RE C.A. PACIFIC FINANCE LTD. (in Liquidation)

HCCW 36/1998, 37/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 36 AND 37 OF 1998

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DECISION

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1. This is an application by the Joint Liquidators ("the Liquidators") of C.A. Pacific Securities Ltd ("CAPS") and CAP Finance Ltd ("CAPF") for approval of their remuneration as Provisional Liquidators.

2. I should record that although the latest hearing of this application took place on 29 June 2001, the application has been the subject of a number of reports, affidavits, written submissions and hearings over a period of time. Where possible, to save on costs of appearances in Court, the Court has raised queries and the Liquidators have provided responses to them in writing.

3. The application is in respect of the period of provisional liquidation from 19 January 1998 to 10 June 1998. This was not a routine provisional liquidation.

4. CAPS was the third largest stockbroker in Hong Kong when it collapsed in the middle of January 1998. It had 11,000 clients. Some (about 5,000) of its clients were also clients of CAPF, a finance company which had obtained authorization from clients to pledge their shares to its (CAPF's) bankers as security for loans made to it. It has been alleged by some clients of CAPS that they had executed CAPF documents as a result of misrepresentation. Some were not even sure whether they were clients of CAPF at all. Consequently, there were anxieties additional to those that would be expected upon any collapse of a large brokerage.

5. There was also the complication arising from the fact that virtually all the shares acquired on the market by CAPS were held in CCASS, a computerised book-entry settlement system where unnumbered share certificates are immobilised and deposited with a central securities depositary. Thus, when shares were pledged by CAPF and sold by its financiers, it was impossible to ascertain exactly which clients' shares had been so taken. It is believed that this was the first time in the common law world where a brokerage dealing with shares in such a system had collapsed.

6. Friday 16 January 1998 was the last trading day for CAPS. On Monday 19 January 1998, the Securities and Futures Commission presented the petition against CAPS on an urgent basis. The Liquidators were appointed on 20 January and 21 January 1998 as provisional liquidators of the two companies on an urgent basis. CCASS also undertook various close-out procedures.

7. From that date until the date when the companies were wound-up on 10 June 1998, the Liquidators were immersed in a number of activities including taking over the various branches of the companies, dealing with anxious clients, securing the companies' records, dealing with officers and employees, verification of clients' claims to shares, finding out from CCASS the positions of shares in the companies' accounts after close-out, reconciling them with the companies' records and clients' claims, undertaking investigations into the way the companies had been operated, making attempts at asset recovery, dealing with the various authorities (Financial Secretary, Official Receiver, SFC and the Stock Exchange), press and politicians in this high-profile matter, and making reports to the Court.

8. It would be fair to say that the Liquidators had to put a great deal of work into the 5-month period of provisional liquidation, due to a large extent to having to deal with unknown factors such as the way CCASS worked and the nature of clients' claims. Apart from the sheer number of anxious clients, it would be noted that not all clients spoke with one voice and a vast portfolio of securities had to be dealt with.

9. The total recorded charges of the provisional liquidators were originally $21.122m. However, there was a voluntary reduction of nearly $4m for overtime claimed and of $1.23m for administrative staff. From this, there was also a reduction to adjust the charges to the Panel A scale agreed between the Official Receiver's Office and the Hong Kong Society of Accountants, which is lower than Cooper & Lybrand's rate referred to in the order appointing them as provisional liquidators. The effect of these voluntary reductions was that the claimed amount was reduced from $21.122m. to $15.418m.

10. At a previous hearing, the Court had approved an on account payment of $10.3m. Certain specific items of work were queried by the Court. Since then, there have been more reports submitted by the provisional liquidators to explain and verify their claims. These are dealt with individually below. I should add that the record keeping in this case has been very full.

11. First, there is a claim for CCASS work in the sum of $915,158. The provisional liquidators have explained that this was necessary for a complete reconciliation of the position of securities held by CAPS on behalf of its clients. Such a reconciliation was essential given the uncertainties at the time immediately after the collapse of the brokerage and finance company, and in the long run, for the purposes of eventual distribution, whether of proceeds or securities. Initially one manager was placed in CAPS head office and the other in the provisional liquidators' office. The former focussed on records kept by the company and the latter was responsible for verification against information kept by CCASS and from CAPF's financiers.

12. The provisional liquidators have clarified this claim to show that most of the time charged was for junior staff. As for managerial time, one manager logged 102.5 hours and the other, 180 hours in the course of 21/2 months. This translates into an average of 56.5 hours per manager per month, or on the basis of 25 working days a month, slightly over 2 hours a day on this work.

13. This reconciliation work provided an accurate position of the share portfolio held by CAPS both as to location and quantities. I note that such information was not previously available from the records of CAPS itself. In my view, this work was essential to implement the distribution order made by the Court and I am satisfied that the charges are justified and reasonable given what was achieved.

14. Secondly, there is a claim for $2,801,906 and $1,231,379 in respect of work related to branches and investors. There were nine branches located in different parts of Hong Kong. All branches were kept open at first to deal with client inquiries, with one senior and one junior staff member assigned to secure company assets and records, and to deal with queries from clients and employees. Seven branches were closed with two kept open (1 on Hong Kong Island and 1 in Kowloon) at the specific request of the SFC to act as centres for client inquiries. After early April 1998, however, time was spent mostly in supervising the packing of records for storage.

15. It is noted that the charges claimed for the month from 29 January to 28 February 1998 came to a total of $686,190, and for the period 1 March to 4 April 1998, a total of $825,720. Annie Chan and Rainier Lam were specifically involved. It seems to me that it was unnecessary for much managerial time to be spent on the tasks specified in paragraph 3.2F(p) of the Consolidated Report. Consequently, I would deduct these amounts claimed by 2/3 to reflect the difference in charges between managerial time and charges for a supervisor. This would reduce the claim regarding Branches by $1,007,940, leading to a figure of $1,793,966.

16. As for "Investors", this comprised during the 5-month period, 555 units (55.5 hours) of the provisional liquidators' time, 2655 units (265.5 hours) for Rainier Lam a Senior Manager, and 1090 units (109 hours) divided between two managers. There were 5 large-scale protests during the 5 months. Rainier Lam was given primary responsibility for dealing with client issues. It is understandable that a more senior member of the provisional liquidators' staff would help in alleviating clients' concerns and I would therefore accept the charge as being reasonable.

17. I would add that there was initially a charge for dealing with press and politicians. After queries were raised, the liquidators have indicated that they are prepared to write off the charge of $204,720 in its entirety.

18. Finally there is the costs of preparing the liquidators' reports to the Court. During the provisional liquidation, three reports were submitted to the Court. I remain of the view that although these reports were of assistance to the Court, they ought to have been a summary of the work done and of the way ahead, rather than a work in itself. Thus the work of 1 liquidator and 2 managers 8 hours a day for 3 days ought to be sufficient, given that the drafting was done by lawyers. This would add up to say $230,000 for each report or $690,000 for 3 reports. Having read the materials in the Consolidated Report, I would halve the claimed amount of nearly $1.5m.

19. Save as indicated above, the provisional liquidators' remuneration and disbursements are approved.