RE SUM CHUN HIGH QUALITY SHOES FACTORY LTD.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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RULING

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1. The issue raised on the six summonses before me has not been considered previously by any Court in Hong Kong.

2. On the 1st December 1984, Mr. W.K. Timso and Mr. T.B. Stevenson, Chartered Accountants of Messrs. Ernst & Whinney (the applicants) were appointed to be the Provisional Liquidators of Millie's Shoes Factory Ltd. and 5 other companies in the Millie's group by the directors of these companies. They were appointed in accordance with the provisions of s. 228A of the Companies Ordinance, which relates to the special procedure prescribed for the Voluntary Winding-up of a Company where it is unable to continue in business. S. 228A(6) provides:

3. The Official Receiver extended the appointment of the applicants by a letter dated the 28th December 1984 to the 14th January 1985. The appointments ceased on that date and subsequently the Official Receiver was appointed to be the Provisional Liquidator of the companies. All the companies were wound up compulsorily on the 18th February 1985 with the exception of Sum Chun High Quality Shoes Factory Ltd which was wound up on the 25th February 1985.

4. On the 12th January 1985, the applicants issued ex-parte summonses requesting the directions of the Court under s. 255 of the Companies Ordinance as to the basis upon which the applicants' remuneration should be calculated. Upon consideration of the applications, I made an order that their fees be considered by a Master pursuant to the provisions of Rule 6 of the Companies (Winding-up) Rules and for a report to be submitted to the Companies' judge.

5. Fee notes had in fact been previously submitted by the applicants to the Official Receiver together with reports setting out the details of the work done. The Official Receiver responded by saying that he required the applicants' bills to be taxed by a Master. Subsequently, it appears that discussions took place between the applicants and the Official Receiver with regard to achieving a settlement, but they were unsuccessful.

6. By a letter dated the 29th October 1985, the applicants' solicitors informed the Court that since important differences had arisen between them and the Official Receiver as to the proper manner in which the fees should be calculated and in view of important matters of principle, both sides agreed that the matter should be restored for hearing.  The summonses came before me yesterday, when after hearing argument, I adjourned the applications and ordered the Official Receiver to attend today concerning allegations that had been made against the applicants and also to lodge a report. That report has been filed in accordance with my directions and has been read by me. I also made an order for costs against the Official Receiver thrown away as a result of the adjournment because the issues raised, if true, would amount to misfeasance by the applicants.

7. The applicants' case is put in the following way:

"That where professional persons are appointed by a company to act as provisional liquidators under s.228A of the Companies Ordinance, 'the adequate remuneration' for their services includes remuneration calculated by reference to time spent at reasonable rates of charge for the persons employed; in the alternative where the tasks undertaken by a provisional liquidator are particularly onerous and complicated, or exhibit other exceptional features, it is reasonable and proper to allow by way of adequate remuneration for his services compensation calculated on the basis of time spent."

8. The Official Receiver on the other hand submitted that the correct approach is for the bills to be taxed on a percentage basis. However, in the alternative, he argued that the taxing Master should ignore any work done other than for the preservation of the assets or necessary as a matter of urgency to be realised. In effect the Official Receiver complains that some of the costs charged are attributable to work that should not have been carried out by the applicants with the result that unnecessary fees and disbursements have been incurred.

9. In a draft report of the Official Receiver which is exhited to Mr. Stevenson's affidavit sworn on the 16th November 1985, it is alleged that the applicants have expended time and disbursed money with little or no regard to the creditors of the companies.  In paragraph 8 of this report the Official Receiver seeks directions from the Court as to whether action should be taken against the joint liquidators for the recovery of any monies held by them out of the assets of the companies.

10. A more serious allegation to make against a professional man in his capacity as a Provisional Liquidator is hard to imagine. Nevertheless Mr. Knos who appeared for the Official Receiver submitted that it was not necessary to file evidence to support his allegations, but that inferences could be drawn from Mr. Stevenson's affidavit. This approach is wholly erroneous. Allegations in the nature of fraud must be strictly particularised. No evidence has in fact been filed by the Official Receiver and the only evidence before the Court, at the present time, is the affidavit of Mr. Stevenson to which I have already referred from which it is apparent that the allegations are denied.

11. Mr. Knos requested that I hear the applications to determine the basis for assessing the costs as a preliminary matter. That if I held in his favour on a percentage basis, the allegations against the applicants would not be raised, but that if I held that the time basis was right, he would seek an adjournment for further directions. In other words the allegations would be held back depending upon my decision. Quite naturally Mr. Dicks who appeared for the applicants objected to this course to which I acceded.

12. Having heard the submission of the Official Receiver, it is in my view incumbent upon him to consider whether he intends to invoke the provisions of s.276 of the Companies Ordinance by making an application to the Court for an examination to be made into the conduct of the applicants to determine whether they should pay compensation for misapplication of the assets of the companies or for misfeasance. In the circumstances, it is quite clear that the matters raised by the Official Receiver cannot be dealt with upon the hearing of the present summonses.

13. The course open to the Official Receiver is either to institute separate proceedings against the applicants or he may withdraw the allegations that have been made, so that the present applications can proceed. On the other hand if the Official Receiver chooses not to issue Proceedings or does not withdraw the allegations, I rule that the Official Receiver be barred from raising them at the adjourned hearing of the present summonses.

14. The summonses which I adjourned yesterday to a date to be fixed will remain adjourned to a date to be fixed in consultation with counsel with two days reserved.