred to the 'pressing need' to alleviate that injustice and urged that public policy would be best served by making the provision applicable to all distributions that post-date the commencement of the section. He also prayed in aid the rule in Heydon's case, namely that in construing a statute it is permissible to have regard to the state of things existing at the time the statute was passed and to the evil which, as appears from its provisions, the statute was designed to remedy. See 23 Halsbury's Laws of Hong Kong [365.068].

19. Mr Fitzpatrick also relied on section 250 of the Ordinance as supporting his view that until distribution, a contributory has no vested interest.

20. Another limb of Mr Fitzpatrick's submissions is that the omission of transitional provisions allows the court to decide the extent of its retrospective application, that being a permitted role of the court in statutory interpretation. Reliance was placed on 44(1) Halsbury's Laws of England 1995 Edition, para.1369 which provides that :

" It is usually said that the making of law, as opposed to its interpretation, is a matter for the legislature, and not for the courts, but, in so far as Parliament does not convey its intention clearly, expressly and completely, it is taken to require the court to spell out that intention where necessary. This may be done either by finding and declaring implications in the words used by the legislator, or by regarding the breadth or other obscurity of the express language as conferring a delegated legislative power to elaborate its meaning in accordance with public policy (including legal policy) and the purpose of the legislation. Whichever course is adopted, in accordance with the doctrine of precedent the court's operation influences the future legal meaning of the enactment by producing what may be called sub-rules, which are implied or expressed in the court's judgment."

What was urged upon the court is that it should adopt a hybrid solution since that is neither inconvenient nor impractical. Because the Hong Kong legislation did not follow fully the English model, i.e. by omitting transitional provisions, that must mean that the difference was intentional and that the court ought not to adopt a construction that accords with the U.K. position.

21. In brief, the reasons advanced for the hybrid solution by counsel for the Official Receiver are :

(a) it is not inconvenient nor unpractical;

(b) it accords with a broader justice to favour creditors over contributories;

(c) it creates no injustice as property in the contributories only vests on distribution;

(d) it cures an injustice perceived as in need of urgent reform;

(e) it accords with the rule in Heydon's case and with section 19 of the Interpretation and General Clauses Ordinance in that it is a liberal construction available in the absence of strict, limiting transitional provisions;

(f) it is within the court's power so to interpret as the matter has been left to the court to determine.

Expert evidence

22. It should be mentioned in passing that the Official Receiver filed expert evidence in the form of a report by Mr John Lees of Ferrier, Hodgson and Marfan to describe the anticipated consequences of the three possible interpretations. Mr Scott objected to its admissibility. The purpose of Mr Lees' report is not entirely clear. The liquidators have obtained the opinion of Mr Moss QC on the interpretation of section 264A. This opinion which is in evidence, is nothing more than submissions made on behalf of the liquidators. Mr Scott has adopted some of those submissions. Certainly, leading counsel's opinion is not put in in any way as expert evidence. Mr Lees disagrees with certain matters stated in Mr Moss' opinion. Mr Lees' disagreement is neither here nor there, and certainly cannot, by any stretch of the imagination, be described as expert evidence. He then goes on to deal with the reasons why he does not consider that one of the three alternative constructions put forward by Mr Moss QC would not be "inconvenient in a practical sense".

23. I have considerable doubt as to whether this so-called expert evidence is admissible. The construction of the statute is plainly a matter for the court. In the circumstances, the dictum of Rogers JA (Mortimer V-P agreeing) in Chen Paul v. Lord Energy Ltd. [1998] 1 HKC 702 at 703H-704A appears particularly apt :

" An expert might give evidence as to a term of art but he was not entitled to say nor was his counsel entitled to ask him what a document meant nor what letter or an agreement or conditions of sale or an assignment meant. The construction of a document was a matter for the court. Still less was an expert witness entitled to give evidence as to what the law was. Any purported expert evidence given on matters that the expert was not entitled to say was inadmissible..... Such expert evidence was a complete waste of time and should never have been called or admitted. It only confused the issues and caused unnecessary expense."

24. Even if contrary to my view it were admissible, it provides no assistance to the court. Barely two out of the 12-page report are remotely relevant to the issue. Moreover, as Mr Scott pointed out, the report does not deal with the difficulties with the section having a partial retrospective effect raised in paragraph 21 of Mr Moss's Opinion.

The effect of section 264A

25. Of the three possible interpretations of the section, the full retrospective operation interpretation was not one that any party contended for with any degree of enthusiasm. The legislature clearly could not have intended section 264A to apply to all liquidations where the estate has become solvent since this would undoubtedly create difficulties where assets may have long been distributed to creditors with a claim to post-liquidation contractual interest and/or to members. The Official Receiver accepts that payments that had been made in the past on a mistaken appreciation of the law is prima facie irrecoverable.

26. The partial retrospection interpretation urged by the Official Receiver is that section 264A is retrospective in so far as there are funds in the hands of the liquidators that remain undistributed although the winding-up may have commenced prior to the commencement date of the section. Such an interpretation would require that partial transitional provisions be implied.

27. I do not consider this to be the true interpretation of section 264A for the following reasons. To give retrospective effect to legislation even where that effect is only partial requires clear and unambiguous language. This is consistent with the general approach of the court that existing rights and obligations should not be impaired or taken away in the absence of clear and unambiguous language. In Yew Bon Tew v. Kenderaan Bas Mara [1983] 1 AC 553 at 558-559, Lord Brightman said :

" Apart from the provisions of the interpretation statutes, there is at common law a prima facie rule of construction that a statute should not be interpreted retrospectively so as to impair an existing right or obligation unless that result is unavoidable on the language used. A statute is retrospective if it takes away or impairs a vested right acquired under existing laws, or creates a new obligation, or imposes a new duty, or attaches a new disability, in regard to events already past."

This was cited with approval in the judgment delivered by Lord Slynn in Marshal v. Apong [1998] 1 WLR 674 at 678H.

28. There are two potential classes of persons whose rights could be impaired if a partial retroactive effect were to be given to section 264A. First, there are the creditors with a contractual interest entitlement. If in a particular case the surplus is merely sufficient to discharge such post-liquidation interest to this class of creditors, they may find themselves receiving less than their contractual entitlement if the surplus has to be shared with creditors generally including those who have no contractual entitlement to interest. The other class would be the contributories. Whether one describes the contributories' interest as 'rights' or 'expectations', that interest will undoubtedly be adversely affected by the operation of section 264A. In that connection, Mr Fitzpatrick's reliance on section 250 of the Ordinance is misplaced. That section deals with the time of distribution to contributories. It does not determine when that interest arises or vests.

29. As Bowen LJ stated in Turnbull v. Forman (1885) 15 QBD 234 at 238 :

"...Where the legislature mean to take away or lessen rights acquired previously to the passing of an enactment, it is reasonable to suppose that they would use clear language for the purpose of doing so, or, to put the same thing in a somewhat different form, if the words are not unequivocally clear to the contrary, a provision must be construed as not intended to take away or lessen existing rights."

I can find no such clear and ambiguous language which can be implied from the surrounding circumstances. The fact that the Hong Kong legislation did not follow the English legislation inasmuch as it omitted transitional provisions is insufficient to give rise to the necessary inference that the legislation was intended to be retrospective. After all, the omission may be attributable to sheer oversight. In this regard, that will hardly be the first time that it will have occurred when Hong Kong legislation is modelled on UK legislation. Moreover, the legislature would hardly have chosen such an elliptical manner to achieve partial retrospection of section 264A.

30. Those considerations appear to me to be dispositive on the construction to be given to section 264A. Ground (c) advanced by Mr Fitzpatrick is plainly wrong. Ground (a) is not a relevant test. As regards policy considerations (grounds (b) and (d)), the 'pressing need' mentioned has nothing to do with section 264A and the perceived unfairness : as appears from para.19.1 of the Law Reform Commission's Report on Bankruptcy, the problem was with the application of the question of interest on debts in the winding up of companies where the current provision has been found to be virtually unworkable in complex liquidations, especially the winding up of banks and other financial institutions. As to grounds (e) and (f), insofar as creative interpretation is open to the court, it is to be exercised with circumspection since it is not the court's function to legislate. In this regard, the passage in Bennion on Statutory Interpretation 3rd Ed. section 168 cited is of little assistance since it is debatable that neither the legislators nor the drafters possessed an actual intention : it was certainly the intention to follow the U.K. legislation.

31. In my judgment, section 264A operates prospectively only and applies to liquidations that commence after that section came into effect on 10 February 1997. Having regard to this conclusion, the question as to interest does not arise.

(Doreen Le Pichon)

Judge of the Court of First Instance
High Court