Re LAWE WILLIAM (CHINA TRADE) LIMITED

No. CWU 482 of 1993

HEADNOTE

Winding up - Preferential Creditors - Whether preferential creditors should be paid prior to liquidators ascertaining the costs of completing investigations and taking any necessary action - Construction of S.265(4) Companies Ordinance, Cap. 32.

No. CWU 482 of 1993

IN THE SUPREME COURT OF HONG KONG

COMPANIES (WINDING UP)

___________

___________

____________________

REASONS FOR DECISION

____________________

1. This application raises a matter of some slight importance and I have been asked by the parties to allow my decision to be circulated. Having listened to the careful arguments that have been presented, I do not consider it necessary to reserve my decision.

2. The liquidators of the company apply to Court for directions. Essentially the way the matter arises can be summarized in this way. There is a substantial sum of money which has been recovered. That sum would be sufficient to pay the preferential creditors. However, there are a number of potential claims on the part of the liquidators. Some of those claims are very sizeable, indeed much larger than the amount of money that has been so far recovered. The liquidators consider it is necessary to pursue these at this stage. They want at least to examine the former leading light of the company to see what has become of those assets and whether they are recoverable. Following that they may wish to commence proceedings. That would, of course, require further investigation and therefore further costs on the liquidators' part.

3. Essentially, therefore, if the liquidators were to do all that, they would be spending money which they have in hand now. That money could not then be used to pay the preferential creditors. The question therefore arises as to whether they should pay a dividend now to the preferential creditors and use what little money would be left to follow the investigations in the winding up, or whether they should pursue the winding up and see where that leads to. If necessary they could also seek to persuade some of the major creditors, who are banks, to pay money and perhaps benefit under S.265(5B) in financing further litigation and investigations.

4. Having listened to the arguments, in my view, the answer to the basic question is essentially one of statutory construction. Under S.265(4) of the Companies Ordinance, the liquidator is required to do the following:-

"Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the foregoing [i.e. the preferential] debts shall be discharged forthwith so far as the assets are sufficient to meet them."

The liquidator is under a duty to perform various functions in the winding up including getting in the various assets belonging to the company under liquidation. It seems to me that if the liquidators still have investigations to make and, if necessary, action should be undertaken prior to the liquidators completing their task as liquidators of the company, then the costs of these are part of the costs and expenses of the winding up. They therefore cannot properly pay any debts until they have satisfied themselves they have retained enough money to perform their duty.

5. It is perhaps surprising that there is no authority on this point. It is possibly less surprising since I have been told that whereas in the past the general scheme was that liquidators would be paid a percentage of the assets recovered, nowadays liquidators are generally paid on a time and cost basis. It may be that it will be necessary in time to come to impose strict safeguards as to awards of costs to liquidators and as to what expenses can be incurred by liquidators: what would be proper and what would not, what investigations can be carried out and cannot be carried out. But it seems to me that if and in so far as there are further investigations which are properly within the bounds of the liquidators' duties, then they must carry those out and those costs and expenses clearly take priority over even the preferential creditors. That is the scheme of the Ordinance. As has been shown in, for example, the case of Re Barleycorn Enterprises Ltd. [1970] 2 All E.R. 155, that was the scheme of corresponding provisions of the Companies Acts.

6. In arriving at this decision, I do not consider that the liquidators are breaching any duty to maintain an even and impartial hand between all the individuals whose interests are involved in the winding up. I say that for this reason. It is in the public interest that the liquidators perform their duties. It is in the public interest that people who owe money to companies that have gone into liquidation should be forced, where possible to pay up. If it is necessary for the liquidators to take proceedings either against other companies or against individuals or indeed to secure that those individuals are made bankrupt if necessary, then in my view it is in the public interest that the liquidators pursue all their duties under the winding up to the full extent. Subject to discussing with Counsel the form of the order that should be made, I therefore intend to make an order on the summons substantially in the terms that have been prayed.

[Discussion as to the form of Order

AFTER WHICH AN ORDER WAS MADE

THE MATERIAL PARTS OF WHICH ARE AS FOLLOWS.]

7. The liquidators of the Company be at liberty to retain such sums as are necessary for the costs and expenses of the winding up and until such time as the liquidators are aware that there will be a surplus of assets available for distribution over and above the costs and expenses of the winding up they shall not be required to pay a dividend to the preferential creditors.

8. The costs of this application be taxed and paid out of the assets of the Company.