RE HSIN CHONG CONSTRUCTION CO LTD

HCCW 239/2018

[2021] HKCFI 2517

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 239 OF 2018

________________

________________

________________

D E C I S I O N

________________

1.  I have before me an application by the Provisional Liquidators of Hsin Chong Construction Company Limited (“Company”) for retrospective leave in respect of two sets of proceedings which arise as a result of applications within these winding up proceedings.

2.  The first commenced with an application by Build King Construction Limited for validation order, the precise details of that matter are not relevant.  It was, however, of some complexity and went all the way to the Court of Final Appeal.  The Provisional Liquidators were successful before the Court of Final Appeal and obtained their costs of the appeal.  No order as to costs was made by the Court of Final Appeal in respect of the proceedings before the lower courts.  It does not seem to me that the second part of the costs order is a reason not to grant retrospective leave in what would appear to have been a justified decision to contest Build King’s application.

3.  The second set of proceedings arise from an application made by the Mandatory Provident Fund Schemes Authority.  That matter was heard by Mr Justice Godfrey Lam at the end of 2020.  That was also an application for validation orders.  Part of the application was dismissed and part adjourned, until such time as the Provisional Liquidators have established whether there is any surplus assets in the winding up.  Costs were reserved.  I understand that an application was in fact made before Mr Justice Godfrey Lam for sanction by the Provisional Liquidators but Mr Justice Godfrey Lam thought that it was a matter that should be dealt with by another judge.  I do not think it is necessary to go into any detail about the substance of the dispute which on the face of the matter it was also reasonable for the Provisional Liquidators to contest.

4.  However, the determination of this application does not turn solely on whether or not the court thinks the Provisional Liquidators’ decision was reasonable in the circumstances. The reason why there has been a substantial delay in seeking sanction is also relevant.

5.  The Provisional Liquidators were appointed by me on 18 January 2019.  On 2 November 2020 I made an order winding up the Company on the grounds of insolvency.  The order appointing the Provisional Liquidators contained the normal provision in [4(f)], requiring court sanction for the commencement or defence of legal proceedings.  The paragraph is in the following term:

“With the prior sanction of the Court, to bring or defend any action or other proceedings (whether court proceedings, arbitration or otherwise) or to take any steps in existing actions or proceedings, whether within or outside of the jurisdiction, in the name of and on behalf of the Company or to take such other action as may be considered by the Provisional Liquidators to be necessary for the protection of the Assets.”

6.  The Provisional Liquidators’ solicitors took the view that this only required the Provisional Liquidators to seek sanction of the prosecution or defence of proceedings outside the winding up proceedings. As I have already explained the two matters in respect of which retrospective sanction are sought, were brought within these winding up proceedings.

7.  I, accept that simply as a matter of language [4(f)] is arguably open to the construction that “action or other proceedings (whether court proceedings, arbitration or otherwise)” is a reference to proceedings outside the winding up proceedings as the Provisional Liquidators’ solicitors assumed.  However, the purpose of the order is to require the Provisional Liquidators to obtain the court’s consent before expending the insolvent company’s money on formal proceedings without the prior of approval of the court and it is difficult to see why the same restriction would not apply to a substantive application commenced within the winding up proceedings such as an unfair preference claim.  In my opinion the better reading of [4(f)] is that the reference to “proceedings” is to any application for a substantive order regardless of whether it is brought in the winding proceedings or by way of a new proceedings with a separate action number.  If the application is made pursuant to a term of the order, for example, the common provision, which allows the provisional liquidators to sell an asset of the company with the approval of the court, prior approval will not be required because it is inherent in the terms of the order that such an application can be made.  The same will be true if, for example, after a winding up order has been made the provisional liquidators, or liquidators, wish to make an application to commence proceedings.  Section 199B(2) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”), provides that a provisional liquidator holding office by virtue of section 194, as the current Provisional Liquidators have been since 2 November 2020, who wishes to “bring or defend any action or other legal proceedings on the name and on behalf of the company [1]” is required to obtain the approval of the court.  It is, unsurprisingly, not necessary to obtain leave to make an application for leave to seek the court’s approval to commence separate legal proceedings as it is inherent in [4(f)] and section 199B(2) that the application can be made and it would lead to unnecessary duplication, but it is in my view necessary to obtain the court’s prior approval to expend the company’s money on the substantive application the provisional liquidator is contemplating and this is so whether or not it is commenced in the winding up proceedings or by way of originating process or notice of arbitration.

8.  This would seem to be consistent with the reasoning of Madam Justice Linda Chan in dealing with an application by the same Provisional Liquidators for directions under section 200(3) of the Ordinance.  In [18] and [19] of her decision in Re Hsin Chong Construction Company Limited (No 2)[2]Chan J says this.

“18. Third, where, as here, provisional liquidators have been appointed over the company pending determination of the petition, an application under section 200(3) should not be made without the prior sanction of the Court. This is because the powers of the provisional liquidators are prescribed by the order appointing them, which invariably require the provisional liquidators to seek prior sanction of the Court before they commence or defend proceedings (or do other acts such as to borrow money, enter into compromise or arrangement with other parties or dispose of the company’s assets). Under §4(f) of the Appointment Order (which continues to date), there is a specific limit on the PLs’ power to engage in proceedings:

‘With the prior sanction of the Court, to bring or defend any action or other proceedings (whether court proceedings, arbitration or otherwise) or to take out any steps in existing actions or proceedings, whether within or outside the jurisdiction, in the name of and on behalf of the Company or to take such other action as may be considered by the Provisional Liquidators to be necessary for the protection of the Assets.’ (underlined added)

19.  The limit in part mirrors the effect of section 186 of the Ordinance, which provides that when a provisional liquidator has been appointed, ‘no action or proceeding shall be proceeded with or commenced against the company except by leave of the court, and subject to such terms as the court may impose’.  The wordings ‘such other action as may be considered by the [PLs] to be necessary for the protection of the Assets’ cover proceedings brought in the names of the PLs, given that the PLs are prima facie entitled to be indemnified of their costs (including adverse costs payable by them) out of the Company’s assets under Order 62 rule 6(2) of the Rules of the High Court.  The purpose of imposing such limit is to ensure that the Company’s assets will not be wasted in pursuing or defending any proceedings unless they are necessary or in the best interests of the Company to do so, as it is generally undesirable for the provisional liquidators to incur costs in litigation at the time when the status of the company has not been determined.”

9.  Although my view is different to that taken by the Provisional Liquidators’ solicitors it seems to me that the view they took was credible and adequately explains the reason for the delay in making the application.

10.  It seems to me, therefore, desirable that in future [4(f)] is drafted so as to specifically include applications commenced within the winding up proceedings itself.  I will, therefore, make the necessary order granting retrospective approval of the defence by the Company of the two proceedings which I described earlier.