RE THE INCORPORATED OWNERS OF TAI CHI FACTORY BUILDING (IN LIQUIDATION)

HCCW 458/2016

[2020] HKCFI 371

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 458 OF 2016

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DECISION

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1.  This is an ex parte application by the joint and several liquidators (“the Liquidators”) of the Incorporated Owners of Tai Chi Factory Building (in Liquidation) (“the Corporation”) seeking:

(1) the court’s sanction pursuant to section 218 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“the Ordinance”) to distribute the only remaining asset (other than an amount of cash held) of the Corporation; and

(2) directions to allow the fees, costs and expenses of the Liquidators to be agreed and paid other than by way of taxation notwithstanding section 196(2)(b) of the Ordinance (“section 196”) and rule 176 (1) of the Companies (Winding-up) Rules, Cap 32H (“rule 176”).   

Background

2.  The Corporation was the incorporated owner of Tai Chi Factory Building (“the Building”).  It was wound up on 8 March 2017 on its becoming functus officio.  The Liquidators were appointed liquidators of the Corporation on 10 July 2017.

3.  The Corporation owns the outer wall of the Building to which, pursuant to the Deed of Mutual Covenant, 1 of 155 undivided shares of the Building was allocated.  It was acquired from the Hong Kong Government on 24 February 1982, the outer wall having devolved on the latter as bona vacantia.

4.  The remaining 154 undivided shares in the Building are owned as to 132 undivided shares by Asia Turbo Development Limited and as to 22 undivided shares by Ray Bright Enterprises Ltd (collectively “the Owners”), both of which are subsidiaries of Henderson Land Development Company Limited.  The Owners wish to acquire the outer wall from the Corporation for redevelopment purposes. 

5.  The Corporation is solvent.  Apart from the 1 undivided share, it holds $292,090 in its liquidation account. It has no other assets and other than the disposal of its interest in the outer wall, there is nothing further to be done in its liquidation.

Distribution in specie

6.  Part X of the Ordinance (which governs the winding up of “unregistered companies”) applies to the liquidation of the Corporation by virtue of section 33 of the Building Management Ordinance (“the BMO”), Cap 344.  Accordingly, the provisions relating to compulsory liquidation apply: see sections 327 (1) and (2) of the Ordinance.

7.  Section 33(2)(b) of the BMO provides that a reference to a member is deemed to be a reference to an owner.

8.  It is proposed that the Corporation’s interest in the outer wall be distributed to the Owners as tenants in common in proportion to the interest they hold in the remainder of the Building.  

9.  The Liquidators submit (and I agree) that in compulsory liquidations the court has power under section 218 of the Ordinance to distribute in specie and such power is exercisable whether or not any adjustment to the rights of contributors is required: see Re Phoenix Oil and Transport Co Limited (No 2) [1958] Ch 565 at 571. 

10.  Having regard to the nature of the asset, the fact that the Owners are the only interested parties in the Corporation and their wish to acquire the outer wall for redevelopment purposes, subject to §28 below, there is no discernible reason why the Court should not exercise its powers under section 218 of the Ordinance to sanction the proposed distribution in specie.

Payment of costs and expenses

11.  The application and combined effect of section 196 and rule 176 (“the relevant provisions”) is a statutory regime for the taxation of the fees and expenses of liquidators.  The taxation process in the present case is estimated to take from 1 to 3 months and would entail further professional fees and expenses to be incurred.

12.  On 16 October 2019 the Liquidators apprised the Owners of their intention to make the present application on the basis that costs and expenses incurred by the Liquidators and their solicitors and any future costs involved in implementing this application (collectively “the Professional Fees”) be approved by the Owners directly and borne by the Owners if the Corporation’s assets prove insufficient.

13.  On 24 October 2019, the Owners through their solicitors agreed to pay the Liquidators’ “reasonable costs”. In same letter, the Liquidators were asked to provide their draft bill of costs and disbursements for consideration in lieu of taxation.

14.  Then, in November 2019, the respective solicitors for the Owners and the Liquidators agreed the terms of the draft assignment.

15.  Under section 200(3) of the Ordinance a liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up.  The Liquidators’ application is made under that provision and they seek directions from the Court to dispense with the “procedure” set out in the relevant provisions.

16.  The first question that arises is whether the court has power to dispense with compliance with the statutory regime ie the relevant provisions.  If such a power exists, the next question would be whether in the circumstances of the present case the power should be exercised.

(A) Jurisdiction

17.  The Liquidators referred to my decision in Re Hoi Sing Construction Limited [2000] 2 HKC 805 where the Court exercised its inherent jurisdiction to dispense with the statutory requirement that a meeting of contributories be summoned “as summoning the meeting would be a “waste of resources” ”.  But the scope of that decision has to be understood in the context of the facts of that case.

18.  In that case, after a member of the company’s committee of inspection ceased to be a member upon full repayment, the liquidators convened a meeting of creditors where it was agreed that four creditors be appointed to fill the office.  The question that arose was whether a further meeting of contributories, as well as a meeting of creditors, to change the number and constitution of the committee of inspection was necessary.

19.  Prior to its liquidation, the contributories were 2 BVI companies that had acquired the company prior to its liquidation for a nominal sum.  They were controlled by an individual resident in Australia.  As there was no reason to believe that a further meeting of contributories would be any different from the first which was inquorate, “on those rather special facts”, the court considered (at 808H) that to require a further meeting of contributories to be summoned would appear to be “a fruitless exercise and a waste of resources”.

20.  The Hoi Sing case is not authority for any general proposition that statutory requirements could be dispensed with through the exercise of the court’s inherent jurisdiction. In any event, that decision is distinguishable because it did not concern the relevant provisions.

21.  Significantly, where rule 176(1) applies, taxation by the Registrar is mandatory.  The exception to sub-rule (1) of rule 176 is where the bill has been approved by a committee of inspection by resolution such that sub-rule (2) of rule 176 would apply.

22.  In my view, where (as in the present case) sub-rule (2) is inapplicable, the relevant provisions render taxation mandatory and the court has no power to bypass the statutory regime, whether through the exercise of its powers under section 200(3) or its inherent jurisdiction.

23.  In any event, rule 176 (1) would not have been framed in mandatory terms had there not been good reason to do so. So unless and until it is amended or replaced, I am of the view that the Court has no power to depart from it.

24.  Given my conclusion at §§ 22-23, it is strictly unnecessary to consider whether grounds exist that otherwise would warrant its exercise.  For the sake of completeness and on the hypothesis that my reading of the relevant provisions is incorrect, the grounds advanced are considered below.

(B) The grounds advanced

25.  The reasons advanced for the exercise of the court’s power are that:

(i) taxation by the court will inevitably lead to additional and unnecessary costs being incurred;

(ii) it would prolong the liquidation by 1 to 3 months and that would be “impractical” as there is no further work to be done in liquidation other than the disposal for the outer wall;

(iii) the fees will be subject to the Owners’ scrutiny;

(iv) allowing the fees to be agreed as between Owners and the Liquidators would save the court’s valuable resources; and

(v) this liquidation is in fact a de facto members’ voluntary liquidation (the Corporation being solvent) or akin to such a liquidation and, but for section 33 of the BMO, section 235(1) of the Ordinance would have applied under which such fees are agreed by the Company in a general meeting.

26.  The subtext of §25(iii) is that the Owners’ scrutiny of the Liquidators’ fees is a viable substitute for the Court’s scrutiny.  It was submitted that as the Owners (who are separately advised) will ultimately be responsible for any shortfall should the cash balance held by the Liquidators not be sufficient to cover the Professional fees and expenses incurred, they will have every incentive to ensure that the fees are not excessive and that would be a sufficient safeguard.  It was also said that a further advantage would be the saving of the court’s resources in not having to undertake the taxation.

27.  But, in my view, the Owners’ scrutiny and the Court’s scrutiny differ in nature.  

28.  The taxation regime under the Companies (Winding Up) Rules is set out in HKCP 62/App/89 to 62/App/94A to which reference should be made. In outline, the burden is on the liquidators to justify the amount of the remuneration claimed, and in deciding whether the liquidator has satisfied the burden of justifying his fees, the matters taken into consideration are those set out at 62/App/93, bearing in mind that the yardstick is whether a reasonably prudent man, faced with the same circumstances in relation to his own affairs, would lay out or hazard his own money in doing what the liquidator has done.

29.  The guiding principle is that identified in Mirror Newspapers plc v Maxwell [1998] BCC 324 at p 337: remuneration should be fixed so as to reward value, not so as to indemnify against cost.

30.  In the present case, the acquisition of the outstanding undivided share is a prerequisite to the redevelopment of the Building. For that to come to pass, it is necessary for the Owners to discharge the Professional Fees. One can readily see that from the Owners’ perspective, that amount is but a necessary cost of the redevelopment.

31.  But commercial and/or business decisions take into account considerations that have no place in a taxation by the Court of the Liquidators’ fees, costs and expenses.  In short, I do not consider that one can sensibly equate the Owners’ scrutiny with that of the Court.  The parameters are wholly different.

32.  As regards the other reasons, none has substance or weight.  It is not evident how another period of 1 to 3 months would render the liquidation “impractical” in the context of a liquidation that has been ongoing over 2 ½ years.

33.  The suggestion that as the Corporation is solvent, its position is analogous with a members’ voluntary liquidation where such fees may be approved by a written resolution of the committee of inspection.  However, it is not for the Court rewrite the relevant provisions.

Order

34.  For the reasons stated above, the Liquidators’ fees and expenses must be taxed in accordance with rule 176 (1) and paid out of the assets of the Corporation.  Subject thereto, it is ordered that there be an order in terms of §1 of the summons.