LEGEND INTERNATIONAL RESORTS LTD v. METROPLEX BERHAD

HCCW 1139/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1139 OF 2004

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BETWEEN

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D E C I S I O N

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1.  This is an appeal against a master’s refusal to order security for costs on the application by the liquidators against a creditor/contributory, Metroplex Berhad.

2.  Metroplex filed an application on 26 May 2010 for various relief.  It seeks to firstly lift the regulating order made by Kwan J (as she then was) on 9 June 2006 pursuant to section 227A of the Companies Ordinance.  Secondly, it seeks to remove the liquidators and to appoint new liquidators. In the alternative to removal of liquidators, it seeks to have a general meeting of the creditors and contributories or consultation by the incumbent liquidators of the creditors and contributories, and in either case, that their wishes be conveyed to the court.  It also seeks to inspect certain documents kept in sealed envelopes. 

3.  The supporting affirmation is made by one Mr Mok, a group general manager of Metroplex.  Mr Mok made some allegations against the liquidators.  He said:

“3. The developments which have caused the applicant to seek such orders are:

(1) The liquidators have patently failed to carry out the liquidation in a cost-and-time-efficient and expedient manner and … have in fact presided over the loss of the vast majority of the Company’s landed assets, and most of its Core Assets … by way of piecemeal sale or seizure by/surrender to the landlord. Over 3 years have elapsed since they were appointed pursuant to the order of Kwan J. on 9 June 2006. In the interim their failure to build, and alienation of, local links in the Philippines (including their failure to explore co-operation with local parties via the Applicant, which has strong local connections in the Philippines) has caused this liquidation to drag on, which has certainly not been to the benefit of any of the creditors or shareholders, the Applicant included.

(2) The applicant is a significant creditor (around 11 to 16% of the apparent total amount owed to putative creditors based only on the principal amounts outstanding as of May 2006) and the shareholder of 59.99% of the Company’s shares … and is hence entitled to be heard. However, the Liquidators’ attitude towards the Applicant has revealed that they only see the Applicant as a party to be ignored, or at the very most to be only accorded lip service. They have consistently sidelined any requests or attempts to contribute by the Applicant, which is a creditor and shareholder, and instead carried out the liquidation in a secretive manner without seeking the support or suggestions of creditors such as the applicant. Moreover they have without good reason, and for best reasons known only to them, breached various promises and undertakings made on their behalf to the Applicant, as well as taken an unnecessarily adversarial stance as regards the Applicant’s attempts to find out exactly what is going on as regards the liquidation, and hence to get involved in and contribute to a swift and efficient conclusion thereof.

(3) The Liquidators have not made decisions that any reasonable liquidator would make, and have to the contrary acted entirely irrationally. …

(4) … The Liquidators, however, have not properly met and conferred with the Company’s creditors and contributories to discuss issues relating to the liquidation of the Company in general and or the appointment of [a committee of inspection] in particular.

(5) … Moreover, the liquidators have in the meantime used their position and powers under the Regulating Order to carry out the liquidation in a poorly-managed and entirely opaque manner.

…

135. In the circumstances, the Applicant’s lawyers will submit that given the past dealings between the parties, the Liquidators have, when left to their own devices, exhibited irrational behaviour, particularly in favouring the putative financial creditors’ input for no apparent rational reason, which has been in the end to the detriment of the Applicant’s interests, as well as those of other creditors (save perhaps for SBMA and PAGCOR as they have taken unilateral action). Indeed the Applicant will respectfully suggest at the hearing of its Summons that this is not the way in which reasonable liquidators conduct themselves.

136. Moreover, there is no indication that this will change, going forward, into a more transparent and formal process of consultation, unless the Liquidators are removed. Given their past behaviour, it would also be clearly inappropriate for the Liquidators to adjudicate on proofs of debt (as the Applicant says should be required in order to ensure certainty in relation to any potential voting or consultation) given that over the past 3 years they have shown an obvious bias in consulting … only some putative financial creditors while ignoring the Applicant, the only creditor, and contributory, with the expertise relevant to the winding-up. The Applicant’s lawyers will therefore submit inter alia that the Liquidators should be removed because the Applicant has (by reason of the matters set out above) shown cause for such, and/or because their conduct has been irrational, lacking in good faith, and/or partial and affected the Applicant’s interests.”

4.  The above are the general allegations.  I have omitted the elaborations given by Mr Mok as it is unnecessary to go into them for the purpose of this appeal. 

5.  The liquidators oppose the application.  It will be heard on coming Thursday, 10 February before Fok JA.  The liquidators applied for security for costs on 29 September 2010 under Order 23, rule 1 of the Rules of the High Court.  The application was heard before a master on 10 January this year who dismissed it.  The liquidators now appeal. 

6.  There is no dispute that Metroplex is domiciled in Malaysia and the management based in Selangor.  It has no connection with or assets in this jurisdiction save that there is some money kept by its Hong Kong solicitors which is enough to pay the security for costs sought by the liquidators.  This money seems to have been sent here to cater for an order for security.  If no security should be ordered, the liquidators cannot expect its availability in future for satisfaction of any costs order that the liquidators may obtain.

7.  Mr Hew, counsel for Metroplex, opposes the appeal.  He submitted that Metroplex’s application for, inter alia, the removal of the liquidators is just an interlocutory application.  The winding-up is a process of collective execution against the assets of the company for the benefit of all creditors.  Metroplex’s application was issued by a summons.  It merely seeks directions on the future conduct of the liquidation, including who should be the liquidators and whether the liquidation should continue without a regulating order.  These relate to the conduct of the liquidation and the continuing duties of the liquidators.  The result of the application will not dispose of the liquidation nor will it finally determine a substantial issue which will affect the outcome thereof or the parties’ rights.  It is designed to regulate or assist in some way the conduct of the liquidation.  Hence, it does not constitute “proceeding” for the purpose of Order 23 of the Rules of the RHC.

8.  To distinguish between an interlocutory application from a final order or judgment, Mr Hew referred to Shell Hong Kong Limited v Yeung Wai Man & Another [2003] 3 HKLRD 62 where Chan PJ said in paras 26, 27 and 31:

“Whether a judgment is interlocutory or final

26. In deciding whether an order or judgment is interlocutory or final for the purpose of obtaining leave to appeal, the court has preferred the ‘application approach’ to the ‘order approach’, although it has been said that the former is ‘right in experience’ and the latter is ‘right in logic’ (per Lord Denning MR in Salter Rex & Co v. Ghosh [1971] 2 QB 597, 601). See also First Pacific Bank Ltd v. Robert HP Fung [1990] 1 HKLR 527 and B + B Construction Ltd v. Sun Alliance and London Insurance Plc [2001] 1 HKLRD 1 where the application approach was affirmed. This approach was understood to involve an examination of the nature of the application to see whether the order or judgment made upon such an application would, whether it fails or succeeds, determine the whole action.

27. But it has been recognised that, on the application approach, a judgment, in some circumstances, may be final even if it does not finally determine the whole action, see eg White v Brunton [1984] QB 570; Holmes v Bangladesh Biman Corp [1988] 2 Lloyd’s Rep 120; First Pacific Bank Limited v Robert HP Fung [1990] 1 HKLR 527.

…

31. In my view, what one can extract from these cases is that where an order or judgment given in an application does not finally dispose of the whole action but only an issue in the action, it is necessary to consider the purpose and substance of the application, the issue dealt with and determined by the court and the effect of a determination of this issue on the rights of the parties, the further conduct of the proceeding and the final disposal of the whole action. A broad commonsense approach should be adopted. If the issue dealt with and determined by the court is ‘a substantive part of the final trial’ (Holmes v. Bangladesh Biman, [1988] 2 Lloyd’s Rep 120 at 124); or ‘a crucial issue’ in the case or a point ‘that goes to the root of the case’ (First Pacific Bank Ltd v. Robert HP Fung, [1990] 1 HKLR 527 at p. 532), or ‘a dominant feature of the case’ (Korso Finance Establishment Anstalt v. Wedge & others (unrep. 15 February 1994) at page 7), then the order or judgment, even if it does not finally dispose of the whole action, should nevertheless be regarded as a final judgment”

9.  Mr Hew submitted that Metroplex’s application is not final as the relief sought is not a crucial issue or are dominant features in Metroplex’s rights to share in the proceeds of the collective execution in the liquidation.  He further submitted that no misconduct or personal unfitness needs to be proved for the removal of the liquidators (see Re Keypak Homecare Limited [1987] BCLC 409 at 415 d to g).

10.  Mr Tollan for the liquidators, however, submitted that it is the substance rather than the form of the proceedings that is important.  He also referred to GFN SA & Others v Bancredit Cayman Limited (in official liquidation) [2010] Bus LR587 at para 26 where Lord Scott of Foscote said:

“26. … In my opinion, the same distinction can usefully be drawn between those proceedings, interlocutory in form, that would and those proceedings that would not, sustain an application for security for costs. An interlocutory application designed to regulate or assist in some way the conduct of the substantive action between the parties would not, in my opinion, constitute ‘proceedings’ for the purpose either of section 74 or Order 23. On the other hand, an application which, although interlocutory in form, raised issues as to the rights of the parties which were in substance independent of the issues in dispute in the parent action would, in my opinion, normally constitute in substance ‘proceedings’ for those purposes.”

11.  Mr Tollan further referred to Re Buildlead Limited [2005] BCC 133 where Evans-Lombe J said at paras 11 to 13:

“11. Proceedings under s.108 of the Insolvency Act are proceedings like any other to which the Civil Procedure Rules (‘CPR’) apply. Thus in an application to remove a liquidator it would be open to the applicant or the respondent liquidator to invoke the court’s summary judgment powers under Pt 24 of the CPR. Thus, by means of the Pt 24 rules the claim to remove a liquidator or his defence of the claim could be subjected to preliminary examination of the merits with a view either to striking out the claim or giving summary judgment to the claimant.

12. Equally, Pt 25 applies to proceedings under section 108 so that a respondent liquidator would be able to apply to the court to order the applicant seeking to remove him to give security for his costs under r. 25.12 provided that the conditions proscribed by r. 25.13 were complied with.

13. Similar powers of course existed under the old Rules of the Supreme Court which preceded the CPR.”

12.  Mr Tollan submitted that the power to order security for costs in Metroplex’s application to remove the liquidators also exists in our Order 23 of the RHC.  He also submitted that the observations of Evans‑Lombe J show that such application can be viewed as an action by the creditor against the liquidators.

13.  In the light of the nature of the allegations made by Mr Mok on behalf of Metroplex against the liquidators, which are serious allegations against their professional integrity, Metroplex’s application is not merely for the purpose of regulating or assisting the conduct of the liquidation.  It raises and seeks the final determination of the issue of the fitness of the incumbent liquidators to continue with the liquidation of the company.  This application will result in the determination of the liquidators’ rights to continue with the liquidation which are, in substance, independent of the issues in the liquidation itself.

14.  I therefore hold that this application is not interlocutory but final in nature, and I do have the jurisdiction to order security for costs against Metroplex.

15.  On the question of merits of the application for security, I am referred to an order made on 22 December 2006 by the High Court of Malaya at Kuala Lumpur which appointed a provisional liquidator for Metroplex.  The appointment limited the provisional liquidator to work with Metroplex:

“1.1 to formulate and present a composite group wide scheme of arrangement pursuant to section 176 of the Companies Act 1965 (‘Act’) (‘Scheme’) between the respondent, such companies within its group of companies as the provisional liquidator and the management of the respondent (Metroplex) may deem fit (‘Scheme Companies’);

1.2 to endeavour to preserve the listing status of the respondent and to facilitate continued trading in the shares of the respondent.”

16.  The provisional liquidator was also required to submit a report to the Malaysian court within 30 days from the order, a review of the working draft of the proposed debt-restructuring scheme prepared by Metroplex and dated 13 December 2006. 

17.  The terms of this order have thus created doubts on the solvency of Metroplex.  Since Metroplex is a corporation with a foreign domicile and has no assets within the jurisdiction (and I do not treat the money kept by its Hong Kong solicitors as assets within this jurisdiction for the purpose of the application for security for costs), I will exercise my discretion to order it to pay security for costs into court.

18.  On the question of quantum, I accept the sum of $386,000 as proposed by the liquidators as a reasonable sum because the fee earners have been advising the liquidation and it is reasonable to have them engaged in the preparation to oppose Metroplex’s application.

19.  I also accept the personal undertaking of Metroplex’s Hong Kong solicitors to pay this sum into court as security for the liquidators’ costs of Metroplex’s application within 14 days from today.

(Discussion re costs)

20.  On the question of costs, Mr Hew has submitted that this is satellite litigation.  The making of the application and the filing of the appeal are both late which have caused prejudice to Metroplex.  There is also a without-prejudice letter suggesting that if the liquidators should withdraw the appeal, they would waive the costs ordered by the master.  Mr Hew also suggested that I can consider no order as to costs.

21.  Having heard his submissions, I think there is some strength on the question of lateness in making the application and pursuing the appeal although the appeal was lodged just within time.  However, bearing in mind that the hearing of Metroplex’s application will take place within two days, the application for security should have been made earlier on and the notice of appeal filed shortly after the master had given the decision. In the light of this delay, which has certainly created certain administrative inconvenience for Metroplex in very expeditiously arranging the money to be transferred to its Hong Kong solicitors, I would order Metroplex to pay 80% of the costs of the application and of the appeal to the liquidators.  And I would also order the costs to be assessed by me summarily at a 9.30 am hearing if the parties cannot agree on the quantum within the next 14 days.

(Discussion re delay and costs)

22.  For the reserved costs, I make the same order, that is, Metroplex do pay 80% of them to the liquidators.