RE RE GOOD SUCCESS CATERING GROUP LTD (“the Company”)

HCCW542/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO.542 OF 2002

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J U D G M E N T

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1. The company was ordered to be wound up on 7August 2002.  Earlier on 12 December 2000 the company created a debenture in favour of HSBC over its book debts by way of a fixed and floating charge.

2. On 7 August 2002 the official receiver appointed Messrs Hill and Briscoe joint and several provisional liquidators under section 194(1A) of the Companies Ordinance, Chapter 32.  Messrs Hill were appointed liquidators on 13 January 2003 when a summary procedure order under section 227F was made by Master Wong.  

3. As a result of a settlement agreement dated 19 May 2003, $1.3 million (the fund) was paid into the Companies Liquidation Account (“CLA”).  

4. This is the liquidators’ appeal against the official receiver’s decision not to pay the liquidation expenses out of the fund in the CLA.  I am concerned with liquidation expenses and not with the costs of preserving and realising the charged assets or in identifying preferential creditors and paying them pursuant to statutory obligations, the latter expenses would be payable out of the charged assets.  The official receiver has not contended otherwise.

5. Mr Hill has told me that the settlement agreement was intended to provide payment of liquidation costs to the liquidators although it would result in a deficiency in the payment of preferential debts. 

6. On the material available to me, I would proceed on the basis that the fund “represents realisations under the provisions of the floating element of the charge.”  In his reply Mr Hill sought to argue that it was open to the liquidators to adduce evidence to show that the fund did not represent realisations under the floating charge and that the fixed charge in favour of HSBC was valid.  I refused him the opportunity to do so not only because it would have meant an adjournment but also because Mr Hill was aware throughout that it was the official receiver’s case that there was no fixed charge over the book debts but a valid floating charge.  Indeed that was also the liquidators’ own case, see, for example, the report of the official receiver dated 7 July 2004, paragraph 6 : “The Liquidators agree that the funds recovered by them ‘represent realizations under the floating element of the charge’.”  So I did not think it is right for me to grant an adjournment to Mr Hill so that he could argue that the fixed charge over the book debts was valid.  Also on my reading of the debenture and the authorities, the liquidators’ proposed arguments are, in any event, highly unlikely to succeed.

7. Now in Mr Beresford’s skeleton submission, he raises for the first time questions over the propriety of the liquidators entering into the settlement agreement.  The parties agreed that these questions raised matters on which both the official receiver and the liquidators would need to adduce further evidence.  Therefore it was agreed that I should not go into these questions.  I must not be taken to accept the propriety of the settlement agreement. 

8. As I have said, this appeal by the liquidators arose out of the refusal by the official receiver to pay the costs of liquidation out of the fund.  Put simply, the liquidators’ case is that on the authority of Barleycorn Enterprises Ltd [1970] Ch 465 (Barleycorn), a decision of the English Court of Appeal, the costs of the liquidation were payable out of the fund prior to the preferential debts.  The official receiver’s case is that Barleycorn has been overruled by re Leyland Daf Ltd [2004] 2 WLR 582 (Leyland Daf), a decision of the House of Lords. 

9. Mr Hill submitted that the Hong Kong provisions are indistinguishable from the statutory provisions under consideration in Barleycorn. 

10. The provisions under consideration in Barleycorn were section 319 of the Companies Act 1948 :

“(5) … (b) in the case of a company registered in England, [or Scotland] so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge;

(6)   Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the foregoing debts shall be discharged forthwith so far as the assets are sufficient to meet them …”

11. The Hong Kong provisions are :

Section 265(3B) :

“The debts specified in subsection (1) shall, so far as the assets of the company available for payment of general creditors are insufficient to meet those debts, have priority over the claims of holders of debentures under any charge created as a floating charge by the company, and shall be paid accordingly out of any property comprised in or subject to the charge.”

Section 265(4) :

“(4) Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the foregoing debts shall be discharged forthwith so far as the assets are sufficient to meet them.”

12. In Leyland Daf, the House of Lords were concerned with section 175 of the Insolvency Act 1986 :

“(1)   In a winding up the company’s preferential debts (within the meaning given by section 386 in Part XII) shall be paid in priority to all other debts.

(2)   Preferential debts - (a) rank equally among themselves after the expenses of the winding up and shall be paid in full, unless the assets are insufficient to meet them, in which case they abate in equal proportions; and (b) so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures secured by, or holders of, any floating charge created by the company, and shall be paid accordingly out of any property comprised in or subject to that charge.”

13. Mr Hill submitted that section 319 of the 1948 Act (and hence the Hong Kong provisions) are distinguishable from section 175 of the Insolvency Act 1986.

14. I do not agree.  There is no material difference between section 175 of the 1986 Act and section 319 of the 1948 Act which was under consideration in Barleycorn.  Section 319 of the 1948 Act was derived from provisions of the Preferential Payments in Bankruptcy Act of 1888 and the Preferential Payments in Bankruptcy Amended Act 1987.  This is what some of their Lordships said in Leyland Daf :

“23.    Section 175(1) and 2(a) of the Insolvency Act 1986 derives indirectly from section 1 of the 1888 Act.  The phrase ‘after the expenses of the winding up’ is the modern equivalent of ‘the costs of administration or otherwise’ in section 1(3) of the 1888 Act and ‘costs and expenses of the winding up’ in section 209(3) of the 1908 Act.  Section 175(2)(b) derives indirectly from section 2 of the 1897 Act, reproduced at section 209(2)(b) in the 1908 Act.  There is no reason to suppose that the change in layout from the earlier statues, or that these and other minor linguistic changes, were intended to achieve a different result from that obtaining under the Acts of 1888 and 1897.  On the contrary, in my view the telescoped provisions of section 175 of the Insolvency Act 1986 are, for the purpose in hand, apt to produce the same result as section 2 of the 1897 Act. (per Lord Nicholls)

34.    The provisions of the 1888 and 1897 Acts have since been consolidated and reproduced in successive Companies Acts and now contained in section 175 of the Insolvency Act 1986.  But there is nothing to suggest that any of these consolidating Acts was intended to alter the effect of the original Acts.  So the question is whether the 1897 Act changed the rule that the costs of winding up are payable out of the company’s fund and not out of the debenture holder’s fund.” (per Lord Hoffmann)

15. Moreover, Lord Millett said :

“40.    (Barleycorn) … cannot sensibly be distinguished, for its rationale applies as much to the one situation as to the other.  The question for the House, therefore, is whether Barleycorn was rightly decided.”

He concluded :

“82.    In my opinion Barleycorn was wrongly decided and should be overruled.”

The House of Lords was unanimous in that view.

16. Another prong of Mr Hills’s argument was that the official receiver was wrong to take into account a decision of a foreign court, namely, the decision of the House of Lords in Leyland Daf, which was decided after 1 July 1997.  He submitted that the law applicable in Hong Kong was the UK and Hong Kong law as at 30 June 1997 and he referred me to the Basic Law.  But this argument is unsound.  There is nothing in articles 8, 18 or 84 of the Basic Law to suggest that our law stood still as at 30 June 1997.  Nor that the court cannot take into account later development of the law in other common law jurisdiction.  Indeed article 84 provides expressly that in adjudication, courts of the Hong Kong SAR “may refer to precedents of other common law jurisdictions”.

17. Barleycorn was overruled by the House of Lords in Leyland Daf.  So Barleycorn does not represent the law in England anymore.  There are no authorities binding on me requiring me follow Barleycorn.  With the greatest respect, I find the decision in Leyland Daf compelling.  I have no doubt that the official receiver was right to follow Leyland Daf, and that Leyland Daf represents the law in Hong Kong.

18. Mr Hill also submitted that it was wrong for the official receiver to have formed a view on Leyland Daf’s applicability to Hong Kong.  Mr Hill suggested that the official receiver ought to have applied to the court for direction rather than to act on his own view.  Of course, the official receiver was perfectly entitled to apply to the court for direction but I do not believe he was not entitled to form a view on the matter and act on it. 

19. Mr Hill also made the point that in relation to the CLA the official receiver was in the position of a banker and that he should not second guess the liquidators.  But in my view the official receiver was entitled, indeed bound, to consider the propriety of each payment.  The official receiver plays an important supervisory role.  In so far as the liquidators were seeking payment of the liquidation costs out of the fund, I think the official receiver was entitled to refuse payment on the authority of Leyland Daf. 

20. Nor do I think the fact that had the time-table set out in the official receiver’s performance pledge been followed, payment could have been made prior to the decision of the House of Lords made any difference.  First, I do not believe the official receiver was entitled to ignore the Leyland Daf decision even if they could or should have made payment sooner.  Secondly, the fact that the authority of Barleycorn would be challenged in the appeal to the House of Lords must have been well-known by the time the liquidators sought payment out of the fund since leave was granted by the House of Lords to appeal as long ago as 27 July 2002.  I believe any prudent person faced with a request for payment of liquidation costs out of assets covered by a floating charge would wish to wait until the law was settled by the House of Lords.  Indeed the knowledge that leave to appeal had been given might be relevant when one considers the propriety of the settlement agreement having regard to the liquidators’ potential conflict of interests.

21. Mr Hill also made the point that the official receiver office’s power were re-active, not proactive.  He relied on section 204(1) which provides :

“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, … the Official Receiver shall inquire into the matter, and take such action thereon as he may think expedient.”

22. Mr Hill submitted that the official receiver’s power under section 204 was restricted to a case where liquidator had not performed his duty properly, e.g. sufficiently comprehensively or thoroughly, timeously or in good faith, etc.  He said the official receiver could not maintain that a liquidator was not performing his duty faithfully if the latter had considered the matter and reached a conclusion, clearly in good faith, with which the official receiver’s office happened to disagree.  He further submitted that even if section 204 was applicable, the proper course for the official receiver to take was to invite an application to court by the liquidator or make one itself.  In my view the official receiver has acted properly.  Even if the liquidators had acted in good faith, the liquidation expenses were not payable out of the fund.

23. Mr Hill also relied on Lord Millett’s judgment at paragraph 67 where he said :

“… A curiosity of the case is that there would have been no answer to the accountants’ claim if they had persuaded the bank to release its security, which was worthless.  But the bank would no doubt have refused to do so, since it was also the largest single preferred creditor.”

24. I confess I have difficulty with this passage.  The relevant provision in the settlement agreement is clause 3 :

“3.   Following the execution of this Agreement the Liquidators agree to release to HSBC a sum of HK$700,000 (the ‘Settlement Sum’) out of the Escrow Account in its capacity as secured priority creditor of the Company.  Such payment shall be without prejudice to HSBC’s entitlement to claim in the winding up of the Company the balance of the indebtedness owing to HSBC by the Company which for the purposes of this Agreement shall be deemed to be unsecured.  HSBC agrees that after payment of the Settlement Sum, the balance of the monies in the Escrow Account may be applied by the Liquidators for distribution to the Company’s creditors.”

I do not believe there is anything in the settlement agreement which gave the liquidation costs priority over the preferential debts.

25. Mr Hill also argued that the court had by implication decided that the fund was available to pay the liquidators’ fees.  He relied on Master Kwang’s order rescinding the order for summary winding-up procedure under section 227F(2).  Section 227F provides :

“(1) Where after the presentation of a winding-up petition —

(a)   the court is satisfied; or

(b)   the Official Receiver or the provisional liquidator reports to the court,

that the property of the company is not likely to exceed in value $200000, the court may make an order that the company be wound up in a summary manner, and thereupon the provisions of this Ordinance shall apply subject to the following modifications — (Amended 25 of 1985 s. 4)

(i)    the Official Receiver or the provisional liquidator, as the case may be, shall be the liquidator but there shall be no meetings of creditors and contributories under section 194 or 206; (Replaced 25 of 1985 s.4)

(ii)   there shall be no committee of inspection, and the liquidator may do all things which may be done by a liquidator with the sanction of a committee of inspection;

(iii)  such other modifications as may be prescribed with a view to saving expense and simplifying procedure.

(2)   The court may, upon the application of the liquidator, at any time before the dissolution of the company rescind an order made under subsection (1) and thereupon the winding up shall proceed as if the order had not been made.”

26. I confess I find it difficult to understand why it was said Master Kwang’s order had this effect.  Even if Master Kwang rescinded the summary winding-up order on the basis that the property of the company was likely to exceed in value $200,000, in the context of section 227F the fund might well be regarded as the property of the company.  But an order could be made under section 227F(2) whether or not the fund could be regarded as the property of the company.  The power of the court under section 227F(2) was not thus fettered.  In any event, it is a stretch to say that by making the order the master had by implication decided that the liquidators were entitled to have their costs out of the fund.

27. Mr Hill also relied on the Company’s Fees and Percentages Order, table B paragraph 1 which provided : “On the aggregate amount of assets realised and brought to credit by a creditor (including the official receiver when he is acting as liquidator), after deducting any sums paid to secure creditors, other than holders of floating charges in respect of their securities and any sums spent out of money received in carrying on the business of the company, a fee according to the following scale …”

28. I do not believe that this Order can affect the correct interpretation of sections 265(3B) and 265(4).  There might well be good reasons to allow fees to be levied on assets covered by floating charges. 

29. In this appeal, brought under Rule 199 of the Companies (Winding-up) Rules, the liquidators sought an order “1. varying the decision of the official receiver made on 31 March 2004 … so as to allow the liquidators to recoup the costs and expenses of winding-up the company from the sum of HK$1,321,627.39 being proceeds of certain companies receivables.”

30. For the above reasons, the appeal is dismissed.

31. Mr Hill submitted that I should order the official receiver to pay the liquidators the expenses properly payable out of the fund (see para.4 above).  As I have said there is no dispute some expenses are payable out the fund.  However, they are not the subject of the appeal.  I would not make any order.

32. I make an order nisi that the official receiver is to have the costs of this appeal to be taxed if not agreed.  The order to be made final in 21 days from the date of this judgment unless an application is filed earlier seeking a different order.