XCHRX IN RE GOODWAY LTD.

HCCW 162/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS

NO. 162 OF 1998

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DECISION

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1. This is a summons by the Official Receiver under s.206 of the Companies Ordinance Cap. 32 and Rule 45 of the Companies (Winding-Up) Rules for a decision by the Court between the different determinations of the Meeting of the Creditors and of the Meeting of the Contributories of a company, in respect of the appointment of liquidators in place of the Provisional Liquidator (the Official Receiver) and in respect of an application for the appointment of a Committee of Inspection.

2. The matter arises in this way. The company in question is Goodway Limited ("the Company"), a company which carried on business of distributors of electric cables.

Creditors

3. The petitioning creditor is Pirelli Cables Ltd. ("Cables"), which had obtained judgment against the Company in A6304/96, in the sum of ￡1.7m. The other creditors are (i) Hong Bridge Trading Co. Ltd., which had obtained judgment against the Company by consent in A10415/97, with damages to be assessed; (ii) Yook Tong Electric Co. Ltd., which had obtained judgment against the Company, not by consent, in A10530/97, with damages to be assessed; and (iii) Messrs W.K. To & Co., a firm of solicitors which had acted for the Company in all the actions mentioned above, on account of outstanding legal fees.

Contributories

4. There are only 2 contributories holding 1 share each. One is Yook Tong. According to the Statement of Affairs, the other contributory is a BVI company called TE Holding Corporation. According to the Companies Registry however, Hong Bridge is still shown as a shareholder.

Company's Book Debts

5. The Company has insubstantial liquid assets. It has however book debts of some $43m. According to the Statement of Affairs, these comprise mainly of (i) debts amounting to some $27,235,558.24 owed to it by Pirelli Cavi SpA ("Cavi"), the parent company of Cables, the petitioning creditor; (ii) a debt of $15,557,333.34 owed by Hong Bridge and (iii) a debt of $902,537.99 owed by Yook Tong.

Relationship between the parties

6. There appears to be some considerable mistrust or sensitivity between the parties.

7. Although Pirelli Cables is the major creditor, its parent Pirelli Cavi is also said to be a major debtor. Although no proceedings have been instituted by the Company against Cavi, a claim against Cavi had been referred to in the notes to the Company's accounts in 1996 although the claim had not been included as an asset then or later. The other creditors are concerned that Cables might seek to exert influence over the liquidators so as to affect their decision whether to pursue the claim against Cavi. Cables denies any attempt to exert any such influence over any liquidators of the Company.

8. The matter does not stop there, because Cables in turn harbours suspicions over the validity of the judgments obtained against the Company by Hong Bridge and Yook Tong. Cables points to the fact that the parties are related and that both these actions were instituted after summary judgment was obtained by Cables against the Company, and in the case of Hong Bridge, judgment was obtained by consent. Cables alleges that the purpose of these actions was to provide a means of setting-off debts owed by Hong Bridge and Yook Tong to the Company.

9. This allegation is denied by Hong Bridge and Yook Tong (and by Mr Peter Wong Yiu Sun, a former director of the Company and a director of Yook Tong). Obviously however it is not appropriate to explore these allegations and denials here and now, and I must for present purposes assume that the judgments are valid, in the absence of an adjudication by the court to the contrary. For present purposes, it is sufficient to note that Cables will be pressing the liquidators for a re-visiting of these judgments, which would of course be contrary to the interests of Hong Bridge and Yook Tong.

10. As for Mr To, he has expressed yet a third view, which is that he would wish to see the liquidators pursue Cavi and any other claims which would maximise the Company's assets, including presumably trying to set aside the judgments obtained by Hong Bridge and Yook Tong, even though his firm acted for the Company in their actions.

11. The consequence of the matters I have set out above is that there is more sensitivity in this case than is usual over the issues of (i) the choice of liquidators and (ii) the appointment of a Committee of Inspection. I shall deal with each in turn, although the two are linked in that at least Mr To has indicated that he would not object to the appointment of Cables' nominated liquidators provided that a Committee of Inspection is appointed. Cables is opposed to the appointment of any such committee, a position which does not serve to allay any mistrust on the part of the other creditors.

(i) Choice of liquidators

12. Cables has proposed that Mr NTC Hill and Mr AT Rennie both of Nelson Wheeler be appointed liquidators. Cables has on 16 July 1998 signed a Deed of Indemnity in their favour, the terms of which have been severely criticised by the other creditors as binding the hands of these proposed liquidators.

13. At the First Meeting of Creditors, it was resolved that Messrs Hill and Rennie be appointed liquidators in place of the Official Receiver as Provisional Liquidators. The resolution was carried by reason of Cables' majority in value, the other creditors preferring that the Official Receiver continue as liquidators.

14. At the First Meeting of the Contributories, however, it was resolved that the Official Receiver continue as liquidators - this difference in the determinations of the two Meetings has led in part to the present summons.

15. One of the misgivings which the other creditors had at the First Meeting was that they were not given information about Messrs Hill and Rennie or their firm Nelson Wheeler. This point was no longer really pursued at the hearing since the filing of an Affidavit of Mr Damien Hodgkinson, a Senior Manager at Nelson Wheeler, giving some information about that firm, and the providing at the hearing of an Affidavit of Mr Hill himself, exhibiting his curriculum vitae.

16. There was also some mistrust of the circumstances in which Messrs Hill and Rennie were nominated by Cables, in that Cables had contacted them and signed a Deed of Indemnity in their favour prior to the First Meeting, and had volunteered them at the First Meeting. Mr. James Gardner, Cables' solicitor, has since sworn an affidavit stating that he did not previously know of the proposed liquidators and that he had been referred to them by another solicitor not associated with this case. In any event, I do not see anything wrong as such with a major creditor taking steps to approach potential liquidators prior to the First Meeting, if only to save time.

17. However, what does cause concern are the terms on which the proposed liquidators have accepted the nomination by Cables to act as liquidators. Mr Winston Poon SC, counsel for Hong Bridge, has put forward 3 basic principles governing liquidators :- (1) that liquidators occupy a fiduciary duty to the company, the creditors and the contributories; (2) that as such, liquidators have a duty to act impartially and to avoid any conflicts of interests with inter alios the creditors or any of them; (3) that hence the liquidators must not only be independent but also be seen to be independent of any particular creditor.

18. These principles have not been disputed by Mr Jonathan Harris, counsel for Cables. It is in the application of these principles to the present case which is the subject of dispute.

19. Mr Poon has focussed on the terms of the Deed of Indemnity which he says show that the proposed liquidators have agreed to subject themselves to the control of Cables, contrary to their powers and duties under the Companies Ordinance and the principles set out above.

20. Clause 2 provides:-

"The Guarantor [Cables] hereby covenants that it will indemnify and keep indemnified the Liquidators against all claims, acts, suits, proceedings, payments, demands, actions, costs, charges and expenses or other liabilities whatsoever which whether directly or indirectly may be suffered, sustained or incurred by the Liquidators arising out of or in connection with:

(a) the exercise of any of the Liquidators' powers and authorities, where exercise of such powers and authorities has been approved in advance in writing by or requested in writing by the Guarantor and/or

(b) any warranties or indemnities given by the Liquidators in selling or otherwise dealing with the Assets, where such warranties or indemnities have been agreed to in writing in advance by the Guarantor."

21. Clause 3 provides:-

"The Guarantor hereby further covenants that it will pay and be responsible for the payment to the Liquidators of all reasonable remuneration, commission, charges, costs, fees and expenses payable or to become payable to the Liquidators in relation to acting as Liquidators of the Company to the extent that monies available to the Liquidators are insufficient for that purpose, with the exclusion of the following:

The Guarantor will not be responsible for the Liquidators' fees or disbursements incurred by the Liquidators in considering or pursuing claims against the Guarantor or its affiliated companies. For this purpose `affiliated company' means Pirelli Cavi SpA [etc] ..."

22. Clause 4 provides:-

"Without detracting from the generality of the foregoing and in addition to the indemnity hereby afforded to the Liquidators, the Guarantor hereby:

(a) fixes the remuneration of the Liquidators in an amount calculated on the basis of time spent by the Liquidators, their partners and staff in connection with the liquidation of the Company calculated at the rates as agreed between the Official Receiver and the Hong Kong Society of Accountants for Panel A liquidations;

(b) agrees that such amounts may be drawn by the Liquidators from time to time and in particular at the end of each calendar month from bank accounts of the Company, and subject to:

(1) the Liquidators first obtaining the approval of the Guarantor as to the amount to be drawn; and

(2) such fees being approved by resolution of a meeting of the creditors of the company

(c) agrees to pay to the Liquidators the remuneration aforesaid to the extent that the Assets prove insufficient to discharge such remuneration in full."

23. Now it is clear that the mere fact that a particular creditor provides funds or an indemnity to a liquidator is not cause for criticism (Re Allebart Pty Ltd [1971] 1 NSWLR 24). This is so even though the funds or indemnity are made available for specific steps in the winding-up, such as the bringing of named proceedings.

24. However where this is the case and that particular creditor would be urging the liquidators to take a particular course of action (such as to seek to set aside the judgments obtained by Hong Bridge and Yook Tong), the liquidators must be especially careful to be, and to appear to be, independent of the funding creditor. As expressed by Street J in Re Allebart, 28:- "Where [the liquidator] draws upon financial assistance from a creditor, it is incumbent upon him to ensure that he does not place in jeopardy his independence in the discharge of his duties. It is indispensable that in point of substance the liquidator's independence should be preserved; and it is undesirable that a liquidator should permit a situation to develop in which it might appear that he has yielded up in any degree whatever his exclusive independent control in the decision-making processes and administration of a winding up".

25. I regret to have to say that the proposed liquidators here have, in my view, given the appearance that they have permitted themselves to be subject to Cables' control, or at least, influence. What has caused me particular concern is that they have agreed to Clause 4, which stipulates that they must first obtain Cables' approval before drawing remuneration from the Company's bank account, even if such remuneration had been approved by resolution of a meeting of the creditors of the company. The requirement for this one particular creditor's approval applies whether or not the monies in the Company are sufficient for the liquidators' remuneration. As liquidators cannot realistically operate without fees, this clause in effect gives Cables the right to control the ordinary process of liquidation by controlling the liquidators' remuneration.

26. It is natural that Cables, acting in its own interests, may seek to drive a hard bargain with the liquidators who it is going to fund. However, in my view, this was a bargain that the proposed liquidators should not have accepted. Once they have agreed to accept appointment on the basis that their remuneration depends on the approval of one creditor, it would be difficult for the other creditors, particularly in the light of the underlying relationship I have set out above, to believe that there is no conflict of interests or no partiality on the part of these proposed liquidators in favour of Cables.

27. The second matter which has caused me a little concern is Clause 2(a) in the form in which it has been drafted and executed. It is true that it is open to a particular creditor to say that he would only cover the expenses of a specific step in the liquidation only. That does not mean of course that the liquidators are prohibited from taking any other steps - they will just have to look to the Company's general funds, and if these are insufficient, to finance from other creditors.

28. But the liquidators must be careful to exercise their own judgment as to what powers they intend to exercise when they are carrying out that step, even though it is a step which is funded by a particular creditor. As drafted and executed, Clause 2(a) requires the liquidators to seek the approval of Cables to the exercise of any of their powers, and if such approval is not granted, the indemnity would not apply and the liquidators would then have to turn to the Company's own resources and/or the other creditors for the necessary finance. This would in my view be a clog on the efficient undertaking of the liquidation and is undesirable.

29. In conclusion, as I have said, Clause 4 of the Deed signed by the proposed liquidators at least gives the appearance that they have already subjected themselves to the control of Cables, and with the particular sensitivities in this case, I do not consider that it would be suitable to appoint them as liquidators. Further, in the exercise of my discretion, I do not think it would be appropriate to appoint them as liquidators in light of the consequence of their agreement to Clause 2(a) as discussed above.

30. The determination of the meeting of contributories was that the Official Receiver continues as liquidators. By reason of the matters set out above, I would order accordingly, with special managers to be appointed if and when considered necessary and provided financial resources are available.

(ii) Appointment of Committee of Inspection

31. This issue is less controversial given my decision on the choice of liquidators. Cables considers that a committee of inspection is not necessary and may lead to further time and costs being spent. No evidence has been presented to support that contention. The other creditors and the contributories support the appointment of a committee of inspection.

32. In my view, more good than harm would result from the appointment of a committee of inspection. A committee of inspection assists the court in its supervisory role over liquidators, and ideally the need for time-consuming and costly applications to the Court would be obviated. The fear that the creditors may act only in their own interests may be allayed by putting in place procedural safeguards such as prohibiting interested parties from voting in matters affecting themselves.

33. In the event that there are any differences between the liquidators and the Committee of Inspection, the liquidators may refer the matter to the creditors and contributories in general meeting, and in the last resort, an application may be made to the Court under s.200.

34. No payment is made for the services of a committee of inspection and costs can be kept low. In this regard, I note Mr To's position that he would not serve on a committee of inspection unless he were paid professional fees, which the Court is permitted to sanction under Rule 150 of the Winding-Up Rules.

35. However I see no sufficient grounds for doing so. Mr To's firm is a creditor in its personal capacity. If Mr To serves on the committee of inspection, he would be doing so in a personal and not professional capacity. He would be no different from say, a manager of Cables or of Hong Bridge or of Yook Tong, who would also have to suffer a loss in productivity time.

36. Accordingly I would order that a Committee of Inspection be appointed, and I will leave it to the Official Receiver and the parties to decide on its constitution. In the absence of agreement, they may of course come back to court for a determination.

Costs

37. As to costs, Mr To has asked that the costs be paid by Cables, and not out of the general assets of the Company, for the reasons set out in his skeleton submissions. I do not wish to express any view on the allegations and counter-allegations made regarding Mr To's position at this stage.

38. My present view is that in obtaining as it did the proposed liquidators' agreement to the Deed of Indemnity, Cables, whilst protecting its own interests, was giving the other creditors and the contributories little choice but to object to these proposed liquidators and to bring the matter to Court. I would therefore make an order nisi that the costs of the summons be paid by Pirelli Cables Ltd. I should however make it clear that such costs would not include the costs of the legal representatives of Mr Peter Wong Yiu Sun who was not a party.