RE UDL HOLDINGS LTD AND OTHERS

HCMP 436/1999
(Consolidated with HCMP No. 437 of 199 and
410 to 432 of 2000 by Order of the Honourable
Madam Justice Kwan dated 12 December 2005.)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 436 OF 1999

(AND 437 OF 1999 AND 410 TO 432 OF 2000)

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HCCW 663/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 663 OF 2002

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(Heard together)

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J U D G M E N T

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The petition and the summons

1.  I have before me a petition under section 166 of the Companies Ordinance, Cap. 32, to sanction modifications to 25 schemes of arrangement relating to UDL Holdings Limited (“the Company”) and 24 of its wholly owned subsidiaries (“the Scheme Participating Subsidiaries”) (collectively “the Group”).  The petition was presented by Matthew Finbarr O’Driscoll, who is the scheme administrator.  There is also a summons seeking directions issued by the liquidators of Universal Dockyard Limited (“Dockyard”), one of the Scheme Participating Subsidiaries, under section 200(3) of Cap. 32, in the winding-up proceedings of Dockyard.  I have ordered both matters to be heard together.

The background to the petition

2.  The Company was incorporated in Bermuda on 31 May 1991 and its shares are listed on the Main Board of the Hong Kong Stock Exchange.  It is registered in Hong Kong as an oversea company.  The principal activities of the Company and the Scheme Participating Subsidiaries are to engage in the business of building services, marine engineering and contracting and structural steel.

3.  In 1999 and 2000, as part of a debt restructuring of the Group, the Company and the Scheme Participating Subsidiaries proposed the schemes of arrangement (“the Schemes”) to their respective creditors.  The Schemes are in identical terms and form part of a composite scheme of arrangement, as contemplated by the document dated 11 February 2000 entitled the “Explanatory Statement and Scheme of Arrangement” (the “Original Scheme Document”).  The requisite majorities of the creditors approved the Schemes and they were sanctioned by the order of Le Pichon J (as she then was) on 18 April 2000.  They became effective on 28 April 2000.  Appeals lodged by opposing creditors to the Schemes were dismissed by the Court of Appeal on 7 December 2000 ([2001] 1 HKLRD 156) and by the Court of Final Appeal on 3 December 2001 ([2001] 3 HKLRD 634).

4.  On 21 December 2001, Mr. O’Driscoll retired as a partner of Ernst & Young Hong Kong and left Hong Kong.  He appointed Yeo Boon Ann to supervise and attend to the day-to-day management of the Schemes together with Mr. Yeo’s team at Ernst & Young Transactions Limited.  Mr. Yeo has kept Mr. O’Driscoll regularly updated as to the management and progress of the Schemes.  I will have more to say about these matters in a subsequent part of this judgment.

5.  The Company and the scheme administrator have had many discussions whether an alternative solution could be achieved for the scheme creditors, which could lead to a quicker recovery.  In 2005, they eventually formulated a proposed solution for the scheme creditors (“the Global Solution”) and executed a non-binding memorandum of understanding on 12 August 2005.  The principal elements of the Global Solution are:

(1) the sale to Harbour Front Limited (“Harbour Front”, the major shareholder of the Company) of the “Unencumbered Assets” and “Accounts Receivable” (as defined in the Original Scheme Document), for HK$20 million in cash;

(2) the settlement of the undertaking given by the Company in a trust deed (“the Trust Deed”) dated 11 February 2000 entered into with Mr. O’Driscoll as trustee to pay “the Shortfall” (as defined in the Original Scheme Document), for HK$30 million in convertible notes issued by the Company and convertible into the Company’s shares, redeemable in four tranches of HK$7.5 million over two years; and

(3) an undertaking by Harbour Front to purchase from the scheme administrator all or such proportion as the scheme administrator may determine of such convertible notes at a price equal to 18/30ths of their nominal value, payable in cash, immediately.

6.  Prior to the memorandum of understanding, I had on 11 April 2005 made orders for a meeting of the scheme creditors of each of the 25 Schemes to be convened, to consider, and if thought fit, approving (with or without amendment) the modifications to each of the Schemes proposed by the scheme administrator (“the Modifications”).

7.  On 17 October 2005, a notice convening the court meeting for scheme creditors was advertised in one English newspaper and one Chinese newspaper circulating in Hong Kong.  No later than 18 October 2005, the scheme administrator circulated to the scheme creditors copies of the document dated 13 October 2005 entitled “Explanatory Statement and Modifications to Schemes of Arrangement” (the “Scheme Modification Document”).

8.  The court meeting was held on 9 November 2005.  The requisite majority of scheme creditors passed a resolution approving the Modifications.

9.  On 12 December 2005, I ordered that the 25 proceedings in HCMP Nos. 436 to 437 of 1999 and 410 to 432 of 2000 are to be consolidated as one action under HCMP No. 436 of 1999, with leave to the scheme administrator of each of the 25 Schemes to present one petition seeking sanction of the Modifications in respect of each of the proceedings.  This petition was presented on 16 December 2005.

The background to the summons

10.  On 21 June 2002, Fonfair Company Limited (“Fonfair”, also a scheme creditor as regards Dockyard) presented a creditor’s petition to wind up Dockyard for debts incurred after the effective date of the Schemes.  This is HCCW No. 663 of 2002.  I ordered Dockyard to be wound up on 9 June 2003 ([2004] 1 HKLRD 935).  The Official Receiver became the provisional liquidator.  It was only on 2 November 2004 that Simon Richard Blade and Bruno Arboit were appointed the liquidators of Dockyard by an order of the court.

11.  It has long been recognised by all concerned that an immediate problem arose as to the effect of the winding up of Dockyard on the Schemes and whether the “Unencumbered Assets” and “Accounts Receivable” of Dockyard (as defined in the Original Scheme Document) would form part of the assets of Dockyard in its liquidation.  Under the Schemes, Dockyard is required to transfer all its Unencumbered Assets, excluding, inter alia, the Accounts Receivable, to a new company (“Newco”), the shares of which are held by the scheme administrator, for the purpose of the realisation of such Unencumbered Assets and the distribution of their realisation proceeds in accordance with the Schemes.  Furthermore, Dockyard is required to remit the net recoveries of the Accounts Receivable to the scheme account for distribution in accordance with the Schemes.  However, no application was taken out to seek directions from the court on the problem until 3 March 2006, shortly before the first hearing of the petition for sanction of the Modifications on 9 March 2006.  I understand the delay was due to lack of funding.

12.  The liquidators have taken the view that as Dockyard is in a court supervised liquidation, it should no longer be a participant in the Schemes.  In November 2005, the liquidators’ solicitors wrote to the scheme administrator after the Scheme Modification Document was received, objecting to the indication in that document that Dockyard is a participant in the Schemes and giving notice that they do not regard any of the assets of Dockyard as forming part of the Schemes.

13.  In the summons issued by the liquidators, they seek directions in relation to the questions of:

(1) whether the Unencumbered Assets and Accounts Receivable of Dockyard do constitute the assets of Dockyard for the purpose of its winding up or whether the same should be dealt with pursuant to the Schemes and/or the Modifications effected pursuant to any subsequent approval of the court; and/or

(2) in any event whether the Schemes have failed.

14.  Following the order I made on 9 March 2006, the scheme administrator dispatched a notice to all scheme creditors on 17 March 2006 informing them of the directions sought by the liquidators in the winding-up proceedings of Dockyard and of the liquidators’ position in the petition to sanction the Modifications and that the scheme creditors may make submissions at the adjourned hearing on 18 April 2006.  The scheme administrator also stated in his notice that in relation to the Global Solution, Harbour Front has indicated that even if the court were to determine that the Unencumbered Assets and Accounts Receivable of Dockyard should form part of the assets of Dockyard for the purpose of its winding up, Harbour Front would be willing in principle to proceed with the purchase of the remaining Unencumbered Assets and Accounts Receivable for HK$20 million as contemplated in the memorandum of understanding.

15.  The liquidators also circulated to all scheme creditors their letter to the scheme administrators dated 10 April 2006, in which they articulated their reasoning on the position they took on the petition and on their summons.

Opposition to the petition for sanction

16.  Only two scheme creditors have appeared at the hearing to oppose sanction.  They are Fonfair and Showa Leasing (Hong Kong) Limited (“Showa Leasing”) and are represented by the same solicitors and counsel.  Fonfair is one of the four scheme creditors that had voted against the approval of the Modifications on 9 November 2005.  Showa Leasing did not attend or vote at the court meeting, notwithstanding it had received notice of the meeting.  It has filed a notice of claim in the Schemes against both the Company and Dockyard in the sum of HK$10,553,796.51 and received notification on 23 March 2006 from the scheme administrator that its claim against Dockyard has been admitted in full.  Showa Leasing adopts the position of Fonfair in opposing the petition.

17.  The main grounds in opposition advanced by Fonfair may be stated as follows:

(1) The result of the court meeting did not fairly reflect the views of the scheme creditors.  Although Harbour Front was entitled to vote as a substantial unsecured scheme creditor, its vote should be discounted or disregarded as it has such personal or special interests in supporting the Modifications that its views cannot be regarded as fairly representative of the scheme creditors.  Moreover, as a majority shareholder of the Company, Harbour Front would have access to information as to the true value of the Unencumbered Assets which other scheme creditors would not have.

(2) The explanatory statement did not give all information reasonably necessary to enable the scheme creditors to decide how to vote.  The scheme creditors have not been given all the facts why the Schemes have not been successfully implemented and why the Modifications are put forward.

(3) Neither the Schemes nor the Modifications were put forward in good faith.  The failure of the Schemes was not due to any inherent difficulties in their implementation as a result of events which could not be foreseen at the time when they were sanctioned by the court, but was the result of default of the scheme companies and the accommodation of the scheme administrator to allow this to happen.

The liquidators’ position on the petition

18.  The liquidators’ position is that the Modifications would require the consent of the relevant companies being the subject of the each of the Schemes as well as the consent of creditors in accordance with section 166.  The liquidators, on behalf of Dockyard, do not consent to join in such a Scheme as modified, without first having regard to the views of the creditors of Dockyard and the question whether they should give consent has not yet been considered by the committee of inspection of Dockyard.

19.  It was contended that by reason of Dockyard not consenting to the Modifications and that the Schemes would fail without the Modifications, as the scheme administrator has indicated in the Scheme Modification Document, Dockyard would cease to be a Scheme Participating Subsidiary.

20.  If, however, contrary to the liquidators’ contention, Dockyard’s consent to the Modifications is not required, then only the assets determined as belonging to the Schemes would be available to the scheme creditors.  It was submitted that creditors of Dockyard can claim both in the winding up and in the Schemes, unless they are only post scheme creditors, in which case they are limited to the winding up.

The Modifications

21.  The objects of the Modifications proposed by the scheme administrator, as stated in the petition, are to provide for these matters:

(1) an efficient mechanism for the replacement of the scheme administrator;

(2) permitting a sale or other disposal by the scheme administrator of the Unencumbered Assets and of the benefit of recoveries of Accounts Receivable and/or a release of the Company and the Scheme Participating Subsidiaries from their obligations in respect of the Unencumbered Assets and Accounts Receivable;

(3) permitting the scheme administrator and trustee to approve a compromise or settlement of the undertaking by the Company to pay “the Shortfall”;

(4) requiring the scheme administrator and trustee to obtain the sanction of the committee of inspection (formed pursuant to the Schemes) or the approval of the court before exercising a number of important powers to be granted by the Modifications; and

(5) procedures to facilitate an efficient termination of the Schemes, including the setting of a limit on the extent to which arbitration costs are to be paid out of the funds held in the Scheme Account.

22.  The scheme administrator considers that the sanction of the Modifications, leading to the implementation of the Global Solution, would be the most attractive option available to the scheme creditors.  Assuming that the Global Solution is implemented in full, it is estimated there will be a return of 1.44 cents in the dollar for non-preferential scheme creditors, based on HK$1.66 billion in total possible claims.  If the Modifications were not sanctioned, the scheme administrator considers there would be a need for his release on the ground that, given the Schemes’ history to date and without the prospect of the Global Solution, the Schemes have failed.

23.  Mr. Maurellet, who appeared for the scheme administrator, emphasized that the Modifications are quite separate from the Global Solution.  The Modifications are no more than ‘enabling’ provisions, in that the powers granted to the scheme administrator are to enable him to adopt and carry out the terms of the Global Solution, or any alternative arrangements that he may propose, as the memorandum of understanding for the Global Solution is non-binding.  The scheme administrator does not currently seek the court’s sanction to enter into a legally binding commitment to implement the Global Solution.  By not incorporating the Global Solution into the Modifications, the scheme administrator would have greater flexibility to accept the best deal available and maximise distributions to the scheme creditors.  The powers conferred on the scheme administrator by the Modifications are subject to the sanction of the committee of inspection or the approval of the court.  Harbour Front is not a member of the committee of inspection at present and it will not be eligible to become a member by the provisions in the Modifications.  Furthermore, the Global Solution is subject to approval from or non-objection by various other parties, including the shareholders of the Company and the relevant regulators.

Voting at the court meeting

24.  A total of 63 scheme creditors were present and voted in person or by proxy at the court meeting.  Of these, 59 voted in favour of the Modifications; they represented 93.7% in number and 99.9% in value of the unsecured scheme creditors present and voting.  The results of voting are set out in the table below:

25.  Companies in the Group had lodged proxy forms to vote on the basis of their intra-company debts, in excess of HK$3 billion.  Mr. Yeo, who chaired the meeting, rejected these proxies, on the basis that the debt claims on which they were based were not debts within the Schemes giving an entitlement to vote.

26.  Harbour Front had submitted claims in the total amount of HK$965,129,077.90.  Mr. Yeo saw no ground for excluding Harbour Front from voting.  Of the amount claimed, HK$230,244.899.31 have been admitted, HK$145,808,019.15 are pending determination by the scheme administrator or review by the adjudicators, and HK$589,076,159.44 have been rejected.  As stated in the Scheme Modification Document, unsecured creditors’ claims are valued for voting purposes on one or more of these bases: determined claims, claims not yet determined, and claims rejected by the scheme administrator but currently subject to review by the adjudicators.  Thus, Harbour Front was allowed to vote HK$376,052.918.46 of debts within the Schemes.

27.  The scheme administrator has prepared a table showing those scheme creditors who voted for and against the Modifications and their respective holdings of scheme debts.  If Harbour Front had not been allowed to vote, the Modifications would nevertheless have been approved by the requisite majorities of scheme creditors voting in favour, as the four creditors who had voted against only hold claims in the total amount of HK$830,310.00 odd.  Mr. Maurellet drew attention that among the scheme creditors who voted in favour, there are nine financial institutions with total claims of about HK$290 million, and there can be no suggestion that these institutions had colluded with Harbour Front.

The management and progress of the Schemes

28.  No dividends have yet been paid or distributed under the Schemes, notwithstanding that they had become effective six years ago.  As at the date of the Scheme Modification Document, the aggregate amounts actually received by the scheme administrator and Newco were:

- by way of net recoveries of Accounts Receivable, HK$4.9 million, and

- by way of net realisation proceeds of Unencumbered Assets, nil.

29.  It was emphasized in the Scheme Modification Document that the Schemes do not provide for the assignment of Accounts Receivable to the scheme administrator or Newco, so control of Accounts Receivable has remained with the Group at all times.  The scheme administrator is not a director of any of the scheme companies and has no involvement in their management.  In the Scheme Modification Document, creditors were asked to note “the very limited extent” to which the scheme administrator has been able to verify information in relation to the business, property and affairs of the scheme companies.

30.  Furthermore, the Schemes provide that it is the project manager who shall supervise and be responsible for overseeing the realisation of the Unencumbered Assets, that the Company shall propose the appointment of a project manager acceptable to the scheme administrator, and that the project manager should be a professional independent of the Company and its subsidiaries, and of the directors, chief executives, or substantial shareholders of the Company or any of its subsidiaries or an associate of any of them.  The Company proposed Li Kam Wa Ian as project manager.  Mr. Li is currently a director of three Scheme Participating Subsidiaries (one of which is Dockyard), a director of two companies claiming to be creditors, and he is a minority shareholder of the Company.  The scheme administrator has accepted Mr. Li as project manager, although he cannot be regarded as an independent professional, in the absence of any other candidate and given the limited funding.

31.  According to the Company’s audited consolidated results for the year ended 31 July 2005, the Company and its subsidiaries had a deficiency of capital of approximately HK$55.6 million as at that date, and the Company has not recorded audited consolidated profits since the year ended 31 July 2001.

32.  Difficulties were encountered in the realisation of Unencumbered Assets.  In summary, the problems included difficulties in locating and identifying assets; high costs or unacceptable conditions being levied prior to the assets becoming available for realisation; expired licences, in relation to the vessels and the Erzhou quarry at Zhuhai, the PRC; inadequate documentation; lack of up-to-date information about the assets; lack of funding for the payment of fees, charges, repairs and marketing expenses.  Although the shares in 26 companies holding some of the Unencumbered Assets were transferred to Newco in November 2001, as the scheme companies were required to do under the Schemes, the scheme administrator has not been able to dispose of the relevant scheme assets because all of the 26 companies are in negative net asset position.  Besides, the scheme administrator cannot sell or procure Newco to sell any Unencumbered Asset that has not been transferred to Newco.

33.  In relation to Accounts Receivable, little progress has been made on the arbitration proceedings in Malaysia brought by Dockyard and its joint venture partner, MMC Engineering Services Sdn.  Bhd., against Pantai Bayu Indah Sdn. Bhd. (“PBI”) for a claim of HK$87 million in respect of a contract for land reclamation works in Miri, Sarawak, Malaysia.  In addition, Dockyard has a claim against PBI of HK$8.1 million for refund of its contribution to a performance bond issued in favour of PBI under the said contract.  The lack of progress in the arbitration would seem to be a result of the lack of funds of the scheme companies.

34.  In the Original Scheme Document, the “Estimated Value of Assets to be Realised Under the Scheme” was stated as HK$183.5 million.  In the Scheme Modification Document, the scheme administrator stated he does not consider this an accurate assessment of the current estimated value of assets available for distribution to scheme creditors.  The figure of HK$183.5 million did not include an allowance for realisation costs, which in respect of some assets, as those involving litigation or arbitration, would amount to millions of dollars per item.  Further, a number of assets to be realised under the Schemes are held by companies that are indirect subsidiaries of the Company but are not Scheme Participating Subsidiaries and as all of these companies are in a negative asset position, it is very unlikely that they will be able to make any contribution to scheme funds.  The scheme administrator has estimated that in a liquidation scenario, the assets in the Schemes would only realise about HK$20.77 million.

35.  I turn to consider each of the grounds of opposition advanced by the two opposing creditors.

If the result of the court meeting fairly reflected the views of the scheme creditors

36.  There is no dispute as to the law in this respect.  The principles were summarised by Lord Millett in the judgment of the Court of Final Appeal in dismissing the appeal of the opposing creditors to the Schemes (UDL Argos Engineering & Heavy Industries Co. Ltd. & Ors. v. Li Oi Lin & Ors. [2001] 3 HKLRD 634 at 647E to 648B).  The relevant extract is as follows:

“The Court will decline to sanction a Scheme unless it is satisfied, not only that the meetings were properly constituted and that the proposals were approved by the requisite majorities, but that the result of each meeting fairly reflected the views of the creditors concerned.  To this end it may discount or disregard altogether the votes of those who, though entitled to vote at a meeting as a member of the class concerned, have such personal or special interests in supporting the proposals that their views cannot be regarded as fairly representative of the class in question.”

37.  As mentioned earlier, Harbour Front was allowed by the chairman of the court meeting to vote on the Modifications.  On behalf of the opposing creditors, it was submitted that the votes cast by Harbour Front should be discounted because as the majority shareholder of the Company and the purchaser of the Unencumbered Assets and Accounts Receivables contemplated in the Global Solution, for which a non-binding memorandum of understanding was executed, Harbour Front has such personal or special interest in the Modifications which would render its view a “self-centred view” rather than a “class-promoting view” (Re Jay Marine Pty Ltd. [1967] 1 NSWR 145 at 148, cited in UDL Argos, supra. at 645E to J).

38.  On the part of Mr. Maurellet, I do not think he has contended to the contrary that the votes of Harbour Front should not be disregarded.  The fact remains, as the scheme administrator has demonstrated, that the resolution approving the Modifications would still have been passed by the requisite majority of the scheme creditors in number and in value without the votes of Harbour Front.  A substantial part of the votes in favour came from nine local and international financial institutions.  An overwhelming majority in numbers of the scheme creditors had voted in favour.  So I do not think the allegation that the votes cast in favour of the Modifications did not fairly reflect the views of the scheme creditors is made out.

If the explanatory statement had given all information reasonably necessary

39.  I will also start with the legal principles, which are not in dispute.  For the court to sanction the Modifications, it must be satisfied that the Scheme Modification Document sent to the scheme creditors was “perfectly fair and as far as possible, give all the information reasonably necessary to enable the recipients to determine how to vote” (Re Dorman, Long & Co., Ltd. [1934] 1 Ch 635 at 657).  What sort of information is reasonably necessary and the extent of the information that should be supplied would depend on the facts of the particular case.  Thus, in Re Kansa General International Insurance Co. Ltd. (in compulsory liquidation) [1999] 1 HKC 254, the court held that whilst there were considerable deficiencies in the financial information provided, the deficiencies were not so fundamental as to negative the consent of the scheme creditors and so did not withhold sanction to the scheme.  In Re Heron International NV [1994] 1 BCLC 667, although the information provided to creditors could be fairly criticized on one or two points, when further information was produced in evidence, the court did not think such information would have caused any consenting creditor to change his mind and the scheme was sanctioned.

40.  Miss Rattigan, for the opposing creditors, submitted that the scheme creditors were not given a sufficient explanation of the Modifications and their effects, and sanction should be refused on this ground.  The matters said to be reasonably necessary but no or no adequate information of which was provided may be grouped under three broad headings.

43.  I will deal with the first and second matters of complaint before I move on to the last.  The criticisms made of YT Leung in various judgments are matters in the public domain.  They do not appear to me to be matters of such consequence that must be made known specifically to the scheme creditors to enable them to reach an informed judgment how they should vote on the Modifications.  As to the notice of claim submitted by Fonfair, the scheme administrator is dependent on information provided to him by the relevant scheme creditor and scheme companies to substantiate the claims.  Fonfair had not availed itself of the appeal procedure for proving creditors within time.  The disputes between YT Leung and YK Leung are not matters of concern to other scheme creditors.  

44.  Lastly, complaint was made that there was inadequate explanation to account for the enormous discrepancies between the estimated value of assets to be realised in the Original Scheme Document (HK$183.5 million) and the current estimated value given by the scheme administrator in the Scheme Modification Document (HK$20.77 million).  There is insufficient information to give a realistic valuation of the assets in the Schemes so as to enable the scheme creditors to know precisely the effect of the Modifications.

45.  For the sale of inventories, plant and machinery which had been arranged by the scheme companies but did not yield net realisation proceeds, no details were given in the Scheme Modification Document of the items sold, how the sale was arranged, the identity of the buyers, the exact amounts of proceeds realised or the costs incurred.  No detail was given as to the difficulties in the realisation of the floating crafts and vessels.  In contrast, in an affirmation made on behalf of Dockyard in June 2002 for stay of execution of a writ of possession obtained by Fonfair, it was asserted that Dockyard had in its possession about 180 vessels and a list was produced.  No mention was made of any income from the letting, leasing and/or licensing of the assets under the Schemes, which was estimated to fetch HK$8 million in the Original Scheme Document, notwithstanding that the Group has continued to enjoy the land use right at Shatain, Dongguan, the PRC.  It is not clear whether any of the assets which existed at the time the Schemes were sanctioned were actually transferred to Newco as they should have been.  The scheme administrator has failed to give “clear and acceptable” explanation why the Schemes have failed.

46.  I think the essence of the complaint is inadequacy of information rather than a total lack of it, as some pertinent information has been provided, by and large, in the Scheme Modification Document.  Further information has been provided by the scheme administrator in his affidavits filed in these proceedings.  Whether the extent of the information provided is sufficient in all the circumstances is a matter of fact and degree.  The information in the Scheme Modification Document should be considered in the light of what was already known to the scheme creditors as to the progress of the administration of the Schemes and the difficulties encountered.  The scheme administrator had held 14 formal meetings with the committee of inspection since the Schemes became effective in April 2000.  In addition, he had from time corresponded with members of the committee on the progress and issues relating to the Schemes.  At a meeting of the committee of inspection on 11 July 2005 which was prior to the court meeting, the scheme administrator provided a summary of all the work done from 2000 to 2005, and a copy of this was produced in evidence.  I am not prepared to refuse sanction on this ground, as I am not persuaded that further information along the lines as indicated by Fonfair would have a material effect on the voting or caused any consenting scheme creditor to change his mind.

If the Modifications were put forward in good faith

47.  Fonfair claimed that the way the Schemes have been set up and administered was “scandalous”, as there was absence of any safeguard to protect the interest of the scheme creditors.  Either the sum of HK$183.5 million put forward in the Original Scheme Document was a gross over-statement to lure the creditors into accepting the Schemes, or the subsequent action of the scheme companies had made it impossible for the assets in the Schemes to be realised.  It was alleged that the failure of the Schemes was simply the result of the scheme companies’ default and the accommodation given by the scheme administrator to allow this to happen. 

48.  Given these circumstances, to ask the court to sanction the Modifications is to condone and legitimize blatant and deliberate breaches of obligations of the scheme companies.  Under the Modifications, and if the Global Solution were to be implemented, Harbour Front would benefit substantially at the expense of other scheme creditors by acquiring the Unencumbered Assets and Accounts Receivable for a mere HK$20 million.  It was submitted that the Modifications are not such that an intelligent and honest man acting in respect of his own interest might reasonably approve.  As what was promised to the scheme creditors in the Schemes did not bear any reasonable relation to what had in fact occurred, and there can be no guarantee that the Schemes would have any better prospect of implementation with the Modifications, the scheme creditors would be better off with winding up the scheme companies.  Fonfair intends to apply under section 143(1)(a) of Cap. 32 for an inspector to be appointed by the Financial Secretary to investigate the affairs of the Company.

49.  I do not think the criticism against the scheme administrator is justified.  As stated earlier, his powers and duties as set out in the Original Scheme Document are relatively restricted.  I have no reason to doubt the assertion of the scheme administrator that he has, on many occasions, sought information and documents from the scheme companies regarding the status of recoveries and other pertinent information and it was to no avail, for one reason or other.

50.  As for the alleged breaches of obligations of the scheme companies, it seems to me that most of the scheme creditors may well have taken a pragmatic view on the apparent failure of the Schemes.  They would be more concerned with the question whether anything could be salvaged out of a bad situation after waiting for nearly six years.  Whether any one is to be blamed for the failure, and who is to be blamed, must have been a lesser consideration.  The overwhelming votes in favour of the Modifications would seem to indicate that the scheme creditors still wish to give the Schemes one last try.  The vast majority would prefer an estimated return of 1.44 cents in the dollar as soon as possible, on the assumption that the Global Solution is implemented, as opposed to winding up the scheme companies.  I cannot say this is not what an intelligent and honest man, acting in respect of his own interest, might reasonably approve.

51.  The prospect of the Schemes succeeding with the Modifications is not something that is wholly unrealistic that one should simply reject out of hand.  Under the Modifications, the role of the project manager would be significantly reduced.  The scheme administrators would be empowered to dispose of the assets under the Schemes, subject to the approval of the committee of inspection or of the court.  The scheme administrator would be less dependent on the scheme companies for the recovery of Account Receivables.  The cap proposed to be put on arbitration awards and expenses would seem to be a sensible way in ensuring payment of a dividend in the foreseeable future, otherwise no payment could be made until all the arbitrations proceedings that had been commenced at the effective date of the Schemes are concluded.  Scheme creditors that are parties to arbitrations have not objected to the Modifications, apparently taking the pragmatic view that given the amount left in the scheme funds, they may well not recover anything at all.

52.  I should also mention that the scheme administrator had a meeting with the committee of inspection of the Schemes on 20 March 2006 and has given the committee an update on the progress of the administration of the Schemes and an explanation of the nature of these proceedings and the position taken by the liquidators.  The committee has expressed support for the stance taken by the scheme administrator in these proceedings.

53.  With the exception of Dockyard, which is in a special position, I will sanction the Modifications to each of the Schemes relating to the Company and the other 23 Scheme Participating Subsidiaries.

The absence of Dockyard’s consent to the Modifications

54.  I have set out earlier the liquidators’ position on the petition.  Mr. Carolan, for the liquidators of Dockyard, submitted that where a company by its liquidator does not consent to a scheme of arrangement, it obviously cannot proceed (In re Savoy Hotel Ltd. [1981] 1 Ch 351 at 364H to 365F; Practice and Procedure of the Companies Court, by Boyle and Marshall, 1997 ed., para. 3.6.1).

55.  Mr. Maurellet has not disputed the proposition that the court would have no jurisdiction to sanction a scheme of arrangement under section 166 that does not have the approval of the company concerned or, if the company is in liquidation, the consent of the liquidator.  He contended however that a distinction should be drawn between the establishment of a scheme of arrangement de novo and the modification of an existing scheme where the modification does not have a material effect on the rights, interests, remedies, obligations or liabilities of the company concerned.  In the latter situation, it was submitted that the consent of the company to the modification is not required.  As it was provided in the Modifications that the provisions therein should not operate to avoid or prejudice the rights, interests or remedies of Dockyard or its liquidators in relation to any Unencumbered Asset or Account Receivable of Dockyard, the scheme administrator contended that no consent of the liquidators is required to the Modifications.

56.  I am unable to accept this submission for the following reasons.

57.  As pointed out by Miss Rattigan, it was held by the Privy Council in Srimati Premila Devi v. People’s Bank of Northern India Ltd. [1938] 4 All E R 337 at 343D that once a scheme of arrangement has been sanctioned by the court, its terms become binding on the creditors, shareholders and the company alike, by virtue of the statutory provision equivalent to our section 166; thereafter, its terms could only be varied by order of the court after the variation has been approved at the meeting or meetings convened pursuant to a court order.  Hence, “no variation of, or departure from, that scheme could be validated by the mere acquiescence of the shareholders and creditors” (at 345B).

58.  The binding character of a scheme or the variation of a scheme takes effect when there has been a combination of three acts – the approval or consent of the company or the liquidator, the approval of the prescribed statutory majority of creditors or shareholders at the court meeting, and the sanction of the court (Kempe v. Ambassador Insurance Co. [1998] 1 BCLC 234 at 238e to f).

59.  I cannot see how the approval of the company or the liquidator to the variation can be dispensed with, even though it is not envisaged that the rights and interests of the company would be affected by the proposed variation, just as the acquiescence of the shareholders or creditors does not mean that it would not be necessary to obtain the approval of the prescribed majority at the court meeting.  The Modifications are meant to be binding on Dockyard, once they are sanctioned by the court; Dockyard’s consent is needed as it is a party to the arrangement.  I am not persuaded that the reasoning in In re Savoy Hotel Ltd., supra. at 365B to F would have no application here.

60.  I do not have jurisdiction to sanction the Modifications to the Scheme of Dockyard when the liquidators have not given their consent to the same.  The liquidators say they wish first to have regard to the views of the creditors of Dockyard on this matter, other than that the liquidators have not provided any sufficient reason to withhold their consent.  I was told that the committee of inspection of Dockyard has not formed a view whether the liquidators should consent to the Modifications.  Of the five members in the committee, other than Fonfair (which is likely to veto consent) and Ernst & Young (which is likely to abstain), two have indicated that they wish to have regard to the ruling of the court on the Unencumbered Assets and Accounts Receivable of Dockyard raised in the liquidators’ summons when they consider the matter.

61.  In the circumstances, I adjourn the petition relating to the Modifications of Dockyard’s Scheme to a date to be fixed, not earlier than 28 days from today, for the liquidators of Dockyard to ascertain the wishes of the creditors of Dockyard on the Modifications.

62.  I turn to the liquidators’ summons.

The Unencumbered Assets and Accounts Receivable of Dockyard

63.  I will first set out the relevant provisions in the Scheme before I consider the existing position on the transfer and recovery of the Unencumbered Assets and Accounts Receivable of Dockyard.

64.  These relevant expressions are defined as follows in the Scheme:

“Scheme Assets” – “the Unencumbered Assets and the Accounts Receivables”

“Unencumbered Assets” – “in relation to the Scheme Participating Subsidiaries, such of their assets as at the Effective Date as are not subject to any mortgage, charge, pledge, lien, hypothecation or other encumbrance, priority or security interest, deferred purchase, title retention, leasing, sale-and-repurchase or sale-and-leaseback arrangement whatsoever and which will be transferred by them to Newco for realisation or disposal under the provisions of the Scheme, excluding, for this purpose, the Accounts Receivables, any shares held by a Scheme Participating Subsidiary in any other Scheme Participating Subsidiary and shares in companies whose value is, in the reasonable opinion of the Scheme Administrator, negligible; and in relation to the Company, those of its assets which will be transferred by it to Newco for realisation or disposal pursuant to Clause 13 of the Scheme”

“Accounts Receivable” – “all accounts receivable(s) of the Company and the Scheme Participating Subsidiaries as at the Effective Date …”

“Scheme Account” – “the trust account to be opened in the name of Newco with a licensed bank in Hong Kong for the purposes of and for the benefit of those entitled under the Scheme into which account the Scheme Administrator shall place and deposit all proceeds received in connection with the sale, realisation and recoveries of the Scheme Assets and income from the letting, leasing or licensing of the Scheme Assets whilst they are being held for sale under the Scheme”

“Scheme Funds” – “funds held in the Scheme Account (including all interests accrued thereon) available for settlement of, firstly, the Post-Scheme Costs, secondly, the Preferential Claims and thereafter, distribution as Cash Dividends to the non-preferential Scheme Creditors under the Scheme”

65.  These are the relevant clauses in the Scheme:

“6. The Scheme proposes to involve:

(a)   the participation of the Company and (if nay) the Scheme Participating Subsidiaries; and

(b)   the pooling and realisation of the Scheme Assets under the control of Newco, the payment in full of Preferential Claims and the distribution of the remainder of the proceeds and the issue of New Shares by the Company to the non-preferential Scheme Creditors in full and final satisfaction of their claims against the Company and (if any) the Scheme Participating Subsidiaries.

12. The Company has incorporated Newco (whose shares will be held by the Scheme Administrator upon this Scheme of Arrangement becoming effective) for the purpose of holding the Unencumbered Assets pursuant to this Scheme of Arrangement.  All such assets will be sold and the proceeds used to pay the Scheme Creditors in accordance with this Scheme of Arrangement.

13. The Scheme Participating Subsidiaries shall transfer or procure the transfer of all their Unencumbered Assets (excluding the Accounts Receivable, shares held by a Scheme Participating Subsidiary in any other Scheme Participating Subsidiary and shares in companies whose value is, in the reasonable opinion of the Scheme Administrator, negligible), whether held by them directly or indirectly, and the Company shall transfer its entire interests in the land use right at Shatain, Dongguan, the PRC and the right to operate Erzhou quarry at Dangan, Zhuhai, the PRC (whether by transferring its interests in the companies or entities which hold these assets or by procuring such companies or entities to transfer the same) and its interest in associated companies (being companies in the issued share capital or equity capital of which the Company holds less than 50%) which it holds as at the Effective Date, to Newco, which shall hold the Unencumbered Assets (including such assets of the Company to be transferred to Newco under this Clause 13) for the purpose of their realisation and distribution in accordance with the Scheme and for no other purpose.

17. If the realisation or disposal of the Unencumbered Assets cannot be completed within three years from the date on which this Scheme of Arrangement becomes effective, Newco shall, without prejudice to the ways (including public sale) by which it could sell the Unencumbered Assets previously, be obliged to offer the remaining unsold Unencumbered Assets  … to the public for sale …

19. As soon as the Company and the Scheme Participating Subsidiaries receive any recoveries of their Accounts Receivables … they shall remit and transfer such recoveries (after deduction of all expenses incurred including all legal expenses and the reimbursement to be made to the Company for its provision of finance for the cost of such recoveries pursuant to Clause 21(c) of this Scheme of Arrangement) to the Scheme Account.  The Scheme Administrator shall be responsible for distributing such recoveries which constitute part of the Scheme Funds available for distribution to the Scheme Creditors under the Scheme.

21. (a)(i) The Company has undertaken under the Trust Deed to the Trustee (who, for the time being, is the Scheme Administrator) as trustee for the benefit of all Scheme Creditors that, conditionally on any of the Schemes of Arrangement becoming effective, it will provide a maximum of $2,000,000 revolving fund (“the Revolving Fund”) during the term of the Scheme to finance the costs of recovering the Accounts Receivables (for the purpose of this Clause 21 only, including the accounts receivables referred to in Clause 20) under this Scheme of Arrangement and under such of the other Schemes of Arrangement as become effective and the costs of defending any arbitration claim(s) (the “Arbitration Claim(s)”) made against it or any of the Scheme Participating Subsidiaries by any person which has commenced and is continuing as at the Effective Date.  For the avoidance of doubt, the Revolving Fund is the property of the Company not available for distribution to the Scheme Creditors under the terms of this Scheme of Arrangement but once the Company has provided funds under the Revolving Fund pursuant to Clause 21, such funds shall only be reimbursable to the Company to the extent provided by Clause 21(c) below.

21. (d) The Company shall not be obliged at any time during the term of this Scheme of Arrangement to provide the Revolving Fund beyond the limit in force at that time calculated in accordance with Clause 21(b) above.  If there is not enough Revolving Fund for the above purposes and the Scheme Administrator determines that continuing the process of recovering the Accounts Receivables comprised within the Scheme or continuing the defending of the Arbitration Claims comprised within the Scheme is in the best interest of the Scheme Creditors as a whole, he may, with the approval of the Committee of Inspection, employ part of the Scheme Funds to finance the cost of continuing the same.

41. The Scheme Administrator shall open an interest bearing trust account in the name of Newco (“the Scheme Account”) with a licensed bank in Hong Kong for the purposes of and for the benefit of those entitled under the Scheme into which account he shall place and deposit all the proceeds received in accordance with the sale, realisation and recoveries of the Scheme Assets and income from the letting, leasing or licensing of the Scheme Assets whilst they are being held for sale under the Scheme.  The proceeds and income so placed and deposited shall constitute the Scheme Funds and shall be used solely for the purposes of the Scheme including the payment of costs and expenses and the making of distributions to the Scheme Creditors under the Scheme.”

66.  According to an instrument of transfer dated 16 August 2000 made between the Company and the 24 Scheme Participating Subsidiaries as the transferor, and Newco as the transferee, the Company and the Scheme Participating Subsidiaries had conducted a review and had identified their respective Unencumbered Assets as shown in an appendix attached thereto, including schedules 1 to 4.  These schedules are as follows:

Schedule 1: a list of Unencumbered Assets, which have already been transferred to Newco.

Schedule 2: six lists of the Unencumbered Assets, which are awaiting completion of the formalities for the assignment or transfer to Newco, being

(1) motor vehicle list

(2) floating craft list

(3) plant and machinery list

(4) inventory list

(5) investment interest in associated companies

(6) investment interest in subsidiaries directly or indirectly held by the Scheme Participating Subsidiaries

Schedule 3: a list of Unencumbered Assets whose value was considered negligible

Schedule 4: a list of Unencumbered Assets of which the transfer of them is subject to prior consent of a third party, pursuant to clause 14 of the Scheme

67.  For present purpose, only Schedule 2 is relevant.

68.  By the instrument of transfer, it was agreed that the transfer of title of the Unencumbered Assets and the execution of transfer should have been deemed to have taken place on 28 April 2000 (the effective date of the Scheme) and, for practical purpose, that shall be effected as at 31 July 2000 and shall be deemed to be completed and evidenced by the documentation as specified.  In respect of some of the assets in Schedule 2, these provisions were made:

69.  It was further provided that for Unencumbered Assets held on trust by the Company and the Scheme Participating Subsidiaries because the transfer of title of the Unencumbered Asset cannot take effect in the meantime, the Company and the Scheme Participating Subsidiaries warrant to continue to use their best endeavour to procure the relevant and necessary consent from third parties to that effect.  It was also acknowledged that the Unencumbered Assets as shown in Schedules 1 to 4 shall not be exhaustive and the Company and the Scheme Participating Subsidiaries warrant to endeavour to continue to identify and locate any other Unencumbered Assets not yet included in the Schedules and shall effect transfer to the scheme administrator as and when deemed appropriate.

70.  Of the Unencumbered Assets in Schedule 2, some of the assets in the floating craft list and the plant and machinery list were held by Dockyard.  Dockyard’s shareholdings in five companies which held some of the Unencumbered Assets were transferred to Newco in November 2001.  Mr. Carolan has accepted that as regards 6 listed vessels and the listed plant and machinery in Schedule 2, these Unencumbered Assets of Dockyard do not constitute the assets of Dockyard for the purpose of its winding up, for the arguments he advanced below.  The liquidators would only seek a ruling from the court on the other Unencumbered Assets and the Accounts Receivable of Dockyard.  I will refer to these other assets collectively as “the Disputed Assets”.  What the Disputed Assets may be could be seen from a letter of the scheme administrator to the Official Receiver dated 2 July 2003.

71.  According to that letter, based on the accounting information closing on 30 April 1999 with adjustment up to 31 December 1999, the realisable assets held by Dockyard for unsecured creditors in the Scheme were as follows:

	HK$ ‘000	HK$ ‘000
Fixed assets
Plant and machinery [they are not among the Disputed Assets, having been accepted as such by the liquidators]	44

Floating crafts and vessels [of the 9 vessels listed, only the 3 additional vessels not listed in Schedule 2 are among the Disputed Assets]	5,200	5,244
Current assets
Contract work-in-progress recovery [this is the claim for refund under the performance bond in the land reclamation in Miri, Sarawak]	8,100
Accounts receivable/trade debtors	2,355
Other receivable/debtors	1,083	11,538
Total assets		16,782

72.  The Disputed Assets would include the 3 additional vessels and all the items listed under current assets in the above table.  The liquidators have not been able to locate the additional vessels and the recoverability of the various receivables is questionable.

The arguments advanced by the liquidators

73.  The liquidators contended that the Disputed Assets form part of Dockyard’s assets in the winding up and their arguments ran as follows.

74.  As soon as a winding-up order takes effect, the Official Receiver or other liquidator appointed by the court takes control of the company.  The liquidator is under a duty to take custody and control of all the assets and things in action to which the company is or appears to be entitled.  Dispositions of the property of the company since the commencement of the winding up (in the case of Dockyard this was 21 June 2002) are avoided unless otherwise ordered by the court under section 182.  The property vested in the company is subject to any equities affecting it and coming into existence before the commencement of the winding up.  I do not think any of this is controversial.

75.  Where a trust of assets is created by a scheme of arrangement, the liquidators accept that these assets would continue to be held on trust for the benefit of scheme creditors notwithstanding the winding up and that these assets would not form part of the estate in the liquidation.  The liquidation of a company would make the statutory contract of a scheme of arrangement incapable of further performance and thus bring the scheme to an end, but not the trust created under the scheme (Re NT Gallagher & Son Ltd. [2002] BCC 867).  This also is not disputed by Mr. Maurellet.  The next question is what assets of Dockyard were held on trust.

76.  Mr. Carolan started with the principles summarised in the conclusions reached by the English Court of Appeal in Gallagher at para. 54 (supra. at 897G to H):

“(1) Where a CVA [company voluntary arrangement] or IVA [individual voluntary arrangement] provides for moneys or other assets to be paid to or transferred or held for the benefit of CVA or IVA creditors, this will create a trust of those moneys or assets for those creditors.

(2) The effect of the liquidation of the company or the bankruptcy of the debtor on a trust created by the CVA or IVA will depend on the provisions of the CVA or IVA relating thereto.

(3) If the CVA or IVA provides what is to happen on liquidation or bankruptcy (or a failure of the CVA or IVA), effect must be given thereto.

(4) If the CVA or IVA does not so provide, the trust will continue notwithstanding the liquidation, bankruptcy or failure and must take effect according to its terms.

(5) The CVA or IVA creditors can prove in the liquidation or bankruptcy for so much of their debt as remains after payment of what has been or will be recovered under the trust.”

77.  In Gallagher, the terms of the CVA required the company to make monthly contributions to the supervisors of the CVA “for the benefit of creditors” and the supervisors were to apply all funds accumulated by them, after settlement of the costs of the CVA, in distributing the moneys to the CVA creditors.  The CVA also provided that the recovery of a particular claim pursued by the company in litigation was for the benefit of unsecured creditors and that the entire proceeds of litigation were to be applied, subject to settlement of the costs of the CVA, in distribution to the CVA creditors.  The supervisors were empowered to sue in the name of the company and could take over the conduct of the litigation.  Any settlement of the litigation would require the approval of the supervisors in conjunction with the creditors’ committee.  It was held that although the CVA did not expressly use the language of trusts, the supervisors were trustees of the assets in their hands for distribution and they also held the claim in litigation on trust for the benefit of the CVA creditors.

78.  Here, no provision was made in the Original Scheme Document of the effect of a winding-up order against any of the Scheme Participating Subsidiary.  Applying Gallagher, the trust created under the Scheme will continue notwithstanding the winding up of Dockyard.  One then turns to the terms of the Original Scheme Document and the instrument of transfer executed pursuant to the Scheme to ascertain what was the trust created for scheme creditors and what assets of Dockyard would be held on trust, and then one asks whether those terms have been performed.

79.  By the terms of the Scheme, Unencumbered Assets of Dockyard are to be transferred to Newco, which would hold such assets for the purpose of realisation and distribution in accordance with the Scheme.  As for Accounts Receivable, as soon as Dockyard has received any recovery of its Accounts Receivable, it is obliged to remit and transfer the same to the Scheme Account, which is a trust account opened in the name of Newco into which all proceeds of realisation and recoveries are deposited.  The Scheme did not provide for the assignment of Accounts Receivable to the scheme administrator, so control of Accounts Receivable has remained with Dockyard.  Further, unlike the litigation claim in Gallagher, the scheme administrator has no control over the conduct of the arbitration claim in Miri.

80.  Had the Scheme gone to plan, Unencumbered Assets of Scheme Participating Subsidiaries would have been got in and sold and recoveries from Accounts Receivable would have been received and the proceeds held on trust for scheme creditors.  However, the pooling and sale of Unencumbered Assets for the benefit of scheme creditors has not happened to a very large extent.  Apart from the instrument of transfer, there is no evidence of any transfer of Unencumbered Assets to Newco.  Net recoveries of Accounts Receivable at the time of the Scheme Modification Document only amounted to HK$4.9 million and together with other receipts, the scheme administrator holds HK$1.3 million after the discharge of expenses.

81.  Mr. Carolan submitted that according to the terms of the Scheme, the trust constituted was one in which the assets are to be held by the scheme administrator through Newco for the benefit of scheme creditors.  The Scheme was not designed to make each Scheme Participating Subsidiary a trustee of its assets for the scheme creditors.  There was to be a pooling and realisation of the Scheme Assets, on a group wide basis, under the control of Newco.  The terms provided for Unencumbered Assets and Accounts Receivable to be delivered to Newco, either by transfer of ownership or by payment of proceeds into a bank account.  Upon receipt of the assets and funds, Newco would hold the same on trust for scheme creditors.  Thus, in respect of the assets of Dockyard included in the instrument of transfer, the liquidator would accept that they were held on trust for scheme creditors at the commencement of the winding up.  As for the Disputed Assets, pending transfer of ownership of assets or payment of recoveries from receivables, Dockyard did not stand as trustee for scheme creditors, although it would have a contractual obligation under the Scheme to transfer assets and effect payment of proceeds recovered.

82.  Mr. Carolan pointed out that in Gallagher, only “the moneys in the supervisors’ hands” and “the benefit of the cause of action against [the debtor in the litigation claim] were held at the commencement of the [liquidation] upon trust for the benefit of the CVA creditors” (supra. at 891H, para. 27).  There was ‘transfer’ of the receivable in the form of the litigation claim by the terms of the CVA, as the supervisors were empowered to sue in the company’s name and could take over the conduct of litigation.  He reasoned that if the company had failed to pay some monthly contributions to the supervisors, the unpaid contributions would not have been held on trust by the supervisors for the benefit of the CVA creditors.  And even though the company might be regarded as holding the unpaid contributions on trust for the CVA creditors, there was but a single company in Gallagher and no pooling of assets on a group wide basis, which was a fundamental feature of the Scheme here, so that would not avail the scheme administrator.  Besides, of the Accounts Receivable in the Disputed Assets, Dockyard has not made or received any recovery.

83.  Lastly, Mr. Carolan made the point that there is no injustice in holding that the Disputed Assets do constitute the assets of Dockyard for the purpose of its winding up and should not be dealt with pursuant to the Scheme and the Modifications, as it was held in Gallagher that scheme creditors can prove in the liquidation for so much of their debt as remains after payment of what has been or will be recovered under the trust created by the scheme.

The arguments advanced by the scheme administrator

84.  The scheme administrator contended that the Disputed Assets do not form part of the assets of Dockyard in the liquidation and they fall to be dealt with under the Scheme.

85.  The issue, as put by Mr. Maurellet, is whether the Disputed Assets had become subject to a trust from the effective date of the Scheme.  He prayed in aid the conclusion reached by the English Court of Appeal in Gallagher cited earlier, namely, that “where a CVA or IVA provides for moneys or other assets to be paid to or transferred or held for the benefit of CVA or IVA creditors, this will create a trust of those moneys or assets for those creditors”.

86.  He submitted that the fact that Dockyard was to remit the proceeds of the Accounts Receivable to Newco and that there was no assignment of the Accounts Receivable to the scheme administrator is not of consequence.  Nor does it matter that no monies have yet been received for the Accounts Receivable, this should have no bearing on the question whether a trust has been created for scheme creditors.  In Gallagher, Peter Gibson LJ opined that the fact that the supervisors had not received any moneys from the claim in litigation did not “answer the question” whether the benefit of the cause of action was held on trust for the CVA creditors (supra. at 892E to F, para. 30).

87.  Mr. Maurellet argued that in the absence of any indication to the contrary, a debtor’s undertaking to segregate a particular fund or asset for the purpose of repaying a debt would give rise to an inference of a trust, by which the creditor would have a proprietary interest in the segregated fund or asset, as would enable the creditor to realise out of it the amount owed by the debtor, citing Swiss Bank Corporation v. Lloyds Bank Ltd. & Ors. [1982] AC 584 at 595F to 596A.  In In re Nanwa Gold Mines Ltd., Ballantyne v. Nanwa Gold Mines Ltd. [1955] 1 WLR 1080, Harman J had this to say about the act of segregating assets and the promise made in a document to do so at 1084 to 1085:

“… here I have … the promise to retain the money ‘in a separate account’.  What is the point of making such a promise? It seems to me quite clearly to be a representation that the money will be set apart; not in the company’s ordinary coffers, but in a separate account. … I cannot but think that the whole object of making such a promise was to indicate that it would be kept apart and separate, not mixed with the company’s moneys, until the board saw whether the conditions were fulfilled. …

It is conceded that the mere fact that the money was placed in a separate account, so that one could point to it and say: ‘There it is,’ would not of itself ex post facto create a trust.  That appears from Lister & Co. v. Stubbs (1890) 45 Ch D 1, which shows that because A can point to some money in the hands of B and say: ‘That is where my money went to,’ it does not follow that the position between them is other than that of debtor and creditor. … But here it is not the fact of the money being in the joint account which is relied on, but the promise made in the document on the faith of which the application was made. …

It is not, in my judgment, anything more than a question of construing the application form … they did promise to do so, and I think that their promise is of contractual effect …”.

88.  Mr. Maurellet submitted that the mere fact that such an undertaking or promise was made is sufficient for a trust to be created.  In the Original Scheme Document, there was clearly such a promise that proceeds from the realisation of Unencumbered Assets and net recoveries from Accounts Receivable would be kept separate in the Scheme Account for the benefit of scheme creditors.  As Dockyard is obliged under the terms of the Scheme to remit the net proceeds of recovery to the Scheme Account, it could not deal with the Accounts Receivable as it might wish.  Further, the scheme administrator has access to the Revolving Fund to finance, inter alia, the costs of recovering the Accounts Receivable under the Scheme.  As for Unencumbered Assets, Dockyard is obliged under the instrument of transfer to use its best endeavours to obtain the relevant consents from third parties to effect the transfer of its Unencumbered Assets, or to take reasonable steps to assist in such transfer.  The scheme creditors would have a proprietary interest in the assets segregated by virtue of the trust.

89.  It was further contended that the situation was analogous to a Quistclose trust (Quistclose Investments Ltd. v. Rolls Razor Ltd.  (in voluntary liquidation) [1970] AC 567), where “the money remains the property of the lender unless and until it is applied in accordance with his directions and insofar as it is not so applied, must be returned to him.  The money is not at the free disposal of the borrower” (Typhoon 8 Research Ltd. v. Seapower Resources International Ltd. & Anr. [2002] 2 HKLRD 660 at 669H, para. 19, per Le Pichon JA).  The nature of a Quistclose trust was explained and analysed by Lord Millett in these terms in Twinsectra Ltd. v. Yardley & Ors. [2002] 2 AC 164 at 188B to C and 192H to 193C:

“83.       The borrower’s interest pending the application of the money for the stated purpose or its return to the lender is minimal.  He must keep the money separate; he cannot apply it except for the stated purpose; unless the terms of the loan otherwise provide he must return it to the lender if demanded; he cannot refuse to return it if the stated purpose cannot be achieved; and if he becomes bankrupt it does not vest in his trustee in bankruptcy.  If there is any content to beneficial ownership at all, the lender is the beneficial owner and the borrower is not.”

“100.     … I would reject all the alternative analyses, which I find unconvincing for the reasons I have endeavoured to explain, and hold the Quistclose trust to be an entirely orthodox example of the kind of default trust known as a resulting trust.  The lender pays the money to the borrower by way of loan, but he does not part with the entire beneficial interest in the money, and in so far as he does not it is held on a resulting trust for the lender from the outset.  Contrary to the opinion of the Court of Appeal, it is the borrower who has a very limited use of the money, being obliged to apply it for the stated purpose or return it.  He has no beneficial interest in the money, which remains throughout in the lender subject only to the borrower’s power or duty to apply the money in accordance with the lender’s instructions.  When the purpose fails, the money is returnable to the lender, not under some new trust in his favour which only comes into being on failure of the purpose, but because the resulting trust in his favour is no longer subject to any power on the part of the borrower to make use of the money. …”.

90.  On the analogy of a Quistclose trust, it was argued that the scheme administrator is permitted to use the Disputed Assets solely for the purpose of the Scheme and for the benefit of scheme creditors as a whole, and not for any other purpose.  The beneficial interest in the Disputed Assets remains with the scheme creditors pending their realisation and distribution under the Scheme.  Hence, the Disputed Assets are not the assets of Dockyard in the liquidation.

If the Disputed Assets constitute assets of Dockyard in the winding up

91.  I reject the submissions advanced by the scheme administrator.  Firstly, I do not think one can apply the analogy of a Quistclose trust here.  A Quistclose trust is a resulting trust that arises upon the transfer of the legal title from one party to another where there is failure to exhaust the entire beneficial interest of the transferor in the property disposed of.  The situation here does not give rise to a resulting trust of this kind, as there was no transfer or disposal of the property in the Disputed Assets.  The legal interest in the Disputed Assets has not been transferred to the scheme administrator or Newco but has remained with Dockyard throughout.  Besides, the analogy of a Quistclose trust in this situation does not sit well with one of the conclusions reached in Gallagher, namely,that a fully constituted trust created under a CVA or IVA will continue notwithstanding the liquidation, bankruptcy or failure and must take effect according to its terms, in the absence of any provision requiring the trust to terminate and specifying what is to happen to the trust assets.  In reaching that conclusion, Peter Gibson LJ stated at 896B to D that the Quistclose case would have no relevance even by way of analogy.  In the Quistclose case, the purpose for which money was advanced could not be fulfilled when the company went into liquidation.  In Gallagher, whilst the administration of the trust might not produce the full benefit envisaged for the CVA creditors due to the company’s liquidation, the supervisors could still carry the CVA trust into effect.

92.  Secondly, I am unable to see how a trust could be created in respect of the Disputed Assets, where there was no vesting of the property in the scheme administrator or Newco.  By the terms of the Scheme, nothing had happened to divest Dockyard of its beneficial ownership in the Disputed Assets.  Clauses 12, 13 and 19 of the Scheme relied on in particular by the scheme administrator do not advance his case.  There was no transfer of Unencumbered Assets in the Disputed Assets, Dockyard has not received any recovery of its Accounts Receivable, let alone pooling and realisation of the Scheme Assets under the control of Newco.  I do not think the dicta cited earlier in Swiss Bank Corporation and Nanwa Gold Mines would assist.  In laying emphasis on the mere undertaking or promise to segregate assets in these dicta, without regard to the act itself of segregating assets, Mr. Maurellet would seem to have taken these dicta out of context.  As for the dicta in Gallagher at 892E to F relied on by Mr. Maurellet to support his contention that it did not matter there was no receipt of funds, it is necessary to bear in mind the nature of the property that the court was there concerned with, namely, the benefit of a cause of action.

93.  Thirdly, in respect of the Accounts Receivable, it does not appear to me that a trust was created by declaration of trust.  I have mentioned earlier the distinguishing features in the CVA in Gallagher, where it was apparent that control of the claim in litigation was vested in the supervisors.  Another decision of the English Court of Appeal cited by Mr. Maurellet, Welburn v. Dibb Lupton Broomhead [2003] BPIR 768, was to the same effect.  In holding that a claim in an arbitration belonging to the debtor formed part of his trust assets in an IVA, the court in Welburn examined the terms of the IVA and concluded that it must have been intended that the supervisor should have the necessary control of the arbitration.  Here, the scheme administrator has no control over the conduct of the recovery of the Accounts Receivable.  Further, it was provided in the Scheme, for the avoidance of doubt, that the Revolving Fund provided by the Company to finance the costs of recovering the Accounts Receivable was the property of the Company not available for distribution to the Scheme Creditors under the terms of the Scheme.

94.  Fourthly, I note that in the decision at first instance in Gallagher, Judge Howarth had ruled that the remaining assets of the company (other than the monthly contributions paid to the supervisors and the benefit of the cause of action in a claim pursued by the company in litigation) were not held on trust for the CVA creditors (at 886C and 891B and D).  It was not argued on appeal that the remaining assets not paid to the supervisors were also held in trust and hence not available for the purpose of liquidation (at 891H), notwithstanding that the company was in arrears with contribution payments (at 870C).  The supposition made by Mr. Carolan earlier regarding unpaid contributions was in fact the subject of a ruling.  This ruling is contrary to the contention advanced by Mr. Maurellet that the mere promise of segregating assets is sufficient for a trust to be created over the assets being the subject of the promise.

95.  I am inclined to agree with the submissions of the liquidators that according to the terms of the Scheme, pending transfer of ownership of Unencumbered Assets or recoveries from Accounts Receivable, the Disputed Assets were not held on trust for scheme creditors.  As this had not taken place on the commencement of the winding up of Dockyard, I hold that the Disputed Assets constitute the assets of Dockyard for the purpose of its winding up.  There will be a direction to this effect on the liquidators’ summons.  It is not necessary to make any direction if the Schemes have failed.

96.  Following Gallagher, I take the view that scheme creditors of Dockyard can prove in its liquidation for so much of their debt as remains after payment of what will be recovered under the trust created by the Scheme.  I reject the contention of the scheme administrator that the bar to proceedings in clause 1 of the Scheme would have any application in the situation where Dockyard has gone into liquidation in breach of its obligations under the statutory contract constituted by the Scheme and rendered it impossible to fulfil any further the purpose of the Scheme, save for the fully constituted trust created in respect of those assets of Dockyard covered in the instrument of transfer.

Orders

97.  On the petition for sanction, I sanction the Modifications to each of the Schemes and the other 23 Scheme Participating Subsidiaries, except for Dockyard.  With regard to the Modifications for the Scheme of Dockyard, I adjourn the petition for sanction to a date to be fixed, not earlier than 28 days from today, for the liquidators of Dockyard to ascertain the wishes of the creditors of Dockyard on the Modifications.

98.  On the liquidators’ summons, I direct that the Disputed Assets constitute the assets of Dockyard for the purpose of its winding up and should not be dealt with pursuant to the Schemes and the Modifications.

99.  As for the costs on the petition, I make an order nisi that the scheme administrator’s costs of the adjourned hearing on 18 April 2006 should be borne by the opposing creditors.  Save as aforesaid, I make no order as to costs.  I take the view that by the time of the adjourned hearing, the opposing creditors should have ample information to form a view if they should persist in their opposition.  I see no reason why the unsuccessful opposing parties should not bear the costs incurred by the scheme administrator on account of their opposition.

100.  On the liquidators’ summons, I make an order nisi that the costs of the liquidators are to be paid out of the assets of Dockyard.  I decline to order the scheme administrator to bear any part of the liquidators’ costs.