In re INTER TRANS FAR EAST LTD.

CWU No. 195 OF 1986

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H E A D N O T E

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Section 265(5B) Companies Ordinance - distribution of assets recovered in more than normal share to persons who provide indemnity to liquidator - principles upon which Court should act.

IN THE SUPREME COURT OF HONG KONG

COMPANIES WINDING-UP

NO. 195 OF 1986

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Reasons for Ruling

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1. This is an application under Section 265(5B) of the Companies Ordinance made by the Official Receiver. At the hearing of the application, I made an order that there be a distribution to Gondrand S.N.T. s.p.a. 15% preferentially of the amount recovered namely, approximately HK$305,831.50 after deducting the Official Receiver's usual fees. I stated that I would give my reasons for making the order in due course and that I now do.

2. Briefly, the facts of the case are these, the company involved was the subject of a winding-up order in September 1986. By 1988, the Official Receiver had collected sufficient monies to pay a 100% dividend to the preferential creditors and a dividend of some 32.463% to ordinary creditors.

3. There was a sum of money in a bank account in Taiwan in a former Director's name. Difficulties arose in securing the payment of that sum of money to the Official Receiver for reasons which it is not necessary to go into. The difficulties were such that the Official Receiver virtually abandoned hope of recovery. Then matters were revived by Gondrand S.N.T. s.p.a. which was the company's major creditor, but was then under extraordinary administration in Italy. Following an exchange of correspondence and further enquiries, it appeared that the difficulties which lay in the way of recovery of the amount in deposit in Taiwan were not as great a few years later as they had previously been.

4. Over the course of the next two years, Gondrand went to some trouble to arrange the necessary formalities to be completed in Italy by the former Director. It also indemnified the Official Receiver to the extent of HK$10,000 in order to enable the Official Receiver to take the necessary action. The efforts have come to fruition to the extent that in May last year, a sum of HK$320,831.50 was received for the credit of the company. HK$10,000 has been refunded to Gondrand and a sum of $5,000 has been refunded to the Director in respect of costs and disbursements which he has incurred in completing the necessary formalities.

5. Application is now made by the Official Receiver for an order that in effect will entitle Gondrand to more than the normal share which it would otherwise receive in respect of the money which is now available for distribution to the creditors.

6. There is little authority in Hong Kong as to how the discretion under the section should be exercised. The section creates an exception to the general rule of pari passu distribution. It, therefore, must be construed strictly. nevertheless, I see no reason why this section should not be applied in this case. As was pointed out by Mr. Justice Hunter in Re Companies Ordinance and Kiu May Construction Company Ltd. [1986] HKLR 165, the section has its origins in Australia and has no comparable equivalent in United Kingdom Legislation. I consider that the primary intent behind this section is that encouragement should be given to those who are willing to assist liquidators in recovery of assets. Very often, liquidators will be put in to a position where assets might be recovered, but the cost and expense of doing so is beyond their reach. As a consequence unmeritorious persons might be tempted to hold back on delivery of assets which they should otherwise make. In other instances, assets may simply lie idle. Indeed, on this occasion, it would appear that the money would have remained in the bank account in Taiwan indefinitely, no doubt, ultimately, to be retained by the bank.

7. Secondly, as indeed the section makes clear the advantage given to the indemnifying creditor over the other creditors is in consideration of the risk run by them in providing that indemnity. There must, therefore, be some matching of the risk as against the reward attained. Thirdly, where possible all creditors should be given an opportunity of indemnifying the liquidator, so that no body gets an unfair advantage.

8. Applying those principles to this case, I consider that clearly this case falls within the general rule and that some compensation is merited.

9. Turning to the next criteria, I bear in mind that the section deals with the indemnities given, payments of money and the consideration being the risk run by the person providing the indemnity. I point that out for this reason that, in considering the amount of effort which Gondrand went to in Italy to assist the Official Receiver in obtaining the completion of the necessary formalities, I take into account the cost and expense in so doing on the basis it is quantifiable in monetary terms and therefore amounts to an indemnity of sorts.

10. In this case, I am satisfied that in view of the amounts involved, and in particular the fact that Gondrand is owed far more money than any of the other creditors. There are valid reasons why other creditors were not requested to provide an indemnity.

11. I fix the indemnity at 15% for this reason. On a rough calculation, it would work out that Gondrand would receive approximately an extra $10,000 which would be as much as the amount put at stake by them to the Official Receiver in Hong Kong. In view of the fact that the risk which they ran at the stage at which they actually indemnified the Official Receiver was perhaps not very great, I consider that this is reasonable in the circumstances and sufficient to encourage future creditors to come to the aid of liquidators. In circumstances where the risk being run might be greater, higher awards may well be justified.