XCHRX RE FORLUXE SECURITIES LTD.

HCCW 310/98
HCCW 311/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) ACTION NO. 310 OF 1998
COMPANIES (WINDING-UP) ACTION NO. 311 OF 1998
(Heard together)

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DECISION

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1. On 20 December 2000, I gave a decision regarding the distribution of securities held by or for the account of Forluxe Securities Ltd ("FSL") and Forluxe Finance Ltd ("FFL").

2. By a summons issued on 8 February 2001, the liquidators sought further directions regarding allocation of the liquidators' fees and expenses and for the working out of the above order.

3. On 15 February 2001, that summons was heard. The Court asked for further evidence on some aspects and on 22 February 2001, Mr Hill filed his 9th Affidavit exhibiting various documents. There was also supplied under separate cover an opinion of London Counsel on FSL's claim under a Brokers Fidelity Insurance Policy. This opinion is privileged and has been kept sealed. It is not to be read without leave of the Court.

4. The main directions sought relate to the allocation of the liquidators' fees and expenses. These have been divided into 7 categories.

General Liquidation/Statutory Work

5. The 1st category is General Liquidation/Statutory Work. The liquidators have attributed their time costs to FSL or FFL where it has been possible to so designate the work. Where such a designation has not been possible, the costs have been apportioned equally between the companies. In my view, that must be the correct approach.

6. As for apportionment of these costs between trust assets and general assets, in my view, a fair apportionment would be in proportion to the value of such respective assets, as on the whole, the process of liquidation is for the purpose of collecting and distributing assets. This is particularly appropriate in the present case as most administration expenses have been incurred in dealing with clients' claims to trust assets.

7. Whilst on this aspect of costs for General Liquidation/Statutory Work, I note from Mr Hill's 8th and 9th Affidavits that the Committees of Inspection have apparently not been as diligent as they should have been in the process of vetting the liquidators' costs and expenses. This is regrettable because committees of inspection have an important role to play in the liquidation process.

8. Whilst the vetting and approval of fees during the period of provisional liquidation has to be performed by the court under the statutory regime, that work for the post-provisional liquidation period is primarily the duty of the committee of inspection.

9. In the present case, correspondence sent by the liquidators to the committees of inspection have been exhibited. The majority of the members have failed to respond at all. This attitude is unhelpful.

10. If the committees have any queries or comments concerning the fees claimed, they should raise them with the liquidators. That would enable them to form an informed opinion as to whether they should approve the fees, and if so, to what extent.

11. If the committees simply do not respond, the liquidators may have to seek approval from the Court. This would lead to further delay as the Court, unlike the members of the committee of inspection, has to deal with many liquidations, not just one. Further, it would lead to more costs being incurred which would deplete the assets available for distribution. The losers at the end of the day would only be the clients and creditors themselves.

Share Portfolio Management and Administration

12. I now turn to the 2nd category, being Share Portfolio Management and Administration. As between FSL and FFL, these costs should be allocated by reference to whether the shares were held for FSL or FFL.

13. As for allocation as between trust assets and general assets, it is noted that there are shares in Categories D and E referred to in my Decision of 20 December 2000, viz where there are more shares than claims (Category D) and where there are shares but no claims (Category E). I have in my Decision held that the surplus of shares in Category D and all shares in Category E are free (i.e. general) assets of the companies. Therefore, the costs of Share Portfolio Management and Administration should be borne in accordance with the proportion between the value of the shares which are trust assets and the value of the shares which are general assets.

Claim on the Brokers Fidelity Insurance Policy

14. The 3rd category relates to the Claim on the Brokers Fidelity Insurance Policy. The assured is FSL. Therefore, as between FSL and FFL, the costs for pursuing this claim should fall to FSL.

15. As between trust assets and general assets, it is obvious that any payments received from the insurers would form part of the general assets of FSL for the benefit of its unsecured creditors. Therefore, the costs should be borne by the general assets.

Sale of seat on Stock Exchange

16. The 4th category relates to the sale of FSL's seat on the Hong Kong Stock Exchange. This is an asset of FSL and its unsecured creditors have benefited from the sale. Therefore, these costs should fall to FSL and should be borne by the general assets.

Costs of proceedings in HCA 7543/1998

17. The 5th category relates to proceedings in HCA 7543/1998. The Plaintiffs are both FSL and FFL and the Defendants are James Mui Kwong-ngok, Gordon Mui Kwong-yin and Peggy Lee Pui-yin who were all directors of FFL. James Mui was a director of FSL but Gordon Mui and Peggy Lee also took part in the day to day running of that company.

18. Judgment has been obtained by FFL against James Mui for about $32m., and against Gordon Mui for a little over $50,000. Judgment has been obtained by FSL against James Mui for about $5.9m., against Gordon Mui for $50,000 and against Peggy Lee for $954,000. There has also been judgment for interest and costs. However, it would appear that very little may be recovered under these judgments.

19. Although there is one action with FSL and FFL as plaintiffs, the liquidators' fees can apparently be apportioned between the two companies on an actual basis by reference to the individual companies. Their solicitors have apportioned their costs in accordance with the value of the companies' respective claims, which is approximately 20% to FSL and 80% to FFL. This seems to be a fair apportionment as one of the main considerations in funding litigation must be the size of the claims in such litigation.

20. As for apportionment between trust assets and general assets, the liquidators have suggested that the trust assets should bear the costs because of the claims for restitution of the shares and monies taken. However I take the view that that would not be fair to the beneficiaries of the trust assets. Although the claims were for both shares and money, the default judgment obtained was for a money judgment. Therefore, any amounts recovered from the defendants would accrue to the benefit of the general body of creditors. I would therefore allocate the costs equally between the trust assets and the general assets on the basis that when the litigation commenced, both shares and money were being claimed from the defendants and one would not have known the extent of success on either type of claim.

Expenses of interviews with former officers and preparation of s.221 examination

21. The 6th category relates to the questioning of the Muis for the purpose of tracing the shares and any proceeds of sale. As between FSL and FFL, the liquidators have apportioned the costs equally, unless certain work related only to one of the companies in which event those costs have been allocated to that company. That seems proper because of the close relationship between the companies and the way that they have been run as described in my Decision of 20 December 2000. It would hardly have been possible to restrict questioning to one company without involving the other.

22. The solicitors' costs have been apportioned in accordance with the value of claims by clients, which work out at 60% for FSL and 40% for FFL. I do not however consider that that is a viable apportionment in this case because the poor state of the companies' documentation and record-keeping as described in my Decision. In my view, an equal apportionment would be fair and proper. Insofar as any costs have been taxed and paid on the basis of the apportionment done by the solicitors, I would order that those are to be re-apportioned.

23. As for apportionment between trust assets and general assets, the liquidators have indicated that the purpose of the questioning was to discover what had happened to the shares. That being the case, I take the view that all costs should be borne by the trust assets as the clients claiming those assets would have been the primary beneficiaries of any tracing exercise arising from the questioning.

Application to Court for Berkeley Applegate order

24. Finally, there are the costs of the application to the Court for a Berkeley Applegate order. I do not need to repeat here the rationale for making a Berkeley Applegate order. Clearly such an order should be made. As the application relates entirely to trust assets, all costs should be borne by the trust assets wherever they lie and to be borne pari passu.

Distribution

25. I have also been asked to order that all shares be sold and the proceeds distributed unless there is a specific request by any clients that actual shares should be distributed to them. This would of course ease the work of the liquidators and I am mindful of the fact that there are about 600 clients.

26. However I do not see how I can override the beneficial interests of the clients that way. I would order that for those shares which are less than a board lot, such shares be sold and proceeds distributed in place of the shares, but for other shares, that the shares themselves be delivered to the clients.

Costs of present summons

27. Finally I would order that the costs of and incidental to this summons be dealt with in accordance with the method in paragraph 24.