RE CONSO ELECTRONICS (FAR EAST) LTD

IN THE COURT OF APPEAL

1994, No. 230
(Civil)

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J U D G M E N T

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Godfrey, J.A.:

1. This is an appeal from an order of Sears, J., made on 17 November 1994, on an application to the court made by summons dated 3 August 1994, taken out by Kevin William Page and Gabriella Ricardo Diaz-Azedo ("the applicants") against Nicholas Timothy Cornforth Hill and Kennie Lui Lai Hang ("the liquidators") of Conso Electronics (Far East) Ltd. ("the company"). An order for the compulsory winding up of the company had been made on 7 April 1993. The applicants had been appointed liquidators of the company, by an order made on 14 May 1993, providing (among other things) for their remuneration, but had been removed from office by an order made on 10 March 1994, when Messrs. Hill and Hang were appointed in their place.

2. On 7 July 1993, the winding up was ordered by the court to be continued as if it were a creditors' voluntary winding up, under the provisions in that behalf contained in s.209A of the Ordinance. The order ("the s.209A order") failed, however, to provide for the applicants' remuneration (indeed it not even provide, expressly, for their continuance in office; but this was a slip which can and should now be cured under O.20 r.11 of the Rules of the Supreme Court).

3. By their summons of 3 August 1994, the applicants complained of a decision of the liquidators rejecting a fee note which the applicants had submitted on 15 April 1994 in respect of their professional fees and disbursements in acting as liquidators of the company down to 10 March 1994; and they asked that their professional fees be paid in accordance with the order of 14 May 1993.

4. The applicants took out their summons of 3 August 1994 under s.200(5) of the Companies Ordinance, Cap. 32, which provides that any person aggrieved by any act or decision of a liquidator may apply to the court, which may (among other things) reverse the act or decision complained of, and make such order in the premises as it thinks just. The judge, accepting that he had jurisdiction to do so, decided the application in their favour. Was this right?

5. S.200(5) is contained in part V of the Ordinance, which is concerned with winding up. Part V is laid out in five divisions. Division (i) is preliminary; division (ii) relates to winding up by the court; division (ii)A relates to winding up by the court with a regulation order; division (iii) relates to voluntary winding up; division (iv) has been repealed; and division (v) contains provisions applicable to every mode of winding up.

6. S.200(5) appears in division (ii) of Part V, relating to winding up by the court. An application under s.200(5) may be made only in relation to a company the affairs of which are being wound up by the court.

7. However, s.255(1) of the Ordinance, which appears in division (iii), relating to voluntary winding up, provides (so far as it is material) that any "creditor" of a company in voluntary winding up may apply to the court to determine any question arising in that winding up, and may ask the court to exercise any power which the court might have exercised, if the company were being wound up by the court, to reverse a decision of the liquidator of the company; and the court may then make such order on that application as it thinks fit.

8. The liquidators contend that the court had no jurisdiction to entertain the applicants' summons of 3 August 1994, and it has become necessary in this connection to decide whether (as the applicants contend) the company is being wound up by the court; or whether (as the liquidators contend) the company is being wound up voluntarily. If the company is being wound up by the court, the applicants, claiming as they do to be aggrieved by the decision of the liquidators, were entitled to apply to the court under s.200(5). But, if the affairs of the company are being wound up voluntarily, the applicants were not entitled to apply to the court under s.200(5). They can apply to the court under s.255(1); but they cannot do that unless, for the purposes of s.255(1), they are properly to be described as "creditors" of the company.

9. The liquidators claim, as I have indicated, that the company is being wound up voluntarily; and they claim that the court has no jurisdiction to entertain the application made by the summons of 3 August 1994, even if treated as having been made under s.255(1), because, they say, the applicants are not "creditors" of the company for the purposes of s.255(1).

10. The applicants, on the other hand, claim that the company is being wound up by the court, and that therefore their application under s.200(5) was well-founded; if that is wrong, they say, and the company is being wound up voluntarily, nevertheless their application is still well-founded, for they are, contrary to the contention of the liquidators, "creditors" of the company, and accordingly they are entitled to apply to the court for relief under s.255(1).

11. In order to resolve this controversy we have to decide exactly what was the true effect of the s.209A order.

12. The genesis of s.209A is to be found in the report, in 1962, of the English Company Law Committee (The Jenkins Committee), CMND.1749, which recommended the introduction, into the English companies legislation, of a provision giving the court power, on the application of the liquidator or any creditor, to direct that the winding up of a company ordered to be wound up by the court should be conducted as if the winding up were a creditors' voluntary winding up. It did not prescribe in detail the machinery by which this change was to be effected; no doubt, if the recommendation had been accepted, the details could and would have been considered and included in the amending legislation. In fact, the recommendation was not accepted.

13. However, the recommendation received a more favourable (if belated) reception in Hong Kong. In 1984, the local ordinance was amended by the insertion in it of a new section 209A in the following terms:

"209A. (1) The court may, on the application of the liquidator or any creditor, direct that the winding up of a company ordered to be wound up by the court shall be conducted as if the winding up were a creditors' voluntary winding up.

(2) In the exercise of its power under this section, the court shall have regard to the wishes of the creditors and the contributories of the company, as proved to it by any sufficient evidence, in the same manner and to the same extent as provided in section 287."

14. The marginal note to the new section 209A read as follows:

"Power of court to order winding up to be conducted as creditors' voluntary winding up."

15. Unfortunately, it does not seem to have occurred to those responsible for the new s.209A that the recommendation which they were implementing needed to be fleshed out if it were to work. When years later this did finally dawn on those responsible for the operation of the local ordinance, some thought was given to the matter. This resulted in a comprehensive code regulating the powers of the court to make such an order and providing for its consequences, to be found in new sections 209A and 209B, introduced into the Ordinance in 1990. I must set out these sections in full:

"209A. Power of court to order winding up to be conducted as creditors' voluntary winding up

(1) The court may on the application of the liquidator or any creditor made -

(a) in the case of a company in respect of which an order has been made under section 227F, not later than 3 months from the date of such order; and

(b) in any other case, not later than 3 months from the date of a resolution to make such an application passed at any of the meetings (including an adjourned meeting) of creditors and of contributories held pursuant to section 194 or such further time as the court may permit,

order that the winding up of a company ordered to be wound up by the court shall, from the date of the order made on such application, be conducted as if the winding up were a creditors' voluntary winding up.

(2) Where an application is made under subsection (1), the court shall have regard to -

(a) the wishes of the creditors and contributories of the company, as proved to it by sufficient evidence;

(b) the progress of the winding up (including in particular assets realized, proofs of debts submitted by creditors and whether a statement of affairs has been submitted under section 190);

(c) whether any report has been made to the court under -

(i) section 191 (1); or

(ii) section 191(2) that in the liquidator's opinion a fraud has been committed;

(d) whether any director, former director or other officer of the company has been convicted under this Ordinance or any other law for any offence involving fraud, dishonesty, fraudulent trading, misfeasance or breach of duty in relation to the affairs of the company;

(e) whether any criminal proceedings in respect of any offence referred to in paragraph (d) are contemplated or have been instituted against any person referred to in that paragraph;

(f) whether the company forms part of a group of companies the affairs of which are proposed to be investigated or are being investigated under this Ordinance or any other law;

(g) whether there has been a failure on the part of the directors to provide a statement of affairs which the court considers satisfactory or to co-operate with the Official Receiver or liquidator or to comply with any requirement under this Ordinance in relation to the winding up of the company;

(h) whether any director or former director of any other company which has gone into liquidation within 5 years of the date when the company went into liquidation, has been directly or indirectly concerned in the management of the company;

(i) the fact that the insolvency of the company is a matter of public concern; and

(j) any other matter which the court considers appropriate in the particular circumstances.

(3) Where an application has been made under subsection (1) in relation to a company in respect of which an order had been made under section 227F then, without affecting the generality of subsection (2)(a) and subject to subsection (4), the court shall before hearing the application direct that meetings of the creditors and contributories be called, held and conducted in such manner as the court may direct for the purpose of ascertaining the wishes of the creditors and contributories and may appoint a person to act as the chairman of any such meeting and to report the result of the meeting to the court.

(4) Where the court is of the opinion that it is impractical to hold meetings of the creditors or of the contributories, the court may order that such other course of action as directed by the court be taken to ascertain the wishes of the creditors and contributories.

(5) In an order made under this section, notwithstanding any other provision of this Ordinance, the court may, after taking into consideration the wishes of the creditors and contributories, direct either that the liquidator of the winding up by the court appointed under section 192 continue to act as the liquidator or appoint any other person to act as the liquidator.

(6) Where an application is made under subsection (1) -

(a) the Official Receiver, if he is the liquidator in the winding up by the court; or

(b) the liquidator and the Official Receiver, if the Official Receiver is not the liquidator in such winding up,

shall submit to the court a report with regard to the application.

(7) On the hearing of any application made under subsection (1), the Official Receiver may appear and call, examine or cross-examine any witness if he so thinks fit and may support or oppose the application.

209B. Consequences of an order under section 209A

Where an order is made under section 209A that the winding up of a company shall be conducted as if it were a creditors' voluntary winding up -

(a) the date of -

(i) the commencement of the winding up shall be the date deemed under section 184 to be the date of the commencement of the winding up by the court;

(ii) the appointment of the liquidator shall be the date of the appointment (or first appointment) of a provisional liquidator in the winding up by the court; and

(iii) the order for winding up shall be the date on which the order for winding up by the court is made,

for any purpose for which the date of the commencement of the winding up, the date of the appointment of a liquidator or the date of the winding-up order respectively is relevant under this Ordinance;

(b) sections 182, 183 and 186 shall continue to apply;

(c) the rights of a creditor or a contributory under section 257 shall not be affected;

(d) the fees of the liquidator and any charges or or expenses due and payable under section 296 or under any other provision in this Ordinance up to the date of the order made under section 209A shall be paid forthwith out of the assets of the company in priority to all the other claims;

(e) the statement of the affairs of the company required to be submitted under section 190 and the accounts of the liquidator up to the date of the order made under section 209A may be inspected by the creditors;

(f) any creditor is entitled to have a copy of any document referred to in paragraph (e) on payment of reasonable photocopy charges (if any);

(g) the court shall make such other orders as it considers appropriate to safeguard the books, records and documents of the company in the custody of the liquidator or the Official Receiver, and notwithstanding section 283 or any other provision of this Ordinance they shall not be disposed of otherwise than as specified in such order."

16. The applicants contend that, under a section 209A order, matters of substance continue to be regulated "as if" the company was still in compulsory winding up, matters of procedure only being regulated "as if" the company were now in creditors' voluntary winding up. The liquidators, on the other hand, contend that a s.209A order brings an end to the compulsory winding up by converting it from a compulsory winding up into a creditors' voluntary winding up. (For what it is worth, the operation is referred to as a "conversion" in the explanatory memorandum accompanying the bill proposing the enactment of the new sections 209A and 209B.)

17. In my judgment, the liquidators' contention is to be preferred. There is no warrant, either in the language of the two sections, or anywhere else, for the alternative contention, which would lead to grave difficulties in the conduct of the winding up. A liquidator under the new regime would, if the applicants are right, have to decide, before he did anything, whether the action on which he was proposing to embark ought to be regarded as substantive or procedural (a notoriously difficult distinction to draw).

18. On the other hand, the language of the two sections positively supports the liquidator's contention. The words "as if" are ambiguous; and, it is true, are consistent with the applicant's contention. But in my judgment, they are equally consistent with the liquidator's contention. And the detailed provisions of s.209B seem to me to put the matter beyond doubt. If the compulsory winding up in some way survives a s.209A order, why does s.209B need to provide, as it does provide, for the date of the commencement of the winding up to be the date of the commencement of the winding up by the court? That would be the case anyway. Why should s.209B provide that "sections 182, 183 and 186", which are contained in division (ii) of part 5 relating to compulsory winding up, "shall continue to apply" when, if the company was still in compulsory winding up, these sections would apply anyway? Why should s.209B provide that the rights of a creditor or a contributory under s.257, which gives a creditor or contributory the right to apply for a compulsory winding up, are not to be affected by a s.209A order if the company is still in compulsory winding up anyway? And (coming closer to home) why should s.209B provide for the liquidator's fees and expenses down to the date of the s.209A order to be paid forthwith out of the assets of the company, if not to demonstrate, conclusively, that a s.209A order brings the original regime (compulsory liquidation) to an end and substitutes another (creditors' voluntary liquidation) in its place?

19. The answer to all these questions must be that, as the liquidators contend, by the s.209A order, the compulsory winding up is indeed for all purposes converted into a creditors' voluntary winding up.

20. It follows that the applicants' summons of 3 August 1994 could not properly have been issued, as it purported to be issued, under s.200(5), which relates only to compulsory liquidations. This, however, would not matter if the summons could properly have been issued under s.255(1). Clearly it could have been so issued if, but only if, the applicants were "creditors" of the company for the purposes of s.255(1). In my judgment, however, the applicants were not "creditors" of the company for the purposes of s.255(1). The whole purpose of a winding up, whether compulsory or voluntary, is to regulate the competing claims of creditors and contributories among themselves as at the date of the commencement of the winding up. The question who is a "creditor" or contributory of a company in winding up is a question which has to be settled by reference to the state of the company's affairs as at that date.

21. The applicants were not "creditors" of the company at the date of commencement of the winding up here (10 March 1993). Accordingly, they are not qualified to make any application to the court under the provisions of s.255(1).

22. It is most unfortunate that the applicants did not ensure, when they applied for the s.209A order as they did, that it would contain provision for their future remuneration, as clearly it should have done. The compulsory winding up having terminated with the making of the s.209A order, the effect of the previous order of 14 May 1993, which had provided for their remuneration, was clearly spent, although obviously the applicants did not realise this at the time.

23. It follows that the order under appeal was made without jurisdiction and must be discharged; but that need not be the end of the matter. It is open to the applicants, if so advised, to proceed by ordinary action against the company (although, since s.186 continues to apply to the winding up, they must first obtain the leave of the court in order to do so). What the nature and amount of the applicants' claim might be is not for this court to consider. All we can do is to allow with costs here and below, the present appeal. I would so propose.

Mortimer, J.A.:

24. I agree that this appeal must be allowed and the order made in favour of the applicants must be discharged.

25. At the relevant time s. 209A(1) of the Ordinance provided:

"The court may, on the application of the liquidator or any creditor, direct that the winding up of a company ordered to be wound up by the court shall be conducted as if the winding up were be a creditors' voluntary winding up."

26. On 7th July 1993 Woo J ordered that the compulsory winding-up of the company be continued as if it were a creditors' voluntary winding-up. In spite of the use of the words "as if" a consideration of the scheme of the Ordinance and in particular the provisions of s.209B set out by Godfrey JA in his judgment demonstrate that the winding-up was for all purposes converted into a voluntary winding-up. The passage in re Carrian Holdings Ltd (In Liquidation) unreported CW-U 244 of 1983 at 8 where Jones J said:

"Section 209A confers a discretion upon the court as to whether an order should be made. The effect of an order will be a continuation of the liquidation by the liquidators without the presence of the Official Receiver in the background rather than a conversion of the liquidation from a compulsory winding-up to a voluntary winding-up."

cited and relied upon by the judge below is in error and should not be followed.

27. The further submission - made here and below - that in any event the court has jurisdiction to entertain the applicant's claim under s.255(1) of the Ordinance is also wrong. The section reads:

"255(1)

The liquidator or any contributory or creditor may apply to the court to determine any question arising in the winding up of a company, or to exercise, as respects the enforcing of calls, or any other matter, all or any of the powers which the court might exercise if the company were being wound up by the court."

The applicants' claim is for fees as former liquidators incurred during the winding-up and not before the date of its commencement. Although it appears that in the court below the above submission was not seriously challenged, a creditor is one whose debt was incurred before the commencement of the winding-up. The applicants do not claim to be creditors in the winding-up and cannot bring their claim within the section.

28. I also agree that for clarity, Woo J's order of the 7th July 1993 should be amended under the slip rule to provide for the continuation of the applicants as liquidators until they were removed from office by Patrick Chan J's order on the 10th March 1994.

29. I regret that it is not possible for the applicants' claim to be determined under the provisions of the Companies Ordinance. This could easily have been done had the applicants applied at any time before the final order for their discharge as liquidators. Unfortunately, they did not do so. The result is that if given leave it will be necessary for them to bring separate proceedings to recover their fees.

30. For these reasons and those given by Godfrey JA, I would allow the appeal, set aside the judge's order and make an order nisi for costs here and below to the appellants.

Power, V.-P.:

31. I also agree.