RE STX PAN OCEAN (HONG KONG) CO., LTD (In Liquidation) (the “Company”)

HCCW 324/2013

[2018] HKCFI 2210

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) PROCEEDINGS NO 324 OF 2013

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D E C I S I O N

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Background

1.  An issue has arisen between the joint and several liquidators of the Company (“Liquidators”) and the Official Receiver concerning the ad valorem fees payable under the Companies (Fees and Percentages) Order (Cap 32C) (“CFPO”).  The question is whether ad valorem fees are payable in respect of the funds transferred by former voluntary liquidators to the Companies Liquidation Account or the court‑appointed liquidators after a compulsory winding up order is made.

2.  The Company went into creditors’ voluntary liquidation pursuant to s 228(1)(c) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“Ordinance”) on 26 August 2013, with two voluntary liquidators (“CVL Liquidators”) appointed.  A petition was, however, presented by a creditor on 14 November 2013 for the compulsory winding up of the Company.  On 26 September 2014, this court made an order on the petition that the Company be wound up whereupon the Official Receiver became provisional liquidator for the Company.[1]  The Liquidators were appointed by the court on 24 April 2015.  All matters with respect to the liquidation had been finalised by 25 September 2017 with the exception of the payment of ad valorem fees to the Official Receiver. 

3.  The following amounts were “realised” from the Company’s assets during the three stages:

Date	Stage	Amount of realisations (HK$)
26 August 2013 to 25 September 2014	Creditors’ voluntary liquidation	162,532,179.17
26 September 2014 to 23 April 2015	Compulsory liquidation with Official Receiver as provisional liquidator	12,808,404.31
24 April 2015 to 25 September 2017	Compulsory liquidation with Liquidators as liquidators	8,489,075.01
Total		183,829,658.49

4.  In November and December 2014, following the winding‑up order, out of the realisations of $162,532,179.17 made by the CVL Liquidators, a total of approximately $143 million was paid by the CVL Liquidators into the Companies Liquidation Account.  After the Liquidators were appointed by the court, a further sum of approximately $1 million was transferred to them by the CVL Liquidators.  The total remittance from the CVL Liquidators amounted to $144,383,785.66.  

5.  The Official Receiver takes the view that ad valorem fees are payable on this amount.  The Liquidators disagree and seek a declaration that ad valorem fees are not chargeable on the balance of funds derived during the creditors’ voluntary liquidation of the Company up to 26 September 2014 and remitted by the CVL Liquidators to the Liquidators.  The amount of fees at stake is in the region of approximately $1.9 million.

Statutory provisions

6.  I shall first set out the relevant statutory provisions.  S 296 of the Ordinance provides:

“ (3) There shall be paid in respect of the relevant proceedings, where no fee is otherwise fixed, such fees as the Chief Justice may, with the approval of the Legislative Council, by order direct, and he may direct by whom and in what manner the same are to be collected and accounted for.

(3A) In subsection (3) — relevant proceedings (有關法律程序) means —

(a) proceedings under this Ordinance (other than winding up proceedings); or

(b) proceedings in the winding up of companies, including those where proceedings under this Ordinance or the Companies Ordinance (Cap. 622) are taken with respect to a company which is being wound up.

(4) The amount of any fees prescribed under this section shall not be limited by reference to the amount of administrative or other costs incurred or likely to be incurred by the Official Receiver in the winding up of companies or of any particular company.

(5) Without prejudice to the generality of subsection (4), fees referred to in that subsection may be fixed by reference to a scale of fees and percentages.”

7.  The order referred to in s 296(3) is the CFPO. CFPO, s 6 provides:

“ The fees and percentages set out in Schedule 3 in respect of proceedings in the winding up of companies shall be taken in the office of the Official Receiver or of the Registrar of Companies, as the case may be.”

8.  CFPO, s 7(1) & (2) provides:

“ (1) The fees and percentages prescribed in Schedule 3 shall be taken in money.

(2) The percentages prescribed in number I of Table B of Schedule 3 shall be paid by a liquidator upon submission of his accounts to the Official Receiver under section 203, or where the Official Receiver is acting as liquidator, before he is released under section 205.”

9.  Under s 203(1) of the Ordinance,

“ Every liquidator (other than the Official Receiver) of a company which is being wound up by the court shall, at such times as may be prescribed but not less than twice in each year during his tenure of office, send to the Official Receiver, an account of his receipts and payments as liquidator.”

10.  Item I of Table B of Schedule 3 to the CFPO provides:

“ On the aggregate amount of assets realized and brought to credit by a liquidator (including the Official Receiver when he is acting as liquidator), after deducting any sums paid to secured 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 — [a sliding scale is then set out]”

11.  In short, fees are payable “in respect of proceedings in the winding up of companies” and the amount of the fees depends, by reference to the specified sliding scale, on the “aggregate amount of assets realised and brought to credit by a liquidator”.[2] It is not in dispute that the fees in Schedule 3 to the CFPO do not apply to voluntary liquidations. 

Discussion

12.  In essence the Liquidators’ argument is that whether ad valorem fees are chargeable in any particular case depends on when the realisation in question was made and by whom.  They argue that the word “realised” should be given an ordinary dictionary meaning (ie to convert into cash or money) and that the amount of $162,532,179.17 represented realisations made by the CVL Liquidators which pre‑dated the winding up order.  Neither that sum nor the sum of $144,383,785.66 (net of the CVL Liquidators’ fees and expenses) remitted to the compulsory liquidation attracts ad valorem fees as there was no relevant “realisation” by the Official Receiver or the Liquidators. 

13.  In contrast, the Official Receiver, whilst accepting that a creditors’ voluntary liquidation does not as such attract ad valorem fees, submits that in the present context, the word “realise” is not restricted to the meaning of “to convert into cash”, but covers the situation where an asset or cash is simply got in, received or recouped.  The Official Receiver regards the situation where money was transferred from voluntary liquidators into the account for the compulsory liquidation as no different from an ordinary compulsory winding up where money is got in and brought to credit by the liquidator.  For reasons I shall explain below, I agree with the Official Receiver’s position.

14.  On behalf of the Liquidators, Mr Joffe submitted that when considering the meaning of “realised”, regard must be had to the ordinary commercial meaning which, relying on cases such as Lewis v Metropolitan Properties Realisations Ltd [2010] Ch 148 and the cases referred to therein, he submitted, is: “convert into cash or money”.  I accept that is an ordinary meaning of the word.  Those cases were, however, decided in very different contexts.  Thus Lewis, for example, concerned whether a trustee in bankruptcy had “realised” the bankrupt’s interest in a dwelling house within the meaning of s 283A(3) of the (UK) Insolvency Act 1986[3] where just before the house was to re‑vest in the bankrupt upon the expiry of three years from the bankruptcy, the trustee purported to assign the bankrupt’s interest in the house to a creditor for £1 and 25% of the proceeds of any eventual sale of the interest.  The English Court of Appeal held that the word “realise” in the provision in question did not cover a sale of the interest in exchange for a future price but involved getting in the full cash consideration for the sale.[4]  Likewise, the question in Board of Trade v Block (1888) 13 App Cas 570, cited in Lewis, was very different.  The issue there turned on the statutory obligation of a bankrupt to “aid to the utmost of his power in the realisation of his property”[5] and in particular whether this included an obligation to submit to a medical examination so as to enable the trustee in bankruptcy to effect an insurance policy on the bankrupt’s life.  The observation of Lord Fitzgerald, dissenting in the result, that “realisation” meant nothing more than sale and conversion into money at the highest price that can reasonably be obtained (see p 579), surely cannot have been intended to suggest a bankrupt has no duty to aid the trustee in bringing in assets that are already in the form of money or cash.

15.  As the Court of Appeal said in Lewis, it is vital to consider “the all‑important question of context”.[6]  In the present context, of more relevance seems to me to be the decision in Re a Debtor (No 29 of 1986) [1997] BPIR 183.  The case concerned the question of the remuneration of a trustee in bankruptcy, where the creditors had resolved, in accordance with s 82(1) of the Bankruptcy Act 1914[7], that the trustee’s fees should be a percentage on the amount realised by him. The bankrupt had a house which was sold by the mortgagee bank.  The balance of the proceeds of sale, after meeting the expenses of the sale and secured debts, were paid over to the trustee.  The county court judge excluded these funds from the calculation of the trustee’s fees on the basis that he had not done any positive act to convert the asset into cash but simply received money. Reversing the county court judge’s decision, Vinelott J stated (at pp 185H‑186B):

“ The county court judge focused his attention on the words ‘the trustee was saved the trouble of realising the estate’ [in the case of Re Christie] which he read as meaning that no remuneration was payable unless the trustee had in effect taken some step in the course of realising the asset. I find his construction of s 82(1) an impossible one. In my judgement the word ‘realised’ in the context of s 82(1) simply means ‘got in or reduced into cash’, and the words ‘by the trustee’ mean simply in his capacity as trustee, that is from assets which vested in him as trustee. … It seems to me immaterial whether the trustee has got to do something in the course of reducing the assets to a form in which they can be distributed or whether it is, as it were, something done for him either by the automatic vesting of the debtor’s property or, as in this case, by a mortgagee.”

Likewise, Warner J held (at p 187D) that the phrase “the amount realised by the trustee” meant:

“ in effect the total of the amounts received by him, in whatever manner, in respect of assets forming part of the bankrupt’s estate.”

16.  It is also relevant to note that, as Mr Bartlett SC submitted on behalf of the Official Receiver, the relevant phrase in Item I of Table B of Schedule 3 to the CFPO is not just “assets realised” but “assets realised and brought to credit”.  That combined phrase is repeated elsewhere in the legislative scheme (CFPO s 10(2) and (3)) although it sometimes appears as an incomplete phrase “brought to credit” (CFPO s 10(3)) and sometimes in an alternative form “realised or brought to credit” (Items IV, V and VI of Table B of Schedule 3 to CFPO).  The combined phrase is also found in the equivalent bankruptcy regime: see Bankruptcy (Fees and Percentages) Order (Cap 6C), s 4(2) and (3), and para 9 in Table B of the Schedule.

17.  In fact, in the equivalent item found in the rules made in 1912 pursuant to s 220 of the Companies Ordinance 1911, which were modelled on the (UK) Statutory Rules and Orders 1903 made under the Companies (Winding‑up) Act 1890, scale fees were payable on the audit of a liquidator’s accounts simply “on the amount brought to credit” (see Item I of Table B of those Rules, gazetted on 19 April 1912), whereas where the Official Receiver acted as liquidator, scale fees for his remuneration as such were payable upon “the total assets … realised or brought to credit by the Official Receiver” (see Item III).  The 1912 rules were replaced in 1936 by the Companies (Fees) Order 1936 made pursuant to s 282(1) of the Companies Ordinance 1932. The 1936 Order appear to have been modelled on the (UK) Companies (Board of Trade) Fees Order 1929.  Item I of the 1936 Order continued to provide for a fee on the audit of the liquidator’s accounts based “on the amount brought to credit” and Item IV (like Item III of the 1912 rules) provided for a fee where the Official Receiver acted as liquidator calculated on the basis of “the total assets … realised or brought to credit by the Official Receiver”. 

18.  The law was changed in 1987 when the Official Receiver’s audit of liquidators’ accounts was made discretionary rather than mandatory (via an amendment to s 203), and subsections (4) to (9) were added to s 296 of the Ordinance.  The Companies (Fees and Percentages) (Amendment) Order 1987 made under the newly amended s 296, inter alia, substituted a new Item I in Table B, which is no longer payable on the audit of the liquidator’s accounts but upon the submission of his accounts to the Official Receiver under s 203.  This scale fee in Item I is payable “[o]n the aggregate amount of assets realised and brought to credit by a liquidator” (emphasis added).  Item IV of Table B in the 1936 Order remained unchanged.  The 1936 Order as amended by the 1987 Order essentially represents the current regime as set out in §10 above.

19.  Quite why the language of Item I was amended in this way in 1987 is not entirely clear.  The rules in the UK had by 1985 been amended and no longer used the terms “realised” or “brought to credit”.[8] Mr Joffe submitted that the 1987 amendment signalled a new scheme and the addition of the words “realised and” before “brought to credit” in Item I of Table B was significant and intended to change the law.  I have some difficulty with this submission.  No doubt a new Item I was substituted, but everything placed before me suggests that it was an amendment to make the fee payable on the submission of accounts rather than upon an audit of the accounts, and to introduce a new scale so that the fees would, in the words of the Financial Secretary, “be marginally higher in small cases and considerably lower in large cases”.[9]  There is no indication in either the Explanatory Note to the Companies (Fees and Percentages) (Amendment) Order 1987 or the speech of the Financial Secretary in the Legislative Council that the scope of the charging provision was to be fundamentally altered.

20.  Having regard to this legislative history, it seems to me that the variations in expressions found in different parts of the Ordinance and the CFPO are inconsequential and that the Official Receiver is justified in submitting that the word “realised” and the phrase “brought to credit” appear to have been used interchangeably in the legislation without any specific intent to distinguish between two separate components.

21.  Considerable reliance was placed by Mr Joffe on certain passages in the Court of Appeal’s decision in Re Suen Kin Ning [2011] 1 HKLRD 982.  That was a case where a bankrupt had applied under s 33 of the Bankruptcy Ordinance for an annulment of the bankruptcy order and under s 114(2) for an order that the fees due to the Official Receiver be remitted.  Le Pichon JA took the view that it was an “unusual case”, the petitioner was a fully secured creditor, and the bankruptcy order ought not to have been made at all. 

22.  In §27, her Ladyship said:

“ In the present case, according to the estimated breakdown provided, the Official Receiver seeks “realisation fees” of approximately $1.57 million. In other words, the assets “realised” were said to have a value of $15.76 million. The statement of affairs reveals that the debtor had cash deposited in bank accounts of only about $11.66 million. How that has become $15.76 million is not explained. Assuming that cash had been transferred to the Official Receiver following the bankruptcy order, the shortfall or difference could be accounted for by the $1.8 million owing by the tenant under the tenancy agreement and the value of one share in a private company estimated at $315,000. But there was no evidence to suggest that those assets have been “realised” since the $15.76 million was referable to ‘bank balances’ only. The rest of the estate is made up of 6 properties owned by the debtor. This puts into perspective the ‘work’ that the Official Receiver had actually undertaken in the short‑lived ‘bankruptcy’.”

23.  When Le Pichon JA stated there was no evidence that “those assets” had been realised, it was a reference to the money owed by a tenant and the share in a private company.  Her Ladyship did not say that money got in from bank balances was not “realised”.  Indeed, the Court of Appeal exercised its power under s 114(2) to remit “the payment of any particular fee or fees due from any bankrupt” which was premised on the fees being due in the first place.  Mr Joffe acknowledged that he might have gone too far in submitting at one stage that when a company’s bank balances were got in by a liquidator they were not being “realised”.

24.  The Official Receiver’s position is logical when one considers the status of the liquidations.  The creditors’ voluntary liquidation is an entirely separate process from the compulsory winding up.  A company being voluntarily wound up may yet be wound up by the court.  While the considerations germane to the exercise of the court’s power to wind up a company already in voluntary liquidation may differ from those relevant to an ordinary petition, the nature and processes of such a compulsory winding up are not materially different from an ordinary one.  The CVL Liquidators were not officers of the court, and were not subject to the general supervision of the court or the Official Receiver.  Like other former officers of the Company, the Company’s money in their possession was not cash held by the compulsory liquidator but an asset that had to be got in.  This was realised and brought to credit when the money was remitted to the Companies Liquidation Account or to the Liquidators, in the same way as the company’s bank balances or money held by a former officer for the company are “realised” when they are paid over to the liquidator after winding up.[10] The fee is not charged on the realisations by the CVL Liquidators as such, but on the net amount paid over into the compulsory liquidation which, in my view, constitutes assets realised and brought to credit from the point of view of the compulsory liquidation.

25.  Reference was made by Mr Joffe to Re MF Global Hong Kong Ltd [2015] 2 HKLRD 325.  On analysis that case does not assist the Liquidators.  The question there was whether the amounts realised by a provisional liquidator appointed under s 193 of the Ordinance (before the making of a winding up order) attracted ad valorem fees under Item I of Table B of Schedule 3 to the CFPO.  The Court of Appeal held that the word “liquidator” in Item I included a provisional liquidator appointed under s 193 and continuing to act as provisional liquidator pursuant to s 194(1)(aa), but what is of relevance is that Barma JA stated in §29:

“ I also note that a substantial portion of the realisations were effected in the period prior to the making of the winding up order, when the provisional liquidators were clearly in office only by virtue of section 193. I do not think, however, that this provides a justification for exempting the realisations made in that period from the ad valorem fee. While in office under section 193 prior to the determination of the winding up petitions, the liquidators made and held such realisations for the purpose of preserving the Companies’ assets pending the outcome of the petitions. It is only after the making of the winding up order (when they will be holding office by virtue of section 194) that they would have brought such realisations to account in the respective liquidations.”

26.  Similarly, in the present case, it was only after the making of the winding up order that the amounts held by the CVL Liquidators were brought to account in the compulsory liquidation.

27.  Mr Joffe submitted that the Official Receiver’s interpretation would lead to a large amount of fees being payable to the Official Receiver for very little work.  There are several observations that may be made.  First, not every voluntary winding up becomes a compulsory one.  Secondly, the amount of ad valorem fees is a matter that can be taken into account by the creditors and the court in deciding, respectively, whether to apply for and make an order for winding up in respect of a company already in voluntary liquidation.  In this particular case, the CVL Liquidators had provided information for the purposes of the hearing of the winding up petition that if the Company was compulsorily wound up, ad valorem fees were likely to be payable on the assets realised by the CVL Liquidators. 

28.  Thirdly and in any event, I do not think this is a weighty consideration in the construction of the statute.  S 296(4) expressly provides that the amount of fees prescribed shall not be limited by reference to the amount of administrative or other costs incurred or likely to be incurred by the Official Receiver.  Item I is in the nature of a levy to support the services provided by the Official Receiver’s Office generally to the administration of liquidations in Hong Kong.  The purpose of Item I is not to remunerate the Official Receiver for work done as a liquidator.  There are other items of fees chargeable in respect of the remuneration of the Official Receiver where she acts as the provisional liquidator or liquidator. 

29.  Furthermore, the use of a scale (sanctioned by s 296(5)) based on amounts realised and brought to credit necessarily sacrifices direct correlation between the quantum of fees and the amount of work for simplicity and certainty.  As was stated in Re a Debtor (No 29 of 1986), at p 186H, with his remuneration based on a scale a trustee in bankruptcy “must take the rough with the smooth.  He may get a very large fee for doing very little, and sometimes he gets a very small fee for doing a great deal.”  A scale fee system, with appropriate percentages, produces swings and roundabouts when spread over a large number of cases in which fees are consistently charged in the same way.  The same rationale for the scale fees under the Bankruptcy Fees and Percentages Order was recognised by Barma J in Wu Kwok Kwong v Official Receiver (unrep, HCB 7690/2008, 9 December 2009), §7.  In the (UK) report of the Review Committee on Insolvency Law and Practice (Cmnd 8558) (commonly referred to as the “Cork Report”, issued in 1982) at §873, it was also stated:

“ … we accept the principle that a substantial part of the costs [of the Insolvency Service] should be borne by the creditors. This is bound to involve an element of rough justice, because there will always be insolvencies in which the assets will be insufficient to pay for the work which the Department provides. It therefore seems to us that there is nothing fundamentally wrong with the fees being fixed in such a way that cases with larger assets subsidise the smaller, so long as there is some element of consistency and so long as inefficient methods of administration are not retained for the sole purpose of providing finance.”

30.  Mr Joffe relied on what was said at §28 of Re Suen Kin Ning:

“ it is only reasonable to infer that the legislature intended the scale fees to reflect and be commensurate with the responsibility that goes with being the trustee in bankruptcy”,

and at §30:

“ it is the court’s function to ensure that the present legislation does not result in a wholly inequitable imposition of a financial burden where it is not justified or justifiable. The court cannot sanction the fees and costs which are sought to be charged in this case on the basis of subsidising the cost of operations of the Official Receiver.”

31.  But in making those observations the Court of Appeal was concerned with the very wide discretion conferred by s 114(2) of the Bankruptcy Ordinance which provides that the court may remit fees “either absolutely or on such terms as it may think fit”.  The court considered that the discretion had to be exercised in the context of an annulment and that an annulment meant that the matter annulled must be regarded as having had no legal existence so that one should seek to restore the status quo ante.  No such provision as s 114(2) exists in the Companies (Winding Up and Miscellaneous Provisions) Ordinance, although there is a much more limited provision in s 9 of the CFPO which enables the Official Receiver to apply for sanction of a reduction of the fees where, inter alia, the fees or percentages in Table B in Schedule 3 would be excessive.

32.  Further, immediately prior to the comments in §30 of Re Suen Kin Ning quoted above, Le Pichon JA had stated:

“ It is, of course, appreciated that the Official Receiver cannot of his own volition waive fees to which his office could claim to be entitled. The constraints of those in public office in relation to their official duties are something which the court must respect. It has come to public knowledge that the effect of multiple bankruptcies in Hong Kong in recent years has put considerable manpower and financial difficulties on the office of Official Receiver.”

33.  Accordingly I do not consider that the Official Receiver’s interpretation is so inequitable as to be repugnant to the purposes of the statute.

34.  The Liquidators submitted that just as ad valorem fees under the CFPO are not payable in respect of realisations made after a compulsory winding up has been converted into a creditors voluntary winding up under s 209A, so also realisations made during a voluntary winding up should not attract ad valorem fees notwithstanding a subsequent compulsory winding up.  But there is no real symmetry.  Once a company is put into compulsory winding up, the winding up becomes subject to all facets of the compulsory regime.  On the correct interpretation of the statutory scheme, the ad valorem fees are not being charged on realisations by the voluntary liquidators during the voluntary winding up; they are charged on the amounts realised and brought to credit within the compulsory winding up.

35.  For all these reasons, the Liquidators’ summons will be dismissed.  There is no dispute that the costs of the Liquidators and of the Official Receiver are to be paid out of the assets of the Company.