CHEN YUNG NGAI KENNETH (as the Liquidator of Hempstone Limited (in Compulsory Liquidation)) v. SHINEWING SPECIALIST ADVISORY SERVICES LTD

HCCW 279/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 279 OF 2010

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R E A S O N S   F O R   D E C I S I O N

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1. These were applications by Shinewing Specialist Advisory Services Ltd (“Shinewing”) for interim payment pending taxation. At the conclusion of the hearing, interim payments were ordered with no order as to costs. My reasons are set out below.

BACKGROUND FACTS

2. The applications were made in relation to Hempstone Ltd (in compulsory liquidation), De Rodeo Catering Ltd (in compulsory liquidation), Senrich Industries Ltd (in creditors’ voluntary liquidation) and Vinki Corporation Ltd (in creditors’ voluntary liquidation).

3. Hempstone has been in compulsory liquidation since August 2011. It has about 60 subsidiaries including De Rodeo, Senrich and Vinki. 

4. Chen Yung Ngai Kenneth (“Chen”) a director of Shinewing at the material time (who had a 5% indirect shareholding in Shinewing) was a joint and several liquidator of those companies and lead partner in those liquidations. 

5. Tang Chung Wah Alan (“Tang”) is the head of Shinewing and its majority shareholder.  He was a joint and several liquidator of Senrich until his voluntary resignation following an application made for his removal in August 2013.

6. A dispute between Shinewing and Chen arose in late 2012. Shinewing issued a notice of immediate suspension to Chen on 24 October 2012.  This was followed by a notice of summary dismissal on 28 November 2012.  Chen, while alleging that the dismissal was wrongful, left Shinewing.  Since his termination Chen has been working at Zhonglei Specialist Advisory Services Ltd.

7. Suffice it to say that since Tang and Chen fell out in late 2012 they have not been on good terms.  While the stakeholders of the Hempstone Group preferred to go with Chen as liquidator, there were inevitable difficulties given that Tang remained a joint and several liquidator of Senrich and all books and papers were with Shinewing.

8. Matters came to a head and on 27 August 2013, I dealt with two applications: one related to Chen’s application to remove Tang as liquidator of Senrich and the second was an application for Shinewing to provide books and records of the Hempstone Group to Chen as liquidator.

9. Prior to Chen’s departure from Shinewing, considerable unbilled and/or untaxed work had been done by Shinewing.

10. At the hearing, the parties reached an agreement which was encapsulated in the order made on 27 August 2013.  Due to an oversight, the order was not expressed to be “by consent”.  The order provided for a number of steps to be taken by both sides with a view to outstanding bills being submitted for taxation and payment made of the taxed bills to Shinewing within a stipulated timeframe.

11. Further disputes arose between the parties but it is unnecessary to recite them here. The end result is that 10 bills remain outstanding.

THE OUTSTANDING BILLS

12. The 10 bills are summarised in Schedule 2 to each of the applications. They can conveniently be divided into and considered under two groups.

Group 1 bills

13. They comprise the first five bills listed in Schedule 2.  They were bills that Chen himself had issued prior to his departure from Shinewing and submitted to the court for taxation.  The total amount is approximately $7.4 million.

14. When pressed, Mr Maurellet who appeared for Chen accepted that there was no reason why they should not be taxed.  It is common ground that six bills in the Hempstone liquidations submitted by Chen in the past and taxed had been allowed at about 91%.  In other words, on average, they were taxed down by only 9%.

15. On the question of interim payment, Mr Maurellet submitted that in view of Chen’s evidence as to Tang’s current financial situation, there was a real risk that Tang would not be in a position to make repayment if after taxation the amount of fees eventually found due and payable was to be less than the amount of the interim payment.  He submitted that those concerns would be alleviated only if Shinewing or Tang were to provide a bank guarantee to cover any excess repayable.

16. Mr Nip who appeared for Shinewing informed the court that, on instructions, no bank guarantees would be provided.

17. In those circumstances, Mr Maurellet maintained his position that the stakeholders should not be exposed to any risk at all and in the absence of any bank guarantee, the court should not order any interim payment.

18. I do not accept that there is any inflexible rule that precludes the court from ordering interim payment pending taxation in the absence of a bank guarantee.  It may affect the amount to be released by way of interim payment but whether or not interim payment should be ordered must depend on the facts of the particular case.

19. In the present case, it is unfortunate that Chen and Tang have fallen out.  That has inevitably coloured the stance taken but the undeniable fact is that work has been done in the liquidations by professionals and, as regards Group 1 bills, four of them relate to work done as long ago as the first half of 2011 and the fifth, to work done in the first half of 2012.  There is no valid reason not to allow a reasonable amount by way of interim payment now since the taxation process is unlikely to be completed any time soon given the court’s diary.

20. I take into account the fact that the bills had been issued by Chen himself and his past bills in the Hempstone liquidation have been allowed at approximately 91%.  In the circumstances, I consider it appropriate to order that a sum of $3.75 million be paid by way of interim payment pending taxation.  That represents 50.56% of the Group 1 bills and, in my view, affords more than an adequate buffer given the average percentage of Chen’s bills taxed down in the Hempstone liquidations.

Group 2 bills

21. The remaining five bills (items 6 to 10) in Schedule 2 total approximately $18.8 million.  Those bills were issued by Shinewing after Chen’s departure.

22. There are two features that call for comment.  First, those bills apparently include approximately $8.6 million of work in progress that Chen had written off. The parties have given different accounts as to what the practice was at Shinewing regarding the making of provisions and/or for writing off work in progress. That is a dispute that I am not in a position to resolve and is a matter for the taxing master.

23. Second, according to Chen, it was his practice to review the bills and make final adjustments before sending them out to the client and on average the original bill would be discounted by about 20 to 30%.  As earlier noted, the Group 2 bills had not been issued by Chen.

24. In view of those two matters, the appropriate course is to work from a figure that first takes out the $8.6 million from the total amount and is then discounted by 30%.  The resultant figure is a little over $7 million.  It is an amount that, in all probability, would reflect the value of Group 2 bills if issued by Chen.  I consider it appropriate in the circumstances to order that $3 million be released by way of interim payment pending taxation.  That represents 15.98% in value of the Group 2 bills.

25. Chen was ordered to pay from cash of each of Hempstone, De Rodeo, Senrich and Vinki the interim payments ordered within 28 days of the order.  Further, in relation to the interim payment payable by Hempstone, in the event of insufficient cash in Hempstone’s estate, Chen should take all reasonable and practical steps as soon as possible to procure its subsidiaries to declare dividends sufficient for Hempstone to comply with the interim payment order.

MISCELLANEOUS

26. The order made at the hearing also dealt with miscellaneous matters that arose: it provided for soft copies of bills narratives to be provided by Shinewing to Chen within seven working days, for Chen to submit Shinewing’s bills for taxation within two months of receipt of the soft copies, that Chen should, with all due expediency, proceed to fix the taxation hearing and inform Shinewing of the hearing date and time and that there be no order as to costs of the applications.