BDO FINANCIAL SERVICES LTD v. HONG KONG UNIVERSAL JEWELLERY LTD (IN MEMBERS’ VOLUNTARY LIQUIDATION)

HCA 527/2024

[2025] HKCFI 733

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 527 OF 2024

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REASONS FOR DECISION

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1.  This is the application of the plaintiff BDO Financial Services Ltd (“BDO”) by summons dated 26 September 2024 (the “Summons”) for summary judgment, or alternatively, interim payment against the defendant, Hong Kong Universal Jewellery Limited (the “Company”) in the sum of $8,761,839.18, particularized in §26 below. At the conclusion of the hearing, the Summons was dismissed. My reasons appear below.

Relevant background

2.  BDO is a provider of specialist advisory services including insolvency.

3.  The Company is a company incorporated in Hong Kong. It has 4 shareholders, namely, (i) Fu Hap Enterprises Limited (“Fu Hap”), (ii) Super Score Investment Limited (“Super Score”), (iii) Cheung Ming Company Limited (“Cheung Ming”), and (iv) Leung Kin Bong (collectively, the “Shareholders”), each holding 25% (or 15,000) of the Company’s issued shares.

4.  In about early 2019, following certain disputes between the Shareholders, they decided to cease business and place the Company into liquidation by way of members’ voluntary liquidation (“MVL”).

5.  On 18 February 2019, the Shareholders signed an engagement letter with BDO in relation to the winding up of the Company (the “Engagement Letter”) by which BDO agreed to nominate Mr Kenneth Yeo (“Mr Yeo”) and Mr Chan Leung Lee (“Mr Chan”) to act as joint and several liquidators (“JLs”) of the Company.

6.  Appendix 1 to the Engagement Letter contained BDO’s indemnity letter and “Terms of Business”. The Shareholders also signed the indemnity letter, indemnifying BDO or any of its nominees in respect of the liquidation.

7.  On 25 February 2019, each of the Shareholders signed inter alia a written resolution to voluntarily wind up the Company and appoint Mr Yeo and Mr Chan of BDO as JLs. The resolution made no mention of remuneration or the Engagement Letter.

8.  On 11 March 2019, the JLs executed an engagement letter with Edward Lau, Wong & Lou (“ELW”) engaging ELW to provide legal assistance in relation to the winding up of the Company. Upon being informed on 2 April 2019 that ELW would cease its practice, the JLs agreed to continue to instruct its successor firm (Patrick Chu, Conti Wong Lawyers LLP (“PCL”)) in relation to the liquidation.

9.  The Company held AGMs on 24 April 2020 (“2020 AGM”), 18 May 2021 (“2021 AGM”) and 14 July 2022 (“2022 AGM”). The Shareholders were informed of the JLs’ fees and professional fees incurred up to the dates of the respective AGMs. They were also advised of the amounts of the JLs’ fees that had been settled[1]. These are summarised in the table below which, for convenience, also includes entries for April 2023[2] and 31 December 2023[3] (the “Table”):

AGM	JLs’ FEES	SETTLED	PROFESSIONAL FEES
2020	10 m	5.9 m	0.78 m
2021	11.9 m*	7.2 m*	1.5 m*
2022	13.5 m*	9.5 m*	2.6 m*^[4]
2023 (April)	18.46 m*	11.4 m *	1.3 m ^
2023 (31 December)	19.16 m*	11.4 m*	0.97 m^
*These are cumulative amounts.
^ See footnote 4.

10.  Between the 2021 and 2022 AGMs, on 16 March 2022, Mr Chan tendered his resignation to BDO and left BDO’s employment on 30 September 2022. He joined Frank Forensic and Corporate Recovery Limited on 1 November 2022.

11.  Meanwhile, following Mr Chan’s resignation but before his departure from BDO, Mr Yeo considered that Mr Chan should also resign as liquidator of the Company.

12.  An EGM was held on 18 August 2022 (“August 2022 EGM”) to resolve whether Mr Chan and/or Mr Yeo should remain as the JLs of the Company. As the Shareholders were deadlocked, no resolution was passed.

13.  On 16 February 2023, solicitors for Fu Hap and Super Score advised PCL that their clients and a 3^rd Shareholder, Cheung Ming, had decided to remove Mr Yeo as liquidator and requested Mr Yeo to convene an EGM for that purpose.

14.  An EGM was held on 4 April 2023 (“April 2023 EGM”) at which Mr Yeo reported that the JLs’ fees as at that date were $18 million of which $11.4 million had been settled.

15.  The Shareholders then passed resolutions accepting the resignation of Mr Yeo as liquidator and rejecting the resignation of Mr Chan. They voted against resolutions for the approval of (1) the JLs’ statement of accounts of the Company, and (2) the JLs’ outstanding fees and disbursements.

16.  Substantial correspondence took place between April and December 2023 relating to the handover of the liquidation to Mr Chan and claims for the JLs’ outstanding fees (and disbursements) as well as outstanding professional fees.

17.  Given the impasse over the issue of outstanding fees, the parties agreed that the fees be taxed. To that end, on 26 June 2023, BDO provided the Company with a summary and breakdown of its time costs between 25 February 2019 and 30 April 2023 with Appendix 1 entitled “Task descriptions[5]” (collectively, the “June 2023 Summary”).

18.  Mr Chan, in his capacity as sole liquidator of the Company, issued an originating summons[6] on 21 August 2023 (“OS”) under section 255(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (the “Ordinance”) seeking the Court’s direction (in the absence of any directly applicable statutory scheme) to resolve the situation.

19.  Linda Chan J who heard the application on 19 December 2023 was not satisfied that the Court should exercise its powers under section 255 to direct that the fees of the JLs and the legal costs incurred by them be taxed as if the Company were one under compulsory liquidation and dismissed the application with no order as to costs.

20.  In an attempt to resolve the fees dispute amicably, on 12 January 2024 RPC advised Withers that liquidation fees of approximately $7.76 million[7] and disbursements of approximately $39,000 and PCL’s professional fees of approximately $970,000[8] remain outstanding and offered to apply a 10% discount to the liquidation fees only.

21.  In their response of 1 March 2024, Withers stated that the Shareholders considered the liquidation fees totalling in excess of $18 million for the period between 25 February 2019 and 30 April 2023 excessive and unreasonable and did not approve them.

22.  Later increases in the discount rate up to 19% made to the Company did not elicit any response.

23.  Meanwhile, BDO commenced the underlying action on 20 March 2024 to recover the fees and disbursements as well as PCL’s professional fees remaining unpaid and in respect of which it seeks summary judgment, and alternatively, interim payment.

24.  On 8 July 2024, BDO sought the Company’s consent to the joinder of the Shareholders as defendants and its confirmation that it and the Shareholders accept liability and only dispute quantum.

25.  The Company did not respond and BDO has not made any joinder application.

26.  Subsequently, the Company proposed that an independent assessor[9] be appointed to examine the invoices to which there was no response.

27.  BDO’s claim against the Company is for an aggregate amount of $8,761,839.18 in breach of its obligations under the Engagement Letter. The amount claimed is made up as follows:

(i)  under 7 invoices issued between 30 October 2022 and December 2023 described as “Interim Liquidators’ Fees” totalling approximately $7,800,081.78 as particularised in §14 of BDO’s Statement of Claim dated 25 April 2024 (“SOC”) and

(ii)  PCL’s professional fees of $961,757.40 that remain outstanding.

28.  Of the JLs’ outstanding fees of $7.8 million, extrapolating from the figures set out in the Table in §9 above, $5.66 million of those fees accrued between the date of the 2022 AGM[10] and 31 December 2023, the balance of $2.14 million being attributable to fees that accrued prior to the 2022 AGM but unpaid.

Applicable legal principles

29.  The applicable principles for summary judgment are well established. The defendant must show that there are triable issues. He has to satisfy the court that he has a “real or bona fide defence” or “a fair probability of reasonable grounds that a bona fide defence exists: see Hong Kong Civil Procedure 2025 at §14/4/9.

The Company’s case

30.  The Company opposes BDO’s application for summary judgment and submits that it has arguable defences which are considered below.

(A)  Party to the Engagement Letter

31.  BDO’s claim against the Company is based on the Engagement Letter. The question of construction arising from the Engagement Letter is whether the Shareholders, the addressees of the Engagement Letter and who accepted the terms therein by signing the same did so in their personal capacities, as opposed to (also) acting for and on behalf of the Company.

32.  Mr James Man, counsel for the Company contends that it is at least arguable that as a matter of construction the Shareholders entered into the Engagement Letter in their personal capacities having regard to the fact that the Engagement Letter was addressed to the Shareholders and not the Company; and it was signed by each of the Shareholders who agreed, accepted and signed the same on its/his own behalf, there being no reference to or indication of acceptance being (also) for and on behalf of the Company.

33.  Mr Joshua Chan and Ms Celeste Chan, counsel for BDO submit that the Shareholders (who together hold 100% of the Company) were contracting with BDO both on their own behalf and on behalf of the Company, emphasising the fact that the Engagement Letter regulated the rights and obligations of the Company vis-a-vis BDO.

34.  They rely primarily on the following matters:

(i)  the provision[11] in the Engagement Letter for payment of the costs associated with MVL out of the Company’s assets; and

(ii)  BDO as the JLs’ employer owes duties co-terminus with those of the JLs[12] and if BDO owes duties it must be the Company who could seek redress against BDO.

35.  BDO submits that it would not be possible to give effect to the costs provision if the Company is not a party to the Engagement Letter. If the Company’s construction were correct, BDO will never be in a position to enforce its right to be paid its costs and it would result in the absurd scenario of there being no avenue for BDO to recover outstanding fees from the Company.

36.  While accepting that the Shareholders could be compelled to pass a resolution to fix the quantum of remuneration pursuant to section 235 of the Ordinance, BDO contends that the Shareholders cannot pass a resolution to cause the Company to transfer the remuneration to BDO because the distribution of assets is a matter for the JLs and not Shareholders. The only way for BDO to recover from the Company is if there is a contract between them.

37.  It is to be noted that the costs provision is not unqualified: it specifically requires the agreement of the Shareholders. In the event of such agreement and the Shareholders so direct the JLs, as a matter of first impression, it is unclear how or why such a direction cannot take effect or be enforced. If my observation[13] that past payments[14] for such fees had been made by the JLs to BDO out of the Company’s assets is correct, BDO’s objection becomes a nonpoint.

38.  Another possibility for recovery is for BDO to sue the Shareholders for damages. The Shareholders contracted with BDO to ensure a certain result, namely, that the costs of the will be paid out of the assets of the Company. If they cannot cause that to happen, they will be liable for damages.

39.  Further, as regards outstanding liquidation fees, there is no reason why Mr Yeo as a former liquidator cannot recover his own costs including the costs of agents employed him such as professionals of BDO or the solicitors PCL. If he does so, no doubt he would have to account to BDO.

40.  In light of the decision in Re Conso Electronics (Far East) Limited [1996] 1 HKLR 1[15], Mr Yeo does not fall within the provisions section 255 (1)[16] of the Ordinance as either “creditor” or “liquidator”. Nevertheless, Godfrey JA (at p 6G) considered it open to a former liquidator to proceed by ordinary action against the company and recover his reasonable fees. Hence, it is not a situation of outstanding liquidation fees and disbursements being irrecoverable.

41.  As regards §34(ii) above, in the event of any breach of duty on the part of the JLs, the Shareholders could seek redress by suing the JLs. In A & J Fabrications, an undisputed express contractual relationship existed between the applicant (a major creditor) and the employer of the liquidators. It was in those circumstances that the court held that the employer owed duties to the applicant coterminous with that of the liquidators. The present case is factually different in that it turns on whether BDO’s interpretation (that when the Shareholders signed the Engagement Letter, they were also contracting on behalf of the Company,) prevails.

42.  In any event, it is unclear why (on the basis that BDO owes duties coterminous with the liquidators) BDO necessarily owes those duties to the Company only and not also the Shareholders, the named counterparty to the Engagement Letter. In the latter case, the Shareholders would be able to sue BDO as well as the liquidators for any breach of duty.

43.  Mr Man submits who the parties are to the Engagement Letter has real legal significance in terms of the relationship between the parties: who can sue and against whom, and whether limitations of liability and exemption clauses apply.

44.  In my view, the question whether BDO is a party to the Engagement Letter raised by the Company is not fanciful or ‘practically moonshine’. BDO has not shown that the defence to be unarguable, frivolous and without merit. Whether or not that defence will ultimately prevail is another matter but that is for determination at trial. Accordingly, summary judgment is not granted in respect of the outstanding liquidators’ fees.

45.  As regards PCL’s fees, BDO’s claim is premised on those fees being “disbursements” within clause 2.2 of the Terms of the Business. But pending resolution of the issue whether BDO is a party to the Engagement Letter, there can be no summary judgment in respect of PCL’s fees.

46.  In any event, as BDO did not employ PCL who were retained by the JLs, PCL’s fees could not be “disbursements” incurred by BDO.

(B)  No approval of BDO’s fees

47.  As earlier noted, the payment of costs associated with the MVL the Engagement Letter provides, inter alia, that “costs associated with the MVL is “subject to the agreements by the shareholders”.

48.  The Company submits that even if it were a party, it is at least arguable that the Shareholders have not approved BDO’s and PCL’s fees. The draft minutes of the AGMs held in 2020, 2021 and 2022 do not reflect any such approval. In fact, at each of the AGMs, some of the Shareholders requested that “detailed time-costs break down” be provided of the liquidators’ fees and the professional fees[17]. In any event, no evidence of such approval is before the Court.

49.  Further, as earlier noted[18], at the 2023 EGM the Shareholders voted against resolutions for the approval of the JLs’ statement of accounts of the Company and the JLs’ outstanding fees and disbursements.

50.  BDO relies on clause 3.4 of its Terms of Business[19] which provides as follows:

“If you disagree with or have queries on an invoice you are required to notify us in writing within 21 days from the invoice date, after which time you want deemed to have agreed the amount (including disbursements).”

51.  BDO submits that as it has never been notified by either the Company or the Shareholders that specific invoices are disagreed or queried, the Company and that Shareholders must be deemed to have agreed to the Outstanding Sums.

52.  Pausing there, “specific invoices” are those pleaded in SOC §14. The only description given for the amount claimed in connection of the MVL in each of the invoices is “Interim Liquidators’ Fees”, with no other information. It is impossible to discern from the “specific invoices” what work they relate to, who did the work and the reasonableness of the fees.

53.  While on 26 June 2023, BDO made available to the Shareholders the June 2023 Summary for the period up to 30 April 2023, as will become apparent, they are of little assistance as the information contained therein do not coalesce.

54.  There is a single page document entitled “Summary of Liquidators’ fees and disbursements between 25 February 2019 and 31 December 2023” (“the List”). It shows a table containing a chronological list of 31 invoices[20] issued from 28 February 2019 to 31 December 2023 with columns headed, inter alia, “Time costs (HK$)” and “Total (HK$)”. While the invoices issued on 28 February 2019 and 29 March 2019 together total $800,000, the time costs incurred for February-March 2019 shown in the June 2023 Summary exceed $2 million. There is simply no correlation between the invoices and the information contained in the June 2023 Summary.

55.  Even reading the June 2023 Summary together with the List, one is none the wiser. It is impossible to discern from that information which particular task was performed when, by whom and the time spent on it.

56.  In those circumstances, it is difficult to see how the Shareholders could be expected to raise any meaningful objections.

57.  BDO’s reliance on clause 3.4 is not pleaded in its Reply in response to §4(c) of the Defence.

58.  That aside, as the invoices provide no meaningful information, it is open to debate what effect clause 3.4 can have, given those circumstances.

59.  For that reason I consider that the deeming provision cannot have the effect of rendering the Company’s point of ‘no approval’ unarguable.

(C)  Whether there is an implied term

60.  The Company submits that it is arguable that there is an implied term under the Engagement Letter that BDO is only entitled to charge time costs reasonably incurred. The Company submits that in the absence of such an implied term, there would be no constraints on a liquidator charging unreasonable costs, for example, by inflating its time costs.

61.  BDO disagrees that such an implied term is necessary to give business efficacy to the contract on the basis that there is an existing and established mechanism to address the problem if a liquidator seeks to charge unreasonable fees, namely, taxation.

62.  Taxation as a remedy presupposes the existence of a statutory scheme for costs incurred in MVL. Plainly, that is not the case.

63.  If the Court has jurisdiction to order taxation in MVL, whether under the Ordinance or its inherent jurisdiction, that remedy depends on the exercise of discretionary powers. There can be no certainty in any particular case that such discretionary powers would be exercised.

64.  For this reason, I accept that it is arguable that there is scope for such an implied term in the Engagement Letter.

Conclusion

65.  As there are arguable defences to BDO’s claim, BDO was not entitled to summary judgment. In that scenario, interim payment does not arise for consideration. The Summons was dismissed with costs following the event.

66.  Accordingly, it is ordered that the costs of the Summons be paid by BDO to the Company, such costs (with certificate for counsel) be summarily assessed and payable forthwith.

67.  It is directed that (i) the Company’s statement of costs be lodged within 7 days hereof; (ii) BDO’s objections (not exceeding 2 pages) be lodged within 14 days thereafter; and (iii) the Company’s reply (not exceeding one page) be lodged within 7 days thereafter.