RE THE GRANDE HOLDINGS LTD

HCCW 177/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 177 OF 2011

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D E C I S I O N

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Introduction

1. On 25 April 2014 McVitie Group Holdings Limited (“McVitie”) issued a summons seeking a declaration that its proof of debt, arising from a judgment against the Company in the Superior Court of California on 13 June 2011 (“judgment”), which as at 21 March 2013 stood at US$47,414,369.48 plus accruing interest (“Debt”), should have been admitted in full at the first meeting of creditors of the Company on 14 March 2014 and that the Provisional Liquidators decision to mark it as objected to should be reversed.  Since the proof was submitted McVitie has submitted further documents to the Provisional Liquidators who now accept that it should have been admitted, although in the smaller amount of US$26,092,345.29.

2. The judgment was obtained by a group of plaintiffs who have been referred to as the (“Kayne creditors”).  The Provisional Liquidators do not take any issue with the Judgment or the amount payable under it.  The Kayne creditors assigned the judgment to McVitie by way of bill of sale dated 10 January 2014 for US$28,000,000.  The Provisional Liquidators do not take any issue with the validity of the assignment.

3. In the present application McVitie was represented by Wong Yan Lung SC and Liu Man Kin and the Provisional Liquidators by Roxanne Ismail SC.

Legal Principles

4. The principles by reference to which the court determines applications of this sort are not in dispute.  It is convenient to quote passages from my decision in respect of another challenge to the Provisional Liquidators’ decision to reject a proof submitted by Gain Alpha Finance Limited [1] in which they are explained:

“6. Rule 128 of the Companies (Winding-Up) Rules, cap 32H, provides:

‘The chairman shall have power to admit or reject a proof for the purpose of voting, but his decision shall be subject to appeal to the court. If he is in doubt whether a proof should be admitted or rejected he shall mark it as objected to and allow the creditor to vote subject to the vote being declared invalid in the event of the objection being sustained.’

7. When the court is called upon to determine a challenge to a liquidator’s decision to admit or reject a proof for voting purposes, it is not deciding whether the liquidator has made a reasonable decision, but is carrying out an independent assessment of whether or not the proof should be admitted or rejected on the basis of the evidence before the court. In doing so, the court should undertake a broad, macroscopic assessment: Re Days International Ltd [2014] 1 HKLRD 20, §10:

‘I also agree with Mr Chain that the court when called upon to determine a challenge to a liquidator’s decision to admit or reject a proof for voting purposes is not deciding whether the liquidator made a reasonable decision, but is carrying out an independent assessment of whether or not the proof should be admitted or rejected on the basis of the evidence before the court.^[2] However, I do not accept that this requires the court to undertake a different exercise to the one undertaken by a liquidator. The court should also undertake a broad, macroscopic assessment. It cannot be sensible at the earliest stages of a liquidation of a company, which may prove to have very little assets, to require the liquidator or the court to be drawn into an application which involves considerable work for the purposes of determining whether or not a proof should be admitted for voting purposes.^[3] It does not seem to me that there is anything unfair in this. A creditor such as Global which has an unusually complex and problematic debt cannot reasonably expect the limited resources of an insolvent company to be expended, on an expensive review of its debt before a Committee of Inspection has even been elected. Mr Chain disputed this. He argued that because the grounds for valuing the debt at HKD1 were fraud it was necessary for the Liquidators to adduce evidence of sufficient cogency to just rejecting the proof on this ground. Mr Chain argued that it is well established the “the more serious the allegation the more cogent is the evidence required to overcome the unlikelihood of what is alleged and thus to prove it”.^[4] This is, of course, correct, but I do not accept Mr Chain’s assertion that it is necessary for the Liquidators to have looked at each individual transaction that allegedly goes to make up the debt and satisfied themselves that there was good reason to think that in each case there was evidence of fraud before valuing the debt at HKD1 or, that unless they adduce evidence in these proceedings addressing each transaction and demonstrating it is fraudulent the court should direct a new meeting of creditors at which Global’s debt is valued at HKD419,645,000. In my view what is required at this stage is for the court to make a relatively broad‑brush assessment of the value at which the debt should be admitted mindful of the fact that as the grounds for rejecting it are fraud the evidence at this stage must be more compelling than would otherwise be the case.’

Re a Company (No. 004539 of 1993) [1995] 1 BCLC 459, at 466b:

‘In my view, the task of the court, on an appeal under r 4.70(4) of the Insolvency Rules 1986, is simply to examine the evidence placed before it on the matter and come to a conclusion whether, on balance, the claim against the company is established and, if so, in what amount. I would only add that, in considering the matter, the court is not confined to the evidence that was before the chairman at the time that he made his decision but is entitled to consider whatever admissible evidence on the issue the parties to the appeal choose to place before the court.’

The task of both a liquidator and the court at this stage does not involve determining whether or not the debt claimed is payable, but whether on a macroscopic assessment it seems probable that the debt is payable and accordingly the proof should be admitted for voting purposes in the value of the debt claimed or, if the evidence justifies it, some other sum.  The assessment should be undertaken in a practical way mindful of the fact that at the early stages of a liquidation when the assessment for voting purposes is most likely to arise it will normally be undesirable that excessive, and thus expensive, time is spent on scrutinising a proof.”

5. It is also not in dispute that under United States’ law a judgment creditor may assign the benefit of a judgment to a third party who then stands in the shoes of the original judgment creditor against the debtor.

The argument

6. The Provisional Liquidators have reduced the Debt for 2 reasons.  First, to take into account payments received by the Kayne creditors pursuant to a settlement agreement made in December 2013 between them, McVitie and other defendants to the action in California including the Company (“sale and purchase agreement”), which led to the signing of the formal bill of sale.  The Provisional Liquidators suggest that the sums paid pursuant to the sale and purchase agreement, namely the US$28,000,000, reduced the amount owed by the Company to the Kayne creditors and thus the amount assigned.

7. Secondly, to take into account a payment received by the Kayne creditors of US$4,000,000 pursuant to an agreement dated 19 December 2013 between them and Emerson Radio Corp.  (“Emerson”) to settle the claims made by the Kayne creditors against Emerson in the proceedings initially commenced against the Company, but to which Emerson was subsequently joined as a defendant (“Emerson settlement agreement”). Clause 4 of the Emerson settlement agreement specifically states that it is not a settlement of claims against the Company in the action in California. 

8. I deal first with the sale and purchase agreement.  In order to understand the Provisional Liquidators’ argument it is necessary to understand the circumstances leading up to the signing of the sale and purchase agreement.  In January 1995 the Kayne creditors commenced an action against MTC Electronics Technologies (“MTC”). They obtained default judgment against MTC in December 2005.  In December 2006 the Kayne creditors commenced an action against the Company for alter ego relief; in other words they alleged that the Company controlled MTC and stripped it of its assets to render it judgment proof (“Company action”). The Kayne creditors obtained judgment on 31 May 2011.  In August 2009 the Kayne creditors commenced an action against Christopher Ho, Accolade (PTC) and a number of its associated companies (“Accolade defendants”) also for alter ego relief alleging that Ho and the Accolades defendants had stripped the Company of its assets to render it judgment proof and should be liable to pay damages to the Kayne creditors (“Ho action”).  On 13 June 2011 the Kayne creditors obtained judgment against the Company.  In July 2011 the Kayne creditors added Emerson as an additional defendant in the Ho action. 

9. On 12 September 2013 Deputy High Court Judge Le Pichon made a winding up order against the Company on a petition issued by the Kayne creditors relying on the judgment in the Company action.  On 13 December 2013 the sale and purchase agreement was signed.  On 19 December 2013 the Emerson settlement agreement was signed. On 10 January 2014 the bill of sale assigning the benefit of the judgment to McVitie was executed.  On 15 January 2014 the Kayne creditors informed the Provisional Liquidators that the judgment had been assigned to McVitie.

10. As I have already mentioned the Provisional Liquidators do not question the judgment or the assignment.  The Provisional Liquidators initially objected to the entire proof.  They did so for various reasons.  Their present position is that having received new information and Californian law advice from O’Melveney and Myers the proof should be admitted in the amount of US$26,092,345.29, which has been calculated as follows:

McVitie’s POD, including interest to the date of the winding up order	US$58,092,345.29
Less: Payment by McVitie to the Kayne Creditors	(US$28,000,000)
Less: Payment by Emerson to the Kayne Creditors	(US$4,000,000)
Net amount admitted for voting purposes	(US$26,092,345.29)

11. The Provisional Liquidators have assumed from the outset that McVitie had some connection with Christopher Ho, the Company’s controlling mind at the material times, and that given that it was unlikely that an independent third party would want to buy the judgment, McVitie was associated with Mr. Ho and that the assignment of the judgment was part of some broader settlement of the claims made against Mr. Ho and the Accolade defendants in the Ho action.  The Provisional Liquidators were apparently advised that a settlement of the Ho action might, as a matter of Californian law, have extinguished the judgment in the Company action or have reduced the amount recoverable pursuant to it.  If this were the case it would mean that the Kayne creditors had assigned possibly nothing of value or less than the full amount of the judgment.  They were also advised that the amount recoverable would be reduced by the amount paid pursuant to the Emerson settlement agreement so as to avoid double recovery.  The way in which they proceeded to approach McVitie’s proof was influenced by this advice.

12. Following the first meeting of creditors the Provisional Liquidators were provided with a copy of the settlement agreement dated 12 May 2014 between Mr. Ho, the Accolade defendants and the Kayne creditors.  After taking further advice from O’Melveny and Myers they reached the following position which is explained in paragraphs 74 and 75 of Mr. Fok’s (one of the 2 Provisional Liquidators) 18^th affirmation:

“74. First, in relation to the effect of the Settlement Agreement:

74.1 The terms of the Settlement Agreement provide that Mr Ho and the Ho Defendants were required to procure that McVitie purchase the Kayne Creditors’ claim, in return for the Kayne Creditors providing a broad general release to Mr Ho and the other Ho Defendants.

74.2 The effect of the Settlement Agreement and the assignment of the Kayne Creditors’ claim to McVitie was therefore, in my view, very different to the situation where, for example, a distressed debt trader purchases from a bank a claim against a company in winding up at a discount. In an ordinary distressed debt transaction, there is no question of the underlying debt having been discharged or reduced as a result of the purchase. In this case, the purchase of the debt was an essential component of the settlement of claims against Mr Ho which sought to recover from Mr Ho and others the same underlying loss as the Kayne Creditors’ judgment against Grande.

74.3 I have obtained further advice from OMM regarding the effect of the Settlement Agreement on McVitie’s POD (“Further OMM Advice”). The Further OMM Advice is at Tab 2.

74.4 In summary, the Further OMM Advice is to the effect that:

74.4.1 under Californian law the assignee of a judgment debt will “stand in the shoes” of the assignor as at the date of the assignment and acquires all the rights and remedies possessed by the assignor for the enforcement of the debt, subject to the equities and defenses that the judgment debtor had against the assignor at or before the time of the assignment (at pages 3-4);

74.4.2 if the Ho Action was successful, the Ho Defendants and Emerson would have been co-obligors with Grande for the Grande Judgment (page 5);

74.4.3 therefore “any value received by the Kayne Creditors in exchange for the release of the Ho Defendants and Emerson from the Ho Action should reduce the Kayne Creditors’, and ultimately McVitie’s claim against Grande as a co- or joint obligor.” Any other result would lead to doubt recovery by the Kayne Creditors / McVitie (page 6);

74.4.4 McVitie’s claim should therefore be reduced by the US$4 million paid by Emerson pursuant to the Emerson Settlement Agreement (page 6);

74.4.5 further, McVitie’s claim should be reduced by a portion of the US$28 million paid by McVitie to the Kayne Creditors under the Ho Settlement Agreement (pages 6);

74.4.6 the portion of the US$28 million which is attributable to the release of the Ho Defendants from the Ho Action depends on the intention of the parties. While it is apparent from the Settlement Agreement that “at least some of the US$28 million paid by McVitie was intended to compensate the Kayne Creditors for the release of their claims against the Ho Defendants… the amount that should be allocated to such release is a question of fact that cannot be determined based on the present record.” (page 6)

75.  In light of the Further OMM Advice, I consider that before any final determination of the admissibility of McVitie’s POD were to be made, it would be necessary for McVitie to be provided with the opportunity to provide any further evidence that it would want considered as to the apportionment of the amounts paid to the Kayne creditors as between the settlement of the Ho Action and the purchase of the Kayne Creditors’ claim against Grande. Pending provision of any further evidence from McVitie and consideration and investigation of that evidence, I would not want to pre-judge what apportionment may have been intended by the parties to the Settlement Agreement, or if there was any intended apportionment at all.”

13. In addition in paragraph 75 Mr. Fok says that he considers that there is a strong and close relationship between the owners of McVitie and Mr. Ho and “I consider this connection to be relevant as I am concerned that in the circumstances where the Kayne Creditors’ judgment against Grande was premised on conduct by Mr. Ho and others that may also have been in breach of fiduciary duty to Grande, that it may be inappropriate or circular for Mr. Ho to benefit from a proof of debt that arises from his own misconduct.” 

14. In paragraph 32 of his 19^th affirmation Mr. Fok summarises the position of the Provisional Liquidators after receiving further advice from O’Melveny and Myers:

“The Provisional Liquidators have considered the further advices obtained since Fok 18 and have concluded that the position remains unchanged. McVitie’s claim should be reduced, for voting purposes, by the amounts received in settlement of the Ho Action, in which the Kayne Creditors sought to enforce against Emerson and the Ho Defendants judgments entered against MTC and Grande (as those terms are defined in Fok 18) (see pages 4-5 of OMM’s advice dated 13 September 2014).”

15. The Provisional Liquidators principal argument is that, for the reasons explained in the O’Melveny and Myers opinions, Mr. Ho and the Accolade defendants were co-obligers with the Company in respect of the same debt, namely, the original liability of MTC.  They say that if judgment had been obtained against Mr. Ho and the Accolade Defendants in the Ho action and, for example, half of the amount awarded against MTC had been recovered the amount recoverable under the judgment would have to be adjusted accordingly otherwise it would potentially lead to double recovery.

16. This conclusion is disputed by McVitie’s expert, Mr. Varnen, who says, and I summarise, that the claims against the Company in the Company action and Mr. Ho and the Accolade defendants in the Ho action involve different facts, allegations, parties and theories.  The short point being both actions involve determining the assertion that the defendants were the alter ego of MTC and the Company respectively and necessarily what has to be proved is factually different in the 2 cases.

17. The Provisional Liquidators objection now comes down to this: part of the money paid to the Kayne creditors pursuant to the sale and purchase agreement must be attributable to the settlement of the Ho action and that until the relevant apportionment has been undertaken it is not possible to admit any part of the US$28,000,000 otherwise it would allow double recovery.

18. Clause 4 of the sale and purchase agreement provides:

“4. DISMISSAL OF THE ACTION WITH PREJUDICE.

Simultaneously with the full payment of the Purchase Price set forth above, counsel for Plaintiffs will file with the Court a Notice of Dismissal Pursuant to Federal Rules of Civil Procedure 41(a) or 41(c) (the “Dismissal Document”), waiving all rights of appeal and providing that each Party shall bear its own costs, attorneys’ fees and expenses in connection with the Action. The Plaintiffs shall use the appropriate dismissal form that is provided by the United States District Court for the Central District of California, or if such form is unavailable, shall cause a substantively identical dismissal notice to be filed that meets all requirements set forth in this paragraph. The Dismissal Document is the result of a settlement between the Parties. Each Party shall take such further actions as may be necessary to obtain a dismissal of the Action with prejudice immediately upon payment of the Purchase Price. The dismissal of the Action pursuant to this paragraph is considered part of the consideration in exchange for the Purchase Price.”

19. It is clear from the recitals that the “Action” is the Ho action. What is not clear is what, if anything, McVitie paid the Kayne creditors for their agreement to the dismissal of the Ho action.  It would seem quite possible that the figure of US$28,000,000 was not calculated by either party by attributing precise portions of it to (1) the value of the judgment and (2) the value of the claims against Mr. Ho and the Accolade Defendants.  It would not, however, have been sensible for McVitie to take an assignment only of the judgment if any future recovery against Mr. Ho or the Accolade defendants might reduce its value or there would be a risk that the full amount could not be proved in the liquidation in Hong Kong of the Company.  Is it reasonable to assume in these circumstances that some part of the consideration is attributable to the settlement of the claims against Mr Ho or the accolade Defendants?  It seems to me that it is.  McVitie can only vote under rule 125 of the Companies (Winding-up) Rules in respect of a liquidated debt.  In so far as it cannot at this stage be calculated as a matter of arithmetic how much of the Debt is attributable to the judgment, the entire Debt should not be admitted for voting purposes.  The Provisional Liquidators have admitted that part of it which they accept is clearly quantifiable, which I accept is correct.

20. As I understand it the US$4,000,000 was paid by Emerson in respect of claims brought against it in the Ho action.  It seems to me that on the material before me McVitie is not entitled to prove for the entire judgment as US$4,000,000 of the loss claimed by the Kayne creditors, and thus forming part of the loss included in the judgment, has been recovered by them.  Regardless of the position under Californian law the Provisional Liquidators are entitled to go behind the judgment and the assignment and consider whether the arrangement entered into is prejudicial to the interests of creditors as a whole[5].

21. I, therefore, will order that the McVitie’s proof be admitted in the amount of US$26,092,345.29. I shall make a costs order nisi that McVitie pay the Provisional Liquidators’ costs of this application.  If any party wishes to challenge that decision it should issue a summons within 7 clear working days.