RE PEREGRINE INVESTMENTS HOLDINGS LTD.

HCCW20, 22 and 32/98

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H E A D N O T E

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Provisional liquidators (other than Official Receiver) appointed under section 193 of Cap.32 - term of office - effect of section 194(1)(aa) of Cap.32

Remuneration during period post-winding-up order - whether within section 196(2) of Cap.32 or under court's inherent jurisdiction

Official Receiver's Office Circulars entitled "Withdrawal of funds from the Companies' Liquidation Account for payment of liquidators' remuneration" - whether ultra vires payment made in respect of provisional liquidator's fees for period post-winding-up order pursuant to Circular - effect

Rule 176 of Companies (Winding Up) Rules - taxations made under a mistake of law - whether to be set aside

HCCW20, 22 and 32/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NOS.20, 22 and 32 OF 1999

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D E C I S I O N

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1. This is a renewed application by the Provisional Liquidators of Peregrine Investments Holdings Limited ("PIHL"), Peregrine Derivatives Limited ("PDL") and Peregrine Fixed Income Limited ("PFIL") respectively for a further interim payment in respect of their fees. The issues which arise are of relevance generally where provisional liquidators have been appointed prior to a winding-up order being made.

2. The present application is a sequel to the original application by the Provisional Liquidators for payment of their fees for the period from the date of their respective appointments up to 18 March 1998 when winding up orders were made in respect of all three Peregrine companies. On 19 March 1998, as an interim measure, payments of 25% on account of the fees of (1) the Provisional Liquidators up to and including 15 February 1998; (2) M/s Deacons, Graham and James up to and including that date and (3) M/s Clifford Chance up to and including 14 February 1998 were allowed. At the adjourned hearing held on 27 May 1998 the purpose of which was to ascertain the principles that apply in fixing the remuneration of provisional liquidators, an interim payment of 25% on account of the fees submitted by the Provisional Liquidators, M/s Deacons and Clifford Chance up to 17 March 1998 was allowed, plus all of what in Re Peregrine Investments Holdings Limited [1998] 3 HKC 1 at 7I ("Peregrine (No.1)") was described as "category (1)" disbursements, being disbursements of the Provisional Liquidators other than counsel's fees and fees of foreign lawyers.

3. The 25% interim payment of the fees of the Provisional Liquidators was further increased to 33% on 25 June 1998, when judgment was given in Peregrine (No.1). In October 1998, when the Provisional Liquidators, its solicitors Deacons and Clifford Chance applied for further interim payments on account, the interim payments to the solicitors firms were increased to 50% in respect of fees for the period up to the date of the winding up orders. The Provisional Liquidators' application was refused since they had not re-submitted their fee notes in accordance with the principles set out in Peregrine (No.1). The re-submission was not made until 28 December 1998 when the Provisional Liquidators submitted eight files evidence in support of their application for approval of their own fees and disbursements and revived their application for a further interim payment.

4. It is regretted that the court's diary was such that the application could not have been dealt with earlier. In any event, the application caused me to revisit Re Peregrine Investments Holdings Limited and Ors (No.2) [1998] 3 HKC 423 ("Peregrine (No.2)"). That was an application by the Provisional Liquidators for the appointment of joint and several liquidators of PIHL, PDL and PFIL and an order regarding the remuneration of the joint and several liquidators. That application was heard on 2 July 1998 and judgment handed down on 7 July 1998. After considering different possible bases of remuneration open to the committees of inspection to agree with the Liquidators pursuant to section 196(2) including the time-cost basis, I observed (at 426F) :

" Finally, in reaching an agreement (if any) with the liquidators on remuneration, the committee of inspection should be aware that the winding-up order in respect of each of the companies was made on 18 March 1998. Such remuneration as may be agreed would therefore be retrospective in the sense that it will cover the period from 18 March down to the date of appointment of the liquidators....." (emphasis added)

5. The premise underlying the passage appearing in italics arose from a submission which I did not question at the hearing on 2 July 1998 (and consequently was never explored or argued), namely, that a different regime took effect upon the making of the winding up orders and that the remuneration of the Provisional Liquidators after that date was essentially a matter for the committee of inspection and not for the court. Upon re-visiting the judgment in Peregrine (No.2), I was sufficiently troubled by what appeared to me to be an incorrect statement of law for a chambers hearing to be scheduled. Meanwhile, by letter of 9 April to Clifford Chance, the Provisional Liquidators were asked to clarify the status of their fees between the date of the winding up orders (i.e. 18 March 1998) and the date when the Liquidators of PIHL, PFIL and PDL respectively became "capable of acting as such" as defined in section 195 of Cap.32 ("the post-Order period").

6. At the chambers hearing, I explained the reasons why the passage in Peregrine (No.2) cited above and its underlying premise appeared to be wrong as a matter of law and I invited assistance on this issue from the Provisional Liquidators and the Official Receiver. Another matter which arose for consideration as a result was the validity of the Office Circulars issued by the Official Receiver's Office, entitled "Withdrawal of funds from the Companies' Liquidation Account for payment of liquidators' remuneration". This question was first raised with the Official Receiver by the court by letter dated 13 April 1999 and responded to by the Official Receiver by letter dated 17 April. Further written submissions on both issues were invited.

7. The day after the hearing, (some three weeks after the request), information regarding the status of the fees of the Provisional Liquidators for the post-Order period was finally made available. The information supplied extended to their disbursements during that period.

Remuneration of Provisional Liquidators during the post-Order period

Term of office

9. Where, after the presentation of the petition but before the making of any winding up order, a provisional liquidator is appointed by the court pursuant to section 193 of Cap.32, he continues in office "as the provisional liquidator" upon the making of a winding up order until he or another person becomes the liquidator and is capable of acting as such. See section 194(1)(aa) of Cap.32. Thus, the period of office of a provisional liquidator appointed prior to the making of a winding up order does not terminate with the making of the winding up order but continues beyond that date until he or someone else is appointed liquidator and is capable of acting as such. So much appears to be common ground.

Remuneration : court or committee of inspection

11. It is again common ground that during the period commencing with the appointment and, at a minimum, ending with the making of a winding up order ("the pre-Order period"), the remuneration of a provisional liquidator appointed by the court pursuant to section 193 is a matter for the court. In issue is whether the remuneration of the Provisional Liquidators during the post-Order period is a matter for the court or the committee of inspection.

12. One would expect the remuneration of a provisional liquidator to go hand in hand with his term of office, that being only logical. But the Official Receiver and the Provisional Liquidators support the correctness of the observations (in italics) made in Peregrine (No.2) cited above. They share a common position which is that the court's control over the remuneration of a provisional liquidator ceases with the making of a winding up order and that thereafter, the question of remuneration is entirely a matter for the committee of inspection.

13. Whilst accepting that the statutory provisions in this regard "are far from clear", the Provisional Liquidators submitted that as the making of a winding up order fundamentally alters the status of the company and the powers and duties of the office-holder appointed to manage its affairs, the relevant provisions of Cap.32 dealing with the powers and duties of liquidators, including their right to seek approval of their remuneration from the committee of inspection under section 196(2), should properly come into operation upon the making of the winding up order. They therefore believe that -

"the most logical cut-off point for the instigation of the two separate regimes for approval of office-holders' remuneration should be the date of the winding up order".

It was also submitted that -

"therefore that it cannot have been the intention of the legislators that two different remuneration approval regimes be in place post the making of a winding up order".

14. The Official Receiver's submissions which are set out in his letter dated 11 May 1999, may be summarized as follows. A liquidator appointed under section 193(1) "provisionally" after the presentation of the petition and pending the hearing of the winding up petition ("the Section 193 PL") is a different officer from the provisional liquidator appointed on the making of the winding up order under section 194 of the Ordinance ("the Section 194 PL") since the roles of a provisional liquidator before and after the making of a winding up order are different. The formal appointment of a "permanent" liquidator does not mark the transition from provisional liquidation to liquidation. The transition must be at the date of the winding up order. Accordingly, the Official Receiver submitted :

"(a) In the case of a Section 193 PL, the court is charged with the duty to determine remuneration pursuant to the order appointing them and where the liquidation does not proceed, according to Companies Winding-up Rule 28(3).

(b) The provisional liquidation of any company ceases with the making of the winding-up order and from this stage, the company is in liquidation by order of the court. The Section 194 PL has all the powers, duties and obligations of a liquidator. He is a liquidator for the purposes of the Ordinance; the only aspect of his position that is provisional being his tenure, pending the decisions of the First Meetings and appointment by the Court.

(c) The duty of the court as detailed in (a) does not apply to a Section 194 PL.

(d) The legislation as it currently stands regarding remuneration has not been amended to take account of the changes made to Section 194 of the Ordinance by The Companies (Amendment) Ordinance 1997.

(e) Whilst on the face of it Section 196 of the Ordinance does not appear to apply to a liquidator before formal appointment, in keeping with the submission that a Section 194 PL is in fact a liquidator as envisaged by the Ordinance, it may be possible to construe Section 196 as applying to the Section 194 PL, and to rule that the remuneration of the Section 194 PL should be determined by the Committee of Inspection."

Nevertheless the Official Receiver acknowledged that there is in fact :

"... a lacuna in the legislation on the issue of who determines the remuneration of the Section 194 PL when it is someone other than the Official Receiver. It is not specifically addressed in the Ordinance. ...."

15. At the forefront of the submissions that the logical cut-off point for the two separate regimes is the making of the winding up order is the assumption that the provisional liquidator does end up becoming the liquidator. That is the Achilles' heel of the submissions : one needs look no further than what had happened in the liquidations of PIHL, PDL and PFIL. In PIHL and PFIL, not all three joint and several Provisional Liquidators became joint and several liquidators : in each case, one of the three did not become liquidator and another was appointed in his place.

16. Reference was made to Palmer's Company Precedents (17th Edition)(1960) Part 11 Winding Up at page 108 where it is stated :

"On the making of the winding-up order, the powers of the provisional liquidator come to an end."

But English statutory provisions and the authorities are of no assistance given a crucial difference in the legislation, being the amendments introduced to section 194(1) of Cap.32 by the Companies (Amendment) Ordinance 1997 (Ordinance No.3 of 1997) which provided for a pre-winding-up order provisional liquidator to continue in office until he or someone else becomes liquidator. This provision has no counterpart under English legislation and is unique to Hong Kong.

17. The Hong Kong statutory framework is clear : where a provisional liquidator is appointed after the presentation of the petition, upon the making of a winding up order, he "continues to act as the provisional liquidator" until he or another person becomes the liquidator. See section 194(1)(aa). Whether or not he becomes liquidator would depend on the outcome of the meetings of creditors and contributories. An application to the court for a liquidator to be appointed would only be necessary where a person other than the provisional liquidator is to be the liquidator. Therefore where the provisional liquidator is to be the liquidator of the company, no application need be made to the court. See section 194(1)(b) and (d). Even so, applications have sometimes been made for the appointment of the provisional liquidator as liquidator which is not strictly necessary.

18. Section 196(2) which addresses the question of remuneration of a person other than the Official Receiver who is appointed liquidator has to be construed in the context of that framework. The provision does not in terms extend to the remuneration of provisional liquidators : it certainly cannot encompass the remuneration of a person who is not or does not become a liquidator. Section 196(2) cannot therefore be given 'retrospective' effect since that might extend to remuneration of persons who may not or do not become liquidators. Even if the submission that upon the making of a winding up order, a provisional liquidator's powers become enlarged because of statutory powers that are conferred upon "liquidators" upon the making of a winding-up order, that of itself does not impinge on the question of remuneration or confer on the committee of inspection any authority in relation thereto.

19. In my judgment, the remuneration of a provisional liquidator (other than the Official Receiver) during the entirety of his term of office whether pre or post the making of a winding up order, is a matter for the court under its inherent jurisdiction. The committee of inspection has no authority or power in that regard.

The Official Receiver's Office Circulars

20. The release of funds from the Companies' Liquidation Account on 14 August 1998 appears to have been made pursuant to the Official Receiver's Office Circular No.1/97 dated 16 October 1997. The material part provides as follows :

" Companies (Winding-up) (Amendment) (No. 2) Rules 1997 became operative on 30 May 1997. Companies (Winding-up) Rule 176 as now revised does not require the remuneration of liquidators to be taxed by the court. However, Companies (Winding-up) Rule 179 stipulates that liquidators can only be paid after settlement of fees, expenses and charges relating to the liquidation.

2. Interim or full payment of liquidators' fees from the estate in the Companies Liquidation Account will be authorized by the Office on the understanding that the payments are on account and should be refunded to the estate to pay the liquidation fees, expenses etc. having priority over liquidators' remuneration under Companies (Winding-up) Rule 179 if there are insufficient funds to do so."

Paragraph 3 of that Circular set out the procedure for processing requests by liquidators for payment of their fees out of the Companies' Liquidation Account and, in particular, the information required. By letter dated 18 May 1999, the Official Receiver informed the court that at that time (i.e. in 1998), the then practice was not to apply the requirements of ORO Circular No.1/97 to cases where the fees had been approved by the committee of inspection. In other words, payments were automatically released without more on evidence of approval. Not even the information set out in paragraph 3 of the Circular had to be made available.

21. What is the legal effect of payments so released?

22. They are described in para.2 of the Circular as "interim" or "on account" payments. However, they are not true "interim" or "on account" payments since the clawback or obligation to repay is restricted to there being insufficient assets to meet claims having priority to the liquidators' fees under Rule 179 of the Companies (Winding-up) Rules. It is only in this limited and restricted sense that the payments are "on account". From the perspective of those who are lower down in the payment chain such as the general body of creditors, under the terms of the Office Circular, such payments are for practical purposes 'final', inasmuch as thereafter there is no scope for any reduction which could operate to augment the dividends payable.

23. Whether or not that is the legal effect of the Office Circular would depend on a more fundamental question which is whether the Official Receiver has power to so provide. His jurisdiction to do so is not immediately apparent. The matter was accordingly raised with the Official Receiver on 13 April 1999.

24. The Official Receiver acknowledges that the Office Circulars were not issued pursuant to provisions in the companies' legislation. Neither section 196(2A) nor section 204 confers any such power : section 196(2A) authorizes the Official Receiver to review remuneration which has been determined and, in the context, must refer to remuneration agreed between the committee and the liquidator in a particular liquidation, and section 204 requires the Official Receiver to inquire into complaints by creditors or contributories. Again this must arise out of and relate to a specific liquidation. Neither section empowers the Official Receiver to 'legislate' on when and how payments to provisional liquidators and liquidators become 'final'. Further, I cannot accept the suggestion (made in the letter of 18 May 1999) that the Official Receiver may have power under section 204 to "query" the amount of remuneration approved by the court. The Official Receiver is an officer of the court, subject to its supervision and not the reverse!

25. If the relevant powers were not conferred on the Official Receiver, it must follow that the Circulars are ultra vires the powers of the Official Receiver where they are not purely administrative in nature but purport to affect the substantive rights of the parties. Whilst administrative expediency has been put forward as justifying the arrangements or procedures set forth in the Circulars, demonstrably, they go beyond that.

26. I accept that if Rule 179 were applied in its full rigour, liquidators cannot expect to be paid until the completion of the liquidation. Since this is a process that normally takes several years to complete, true interim payments would not be objectionable so long as there are reasonable safeguards to ensure that the recipient has adequate means to meet any obligation to repay should it arise.

27. As noted above, the Circular assumes the 'finality' of a liquidator's fees where they have been agreed by the committee of inspection. The assumption is questionable since such agreement is not necessarily the end of the matter : payment of such agreed fees are subject to (1) any order that may be made under section 196(2A); (2) any action that may be taken by the Official Receiver under section 204(1) in the event of any complaint by a creditor or contributory; and (3) any order that may be made by the court under section 205(2), quite apart from its inherent jurisdiction. In any event, ultimate control must lie with the court in whom the power to release liquidators is vested.

28. It is thus obvious that the limited clawback provided for in the Circulars overlooks these matters and the interests of those whose claims rank after the payment of the liquidators' fees, such as the general body of creditors. In my judgment, the Office Circulars are ultra vires, they have no effect and cannot operate to 'validate' payments made thereunder or prevent them from being re-opened at the instance of the court.

Disbursements

Disbursements incurred by the Provisional Liquidators during their tenure of office during the post-Order period have been taxed pursuant to Rule 176. They fall into the following principal categories : the fees of Clifford Chance, the fees of foreign lawyers and counsel (including Hong Kong counsel), and the fees of Price Waterhouse's overseas offices.

29. By far the largest payments were those made to Clifford Chance whose fees for the post-Order period in the three liquidations totalled more than $18.7 million. Their invoices were submitted on the basis that they had been approved by "the Joint Liquidators". These were sent to the taxing master on 25 August 1998 and allowed in full by the Registrar three days later. As is invariably the case for a Rule 179 taxation, there was no opposition to the application. In those circumstances, at best the taxation process was a mere rubber-stamping exercise, devoid of meaning and serving no useful purpose. At worst, it was farcical and nothing but a charade, the so-called 'taxation' giving an air of legitimacy to an otherwise meaningless exercise. This conclusion is best illustrated by what was submitted to the taxing master. For Clifford Chance's fees in respect of PFIL for the period 18 March to 30 June 1998, essentially the post-Order period, there was a covering letter from the Joint Liquidators opining that the total amount charged in the amount of $9,679,594.81 was "reasonable" with no further elaboration. In support of this claim was Appendix 1 to the letter consisting of a single sheet of paper :

"Peregrine Fixed Income Limited

Summary of Clifford Chance's fee notes for the period from 18 March to 30 June 1998

Although the covering letter mentions the enclosure of copies of Clifford Chance's invoices (referred to in Appendix 1), these do not appear to have been enclosed. At any rate, they cannot be found in the court's file. Even if they had been enclosed, it is extremely doubtful if they would have enabled the Registrar to undertake any meaningful scrutiny since at the relevant time (i.e. August 1998) such invoices would not have been anything more than narrative bills.

30. For the taxation process to serve its intended purpose, the taxing master requires proper assistance in cases where there is no true opposing party. It is one thing for a party directly affected in the sense of having ultimately to pay the taxed costs to decide not to challenge the application. It would not be unfair that he should be made to bear the consequences. It is quite another where no effective challenge is mounted by an opposing party who is an office holder and those who have to bear the consequences are not the office holder but the creditors. Scrutiny by provisional liquidators or liquidators is small comfort since their own pockets are not affected by the amount of disbursements to be paid, quite apart from the general unwillingness of those on a time-charge basis to query the bills of other professionals who charge on the same basis.

31. As far as I am aware, it is almost unheard of for opposed bills to be allowed in full. They are invariably taxed down. The result is markedly different in cases where the application is not opposed. In such cases, the (understandable) tendency has been to rubber stamp the application and allow the amount claimed in full without scrutiny. This was certainly the case until late 1998, when I understand, unopposed bills began to be scrutinized where the absence of opposition is from office holders who do not have to bear the financial consequences of the taxation exercise. That is a development in the right direction given the inherent deficiencies in time-based remuneration and the almost unlimited scope for overbilling. This of course imposes an intolerable burden on the taxing master. In my judgment, in discharging those duties he could legitimately require the office holder to provide assistance, whether by the office holder himself or from a third party such as a law cost draftsman.

32. In Peregrine (No.1) [1998] 3 HKC at 5I-6C, I had expressed considerable disquiet on the possibility of overmanning and on the number of billable hours that fee earners were apparently able to achieve on a sustained basis. U.S. courts have had to confront similar issues. The 'billable' hour has given rise to considerable case-law in the United States from which specific problem areas can be discerned. See, for example, Re Pothoven, 84 BR 579 at 585-586 (Bankr SD Iowa 1988); Re Wicat Securities Legislation, 671 F.Supp.726 at 734-737, 742 (CD Utah 1987); In re Gold Seal Products Co. Inc., 128 BR 822 (Bankr ND Ala 1991) and Chrapliwy v. Uniroyal Inc., 584 F.Supp.40 at 46-50 (ND Ind 1983). Given this context, it is highly unlikely that, if subjected to proper scrutiny, claims for time-based fees would be allowed in full.

33. If, as I have held, the approval of the fees of the Provisional Liquidators during the post-Order period of their tenure of office was not within the purview of the committee of inspection under section 196(2), their fees and disbursements must be a matter for the court. Notwithstanding that the disbursements have been 'taxed', as will become apparent, the court's inherent jurisdiction to give directions in respect of these disbursements remains intact.

Payments made

34. The information supplied by the Provisional Liquidators as regards their fees for the period from 18 March 1998 to 2 July 1998 are as follows :

The fees were settled on 14 August 1998 and the disbursements on 16 September 1998.

35. It would appear from the letter dated 15 April 1999 from Clifford Chance that the fees and disbursements which were described in their letter of 21 April 1999 as "direct disbursements of the office-holders" during the post-Order period have been considered and approved by the relevant committees of inspection. It would further appear that an application was then made to the Official Receiver for release of the same out of the Companies' Liquidation Accounts pursuant to Office Circular No.1/97.

36. So far as disbursements (other than direct disbursements of the office-holder) are concerned, they differ from the fees and direct disbursements of the Provisional Liquidators in that they have been taxed pursuant to Rule 176. As noted above, by far the largest disbursements made were in respect of Clifford Chance's fees. For the post-Order period, their fees were as follows :

37. They were allowed in full and settled on 21 September 1998. So were the other two categories of disbursements, i.e. the fees of foreign lawyers and counsel and the fees of Price Waterhouse's overseas offices.

Order

38. As the committees of inspection and/or Joint Liquidators had no authority over the fees of the Provisional Liquidators and disbursements incurred during the post-Order period, the payments made are not binding on the court. The taxations obtained make no difference. For, as explained above, there was no taxation in any real sense but a mere rubber stamping exercise. Moreover, the submission of fees for approval by the taxing master was not pursuant to any order or direction of the court exercising its inherent jurisdiction over the fees and disbursements of the Provisional Liquidators incurred during the post-Order period : rather, as noted above, the taxations were obtained by the Liquidators and granted by the Registrar under a mistake of law. In my judgment, the entire exercise was a nullity and, in any event, is voidable at the instance of the court. I see no good reason for not setting aside the payments made (including the taxations) and I so order.

39. Accordingly, I direct that (a) the directions given in paragraph 1 of the Orders dated 23 November 1998 for the pre-Order period are to apply, mutatis mutandis, to the fees of the Provisional Liquidators of PIHL, PDL and PFIL for the post-Order period and (b) the directions given in paragraph 2 of the November Orders for the pre-Order period are to apply, mutatis mutandis, to all disbursements incurred by the Provisional Liquidators including the fees of Clifford Chance, the fees of foreign lawyers and counsel and the fees of Price Waterhouse's overseas offices for the post-Order period.

40. The directions given in November 1998 are the subject of an appeal which is to be heard in July. If (as I must assume), the Provisional Liquidators do not agree with my decision regarding their fees and disbursements during the post-Order period, this could conveniently be raised for determination by the Court of Appeal at the same time. Indeed, that would appear to be the most efficient way of resolving the issue.

Whether further interim payment to be ordered

41. The fees of the Provisional Liquidators for the period pre and post the date of the winding-up order in round terms total some $93 million. The de facto situation is that they have been paid, on account, 33% of the fees of the pre-Order period and 100% of the fees of the post-Order period. Put differently, they have received on account $69 million of total fees, or approximately 74%. Obviously any overpayment will have to be repaid prior to any release of the Liquidators from office. This would extend to disbursements that cannot be justified. In view of what has occurred, it would not be appropriate for me to exercise my discretion to make any further interim payments to the Provisional Liquidators. The application is accordingly refused.