RE PO YUEN (TO'S) MACHINE FACTORY LTD

HCCW 88/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 88 OF 2008

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D E C I S I O N

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1.  I have before me a summons issued on 20 January 2012 by the liquidators of the company for the court’s sanction of their engagement of what is referred to in the summons as a PRC legal consultant who will act as agent in litigation in the mainland relating to the share capital of a company called, in English, Dongguan Po Yuen (To’s) Machine Factory Limited. The summons also seeks the approval of what is, in practice, a funding arrangement. The funding arrangement involves the legal consultant paying any out of pocket expenses such as court fees incurred in legal proceedings in the mainland and receiving recovery of those expenses and payment for the consultant’s time out of any actual recovery in the proceedings. In other words, the legal consultant will be paid on a contingency fee basis.

2.  There has previously been a similar application.  At the time, I did not grant all the orders that were sought by the liquidators because I had not been provided with sufficient detail of the proposed funding arrangements, and also I had a concern that if I understood the application properly, the funding was to be provided by a person who was, in fact, conducting the litigation, and is not a qualified lawyer.  This, in fact, is the position.  It appears that the proposed legal consultant, a Mr Lu, whilst having some legal qualification, is not a qualified lawyer in the mainland.

3.  The application therefore gives rise to two issues.  The simpler one is the funding.  I do not see anything objectionable in a case such as the present where the creditors of a company are not prepared to fund attempts by a liquidator to make recovery of assets in a liquidation to the liquidator entering a finding agreement with a third party.

4.  I have discussed the legal considerations in detail in my judgment in Jeffrey L Berman v SPFCDOI Limited and Others [2011] 2 HKLRD 815.  It does not seem to me that there is anything inherently objectionable in that funding coming in the form of a contingency fee arrangement with lawyers who it is proposed will act on behalf of the company in liquidation in litigation in a jurisdiction in which contingency fees are permitted.

5.  As I understand the law as it has been explained to me in these proceedings, it is lawful for a litigation lawyer in the mainland to act, in most cases, but not all, on a contingency basis, with a cap on the contingency of 30 per cent of the recoveries.  In this particular case, three of the two creditors who have submitted proofs approve of the arrangement proposed to be entered into by the liquidators with Mr Lu. The third has not responded to communications from the liquidators.

6.  Because Mr Lu is not a qualified lawyer, it is proposed that he receive a contingency fee of 40 rather than 30 per cent of any recovery.  The justification for this is not so much that he is simply not a lawyer and therefore commercially he is entitled to try and negotiate a better fee.  The explanation is that in addition to acting in the proposed litigation, he is also carrying out certain other functions of a commercial nature in connection with the subject matter of the dispute, for example, acting as a director of one of the relevant companies.

7.  I accept that in the circumstances of this case there is nothing objectionable in the liquidators agreeing that the de facto funder receive a contingency fee of 40 per cent.

8.  The issue which had troubled me rather more when this matter first came before me was the extent to which the court should sanction arrangements which involve the use in litigation of a person who is not legally qualified.  My concerns arose mainly from two considerations.  First, doubts as to whether or not this is entirely consistent with ensuring so far as possible that litigation is dealt with in a professional way.  At an impressionistic level, the use of an unqualified representative tends to suggest that the way in which it is intended to pursue the matter in question is unconventional and may have characteristics which are of the sort that the court should not approve.

9.  The other concern is linked to the fact that the legal representative was to be, through the contingency fee arrangement, the funder of the litigation.  This can only add to concerns at an impressionistic level of conduct of litigation in a manner which does not meet the high professional standards and degree of independence which the court expects.

10.  I have, however, been shown the relevant legislation in the Mainland.  It would appear that Article 58 of the Civil Procedure Law of the People’s Republic of China provides specifically that:

“A party to an action may appoint one or two persons to act as his agents ad litem”

and that:

“Any other citizen approved by the People’s Court may be appointed as the party’s agent ad litem.”

11.  I have also been shown a memorandum dated 9 November 2011 issued by the People’s Court of Futian District, Shenzhen City, setting out the conditions for a citizen of the People’s Republic of China to act as an agent ad litem for any domestic or foreign party in civil proceedings. It would appear that the Civil Procedure in the mainland provides specifically for litigants to be represented in litigation by a person other than a qualified lawyer.

12.  It is the liquidator’s evidence that this practice is not unusual and that it is their experience that persons such as Mr Lu can prove more effective in conducting litigation than qualified lawyers.  The reason apparently largely goes to the fact that they are more robust in their dealings with the court and, for example, readier to appeal decisions which they believe are wrong.

13.  As I understand it, it is being suggested that because they are not fully qualified, they do not form part of the community of lawyers of which litigators and members of the judiciary form part, and therefore are not so subject to the tendency which it seems to be suggested exists in some courts that the liquidators have encountered for the litigation lawyers to be sufficiently close to the judges to be wary of arguing too much with them or being seen to criticise their decisions.

14.  I have no reason to doubt that the liquidators have taken an informed view as to what is the best way in which to advance the creditors’ best interests and that they believe that Mr Lu will go about the job in respect of which they wish to engage him in a competent and proper manner.

15.  I am therefore prepared to sanction the arrangements which they wish to enter into, and therefore grant an order in the terms of the summons subject to some minor amendments to paragraph 2 which I have already indicated to Ms Lau, who has appeared on behalf of the liquidators.

16.  I would simply end by adding this postscript.  The liquidators should always bear in mind that they are officers of this court.  Although it may be that the processes in the mainland are more chaotic than those with which the Hong Kong courts are familiar, and practices therefore may be adopted which would not be countenanced in Hong Kong, they should bear in mind that it is their duty to ensure that the creditors’ interests are advanced by proper means and that in sanctioning the arrangement in respect of which I am making an order, I should not be taken as approving standards which are lower than that which I would expect professionals in Hong Kong to adopt.