XCHRX IN RE PEREGRINE FIXED INCOME LTD. (IN LIQUIDATION)

HCCW 32/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO.32 OF 1998

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D E C I S I O N

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The nature of the application

1. This is an application by the Liquidators of Peregrine Fixed Income Limited (In Liquidation) ("PFIL"), pursuant to section 209A of the Companies Ordinance, Cap.32, for an order that the current compulsory winding-up of PFIL be converted into a creditors' voluntary winding-up.

2. The purpose of the application (made at the request of the creditors of PFIL) is to maximize the assets available to PFIL's creditors in that a creditors' voluntary winding-up will avoid certain fees otherwise exigible pursuant to the Companies (Fees and Percentages) Order.

3. In a compulsory winding-up, on an application for release by a liquidator, the fee payable is half a percent of the gross amount of assets realized and brought to credit (Schedule 3, Table A, Item 9). It is to be noted that whilst both the Liquidators and the Official Receiver are of the view that fees payable under Schedule 3, Table A, Item 9 are payable to the court, this is not at all evident from the terms of the Companies (Fees and Percentages) Order. Contrast sections 3 and 4 with section 6 which deals specifically with Schedule 3 fees. However, it matters not, for present purposes, to whom the fees are payable : from the creditors' perspective, the important point is that such fees would be exigible. In addition, there is a fee payable on the aggregate amount of assets realized which is based on a sliding scale. As at 17 July 1998, a total of $2,174,490,832 have been realized, and fees on this amount have already been incurred under Schedule 3, Table B. A fee equal to 0.1% of the gross value (Schedule 3, Table B, Para.I(f)) will be taken on further realizations.

4. Estimated further realizations by the Liquidators range from a low of HK$1.45 billion to a high of HK$5.6 billion. The fees involved, if a conversion were sanctioned, thus range between HK$32.5 million and HK$95 million.

5. As at 20 August 1998, the proofs of debt submitted were of the order of HK$12.8 billion. Depending on whether the actual realization approximates the low or the high estimate, the fees sought to be avoided can be translated into an increase in the rate of dividend distributable to a creditor of between 0.25% to 0.7%.

Section 209A

6. As noted in the Consultation Paper (at para.9.6) recently issued by the Sub-Committee on Insolvency of The Law Reform Commission of Hong Kong ("the Sub-Committee") :

"Section 209A is Hong Kong's own : no other jurisdiction to the best of [the Sub-Committee's] knowledge, has adopted a similar provision."

7. The history of section 209A is conveniently set out in the following passage of the judgment of Godfrey JA in Re Conso Electronics (Far East) Limited (In Liquidation) [1995] 2 HKC 327 at 329I-330G :

" 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.

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 s 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 s 287.

The marginal note to the new s 209A reads as follows:

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

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 ss 209A and 209B, introduced into the Ordinance in 1990..."

8. It will be noted that the interval between the recommendation of the Jenkins Committee and the appearance of section 209A as part of Cap.32 was some 22 years. The Jenkins Report appears to be silent as to the rationale for that provision which, incidentally, formed part of a series of miscellaneous provisions that the Committee recommended should be adopted. As noted in Conso Electronics, the recommendation never found favour in England. Then some 22 years later, the provision suddenly appeared in the Hong Kong legislation. The Sub-Committee having looked into the genesis of section 209A is of the view that it became law "by default" because of the long delay in putting together the Companies (Amendment) Bill. The Second Report of the Companies Law Revision Committee was published on 12 April 1973. But the Bill which it brought about came a decade later. After setting out the provision which appeared in paragraph 503(1) of the Jenkins Report, all the Committee had to say (at para.8.19) was :

"We agree, and so recommend."

In short, the rationale for that provision remains wholly obscure.

9. The desirability of its retention as part of Hong Kong's companies legislation was considered by the Sub-Committee. The majority voted for its retention : the Official Receiver who was in the minority was in favour of abolishing the section. The Sub-Committee summarized the current position as follows :

"...Nobody denies that the major reason that applications under section 209A have happened is because, by converting to a creditors' voluntary winding-up, the company can avoid payment to the Official Receiver of the scale fees set out in paragraph I of Table B of the Companies (Fees and Percentages) Order. Section 7 of the Order provides that the percentages shall be paid by a private sector liquidator on submission of his accounts to the Official Receiver under section 203, or, where the Official Receiver is liquidator, before he is released under section 205. There are other legitimate reasons for converting, however, as there is less court supervision, fewer procedures and generally less expense in a creditors' voluntary winding-up than in a winding-up by the court."

10. The power conferred on the court to convert a compulsory winding-up into a creditors' voluntary winding-up is discretionary. Sub-section (2) of section 209A, introduced into Cap.32 by the Companies (Amendment)(No.4) Ordinance (No.59 of 1990), provides as follows :

"(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 s 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 para (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 five 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."

11. The Official Receiver has provided the following statistics : to date, a total of 19 orders for 'conversions' have been made pursuant to section 209A. Historically, it would appear that every application made in the past has succeeded.

The relevant factors

12. I now turn to the factors that a court is required to take into account in exercising its discretion :

(a) The wishes of the creditors and contributories

The creditors have voted overwhelmingly, by a majority in value of HK$9 billion, in favour of the conversion.

(b) The progress of the winding-up

The statement of affairs is currently being reviewed by the directors at the request of the Official Receiver. Meanwhile, assets to the value of HK$2.17 billion have been recovered and as at 20 August 1998, 149 proofs of the order of HK$12.8 billion have been received.

(c) Whether any preliminary report has been made under section 191(1) or (2) of the Companies Ordinance

A report has been filed with the court under section 191(1) by the Liquidators and the Official Receiver in which it is stated that further investigations into the collapse of PFIL and of the Peregrine Group are desirable.

(d) Whether any of the officers of PFIL had been convicted of any offences of fraud, dishonesty etc. in relation to the affairs of PFIL

The Liquidators' understanding is that no such persons have been so convicted.

(e) Whether any criminal proceedings in respect of the matters referred to in (d) above are contemplated

Since further investigations are desirable and ongoing, the Liquidators are not in a position to come to any conclusion at this stage.

(f) Whether PFIL forms part of a group companies which may required to be investigated

The Liquidators accept that the collapse of the Peregrine Group is a matter that will require investigation.

(g) Whether there has been any failure on the part of the directors to provide a statement of affairs or to co-operate with the Official Receiver and the Liquidators

The directors have essentially complied with their obligations to date with the exception of one director who failed to attend the meeting of creditors. As noted above, a statement of affairs is currently being reviewed by the directors, following comments from the Official Receiver.

(h) Whether any director or former director has been involved with companies that have gone into liquidation within the last five years

Other than the Peregrine Group companies that have gone into liquidation since the collapse of the Group in January, the Liquidators are not aware of the directors having been involved in the insolvent liquidations of other companies.

(i) Whether the insolvency of PFIL is a matter of public concern

The Liquidators consider that the liquidation of PFIL and the collapse of the Peregrine Group as a whole is a matter of public concern.

Should the discretion be exercised?

13. At one end of the spectrum in favour of the exercise of the discretion is the clear wish of the majority of creditors for a conversion (factor (a)). At the other end of the spectrum against such a conversion (which would preserve the court's and the Official Receiver's continuing involvement in the liquidation) is the acknowledged need for further investigation, and the fact that the insolvency not only of PFIL but of the Group as a whole is a matter of public concern (factors (c), (f) and (i)). Because the investigation is still at its preliminary stages, factor (e) which is closely allied to factors (f) and (i) is as yet unknown but it would be premature to rule out the possibility at this stage for it to weigh in favour of the discretion. Factor (b) may at best be said to be neutral although the fact that the statement of affairs has not been finalized may point against the exercise of the discretion, again, at least at this stage.

14. The Liquidators, recognizing that the insolvency of PFIL is plainly a matter of public concern as well as the need for continuing investigation into the reasons for the insolvency of PFIL and the collapse of the Peregrine Group in general, put their case on the basis that "such further investigations can and should be carried out in the context of a voluntary liquidation" and that "those investigations may take place as effectively within the confines of a voluntary winding-up as within a compulsory winding-up". Accordingly, the order sought includes the following provisions :

"5. pursuant to section 255(1) of the Companies Ordinance the Liquidators may exercise all or any of the powers which the Court might exercise if the Company were being wound up by the Court;

7. if at any time in the future the Liquidators come across any matters relating to criminal aspects or fraud, the Liquidators shall report these matters to the appropriate authorities;"

As I understand it, para.5 of the proposed order is meant to dispense with the need to make a preliminary application required by section 255(1) on each occasion, with a view to saving costs. It does not seek or result in any general delegation by the court of the exercise of its powers thereunder. A general delegation would, in any event, be ultra vires the court's power. Paragraph 7 is intended to ensure that there is a positive obligation on the Liquidators (as there would be in a compulsory liquidation but not in a creditors' voluntary liquidation) that matters of fraud or other criminal activity which are required to be investigated by the relevant authorities are reported by the Liquidators to the appropriate authorities. These provisions are meant to address the perceived differences between compulsory and voluntary liquidations in the context of further investigations.

15. Reliance was placed on the order made in L & D Associates Ltd. CWU 534 of 1996, a case where apparently further investigation was required into certain transactions and where the liquidation was also said to be a matter of public concern. But the order is of limited assistance in the absence of written reasons for the exercise of the discretion. It would not be correct to infer from the supporting affidavit and the Report which was before the judge in that case his reasons for making the order. Suffice to say that the fact that it is appropriate in one case to make a section 209A order where the matter was of public concern and required further investigation does not mean that it is appropriate to do so in every case. The exercise of the discretion must depend on the facts peculiar to each application.

16. The Official Receiver chose to stay neutral in view of his "financial interest in the outcome of the application". That approach meant that the court was left with no assistance in testing the validity of the Liquidators' submissions. With the greatest respect, the correctness of the Official Receiver's approach to the application is questionable. It would mean that the court can never expect any assistance from the Official Receiver in such applications since by definition the "financial interest" arises in every case, effectively rendering all such applications ex parte or unopposed and depriving the court the assistance it has a right to expect. The Official Receiver may well wish to reconsider his stance in further cases in the light of those observations.

17. To my mind, what is being proposed by the Liquidators raises a question of principle. The subsection is cast in mandatory terms : the court "shall" and not "may" have regard to the listed factors. So far as any legislative intent is discernible from the subsection, prima facie, the only sensible interpretation of the list of factors to which the court is to have regard appears to support the view that liquidations that are of public concern and/or which require further investigation or, put shortly, where impropriety or wrong-doing cannot be ruled out, should remain under the court's control. If, having regard to the factors set out in subsection (2) of section 209A, the balance points against the exercise of the discretion, it appears wrong in principle to seek to surmount that difficulty by imposing conditions so as to subject the Liquidators to obligations they would not normally be under under a voluntary liquidation regime. A more fundamental objection is that this approach cannot address the key issue which is not the question of continuing investigations but whether the liquidation should be divorced from the control of the court.

18. As the Court of Appeal's decision in Re Conso Electronics (supra) makes clear, a section 209A order brings an end to the compulsory winding-up. Once an order for conversion is made, the liquidation will not be one with the presence of the Official Receiver in the background and the court's control over the liquidation would cease. By way of example, provisions such as section 204 of the Companies Ordinance would no longer apply. Section 204 provides as follows :

"204. Control of Official Receiver over liquidators

(1) The Official Receiver shall take cognizance of the conduct of liquidators of companies which are being wound up by the court, and, if a liquidator does not faithfully perform his duties and duly observe all the requirements imposed on him by statute, rules, or otherwise with respect to the performance of his duties, or if any complaint is made to the Official Receiver by any creditor or contributory in regard thereto, the Official Receiver shall inquire into the matter, and take such action thereon as he may think expedient.

(2) The Official Receiver may at any time require any liquidator of a company which is being wound up by the court to answer any inquiry in relation to any winding up in which he is engaged, and may, if he thinks fit, apply to the court to examine him or any other person on oath concerning the winding up.

..."

19. The Peregrine liquidations brought about by the collapse of Hong Kong's largest investment bank are matters of public concern affecting as they do Hong Kong's standing as a financial centre. There is considerable speculation and disquiet over the possible reasons for the collapse which are still to be identified. Further, the Peregrine liquidations have not been exactly trouble-free. During the period of provisional liquidation, the conduct of the Provisional Liquidators came under judicial criticism. The Official Receiver's continuing involvement in the background is plainly desirable. These factors clearly outweigh the wishes of the creditors who stand to benefit from a marginally increased rate of dividend if a section 209A order is made. In my judgment, it would not be a proper exercise of the discretion for the court to divest itself of its control of the liquidation of PFIL in these circumstances.

20. For these reasons, the application is dismissed.

21. I make an order nisi that the costs, charges and expenses of and occasioned by the application be costs, charges and expenses in the liquidation of PFIL.