RE SWEETMART GARMENT WORKS LTD

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J U D G M E N T

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1.   At this hearing, the principal issue raised for determination was whether, upon the proper construction of section 196(1A) and (2) of the Companies Ordinance (Cap. 32) (“the Ordinance”), the remuneration of provisional liquidators appointed by the Official Receiver pursuant to section 194(1A) of the Ordinance falls to be determined by the Court or the Official Receiver.

2.   I make it clear at the outset that this hearing was concerned only with the position in relation to provisional liquidators appointed by the Official Receiver pursuant to section 194(1A) of the Ordinance, and not in relation to provisional liquidators appointed by the court under section 193, prior to the making of a winding up order, who will, after the making of a winding up order, continue in office as provisional liquidators by virtue of section 194(1)(aa) of the Ordinance.

3.   Section 194(1A) of the Ordinance enables the Official Receiver to appoint another person or persons to be provisional liquidator in his place, where he has become the provisional liquidator of a company by virtue of section 194(1)(a) and is of the view that the property of the company is not likely to exceed HK$200,000. It was introduced into the Ordinance by amendments that came into effect on 1 July 2000.

4.   The background to section 194(1A) can be briefly summarised as follows:-

(1) Prior to section 194(1A) coming into effect, on the making of a winding up order in respect of a company, the Official Receiver became its provisional liquidator pursuant to section 194(1)(a) pending the appointment of a liquidator, which would usually take place following the holding of meetings of creditors and contributories to determine who should be appointed.

(2) The one exception to this was that where a provisional liquidator had been appointed prior to the making of the winding up order pursuant to section 193, he would remain in office as provisional liquidator pending the appointment of a liquidator as a result of the operation of section 194(1)(aa).

(3) However, because the administrative burden of being provisional liquidator (and liquidator ) of a very large number of companies that were wound up by the court was one which it was difficult for the Official Receiver to cope with having regard to the resources at his disposal, he had in about 1996 or 1997 adopted a scheme (known as the “Panel B” scheme) by which he appointed insolvency practitioners from the private sector to act as his agents in many cases. In late 1999, however, Rogers JA pointed out that this was not in fact permissible under the Ordinance, as it involved an impermissible delegation of the whole of the Official Receiver’s functions as provisional liquidator and liquidator to the agent appointed by him. As a result, the Official Receiver discontinued the Panel B scheme.

(4) However, in order to reduce the administrative burdens that would otherwise be placed on the Official Receiver, section 194(1A) was enacted, to cater for the situation in respect of liquidations which were not expected to produce significant assets.

(5) Following the enactment of section 194(1A), the Official Receiver introduced a tender process by which it was open to all firms of accountants, solicitors or company secretaries with relevant insolvency expertise to tender for appointments under that section. As such appointments would be made in relation to cases in which there were not expected to be substantial assets, successful appointees’ remuneration would be paid out of the assets of the company in liquidation where possible, but to the extent that such assets were insufficient, would be met out of a subsidy to be provided by the Hong Kong Government, which was to be administered by the Official Receiver’s office.

(6) Firms tendering for appointment were required to indicate, among other things, the amount of the subsidy which they required (which would form the limit of the payment to be made by the Government where the assets of the company concerned were insufficient to meet their fees) and the charging rates (in respect of the different grades of staff to be used by the tenderer) which would be applied on a time cost basis for work done on each liquidation for which they were appointed.

5.   So far as the remuneration of provisional liquidators appointed under section 194(1A) is concerned, the following provisions of the Ordinance are relevant:-

(1) Section 2, which defines “liquidator” as including a provisional liquidator holding such office by virtue of section 194 (unless the context otherwise requires);

(2) Section 196(1A), which provides that a provisional liquidator appointed under section 194(1A) shall be remunerated either in accordance with a scale of fees approved from time to time by the Official Receiver, or on such other basis as the Official Receiver approves in writing; and

(3) Section 196(2), which provides that subject to section 196(1A), where a person other than the Official Receiver is appointed liquidator, he shall receive such remuneration by way of percentage or otherwise as is determined by the committee of inspection (if there is one), or (where there is no committee of inspection or where the committee of inspection and the liquidator are unable to agree) by the court.

6.   In Re Gold Delta Development Ltd (unreported, HCCW No. 915/2000, Master A Ho, 28 October 2004), Master A Ho took the view that, in providing for the fixing of the basis of remuneration of section 194(1A) provisional liquidators by the Official Receiver, section 196(1A) necessarily required the Official Receiver to also calculate the quantum of the remuneration payable to such provisional liquidators in accordance with the basis fixed by him. He held that the court had no jurisdiction to determine the amount of remuneration payable to provisional liquidators appointed pursuant to section 194(1A).

7.   Subsequently, however, I expressed a different view in Re Bondfield International Limited (unreported, HCCW No. 99 & 711/2002, Barma J, 30 September 2005), where I said (at paragraph 16 of my judgment) that it seemed to me that on the natural reading of [section 196(1A)], the power thereby reserved to the Official Receiver related not so much to the assessment of the quantum of the remuneration to be allowed, but to the fixing of the basis of such remuneration only. On this basis, I held that the court did have jurisdiction to deal with the quantification of a section 194(1A) provisional liquidator’s remuneration.

8.   This divergence of view has, unsurprisingly, created a degree of uncertainty. In particular, private sector provisional liquidators appointed under section 194(1A) (and the Official Receiver) are uncertain as to whether their remuneration is to be assessed by the court, applying the basis fixed by the Official Receiver, or by the Official Receiver himself.

9.   In this case, the former provisional liquidators of Sweetmart Garment Works Ltd applied to the court for their bill dated 5 August 2008 to be taxed, so as to fix the remuneration to which they would be entitled. On 17 October 2008, the application came before Master A Ho, who directed that the question of whether, on the proper interpretation of sections 196(1A) and (2) of the Ordinance, the court had jurisdiction to tax the bills of provisional liquidators appointed under section 194(1A), should be referred to a Companies judge for determination. In order that the matter could be fully argued, Mr Ambrose Ho S.C. was appointed as amicus curiae to assist the court. The Official Receiver also engaged Mr Jat Sew Tong S.C. to put forward submissions on his behalf. I have been greatly assisted by the very helpful submissions that each of them has made.

10.   In the event, both Mr Jat and Mr Ho submitted that the court did, in fact, have jurisdiction to determine the amount of the remuneration to be paid to a provisional liquidator appointed under section 194(1A).

11.   Mr Jat suggested that this was so because:-

(1) This was the natural meaning of the relevant provisions.

(2) This was consistent with the general scheme for the remuneration of liquidators and provisional liquidators in a winding up by the court.

(3) The provisional liquidator was an officer of the court.

12.   As to his first point, Mr Jat submitted that the power conferred on the Official Receiver by section 196(1A) concerned the prescription of the basis of the section 194(1A) provisional liquidator’s remuneration. However, nothing in section 196(1A) conferred on the Official Receiver a power to assess or determine such remuneration. He suggested that the fixing of the basis of remuneration was a different matter from the assessment of the amount of remuneration properly payable applying that basis.

13.   In his oral submissions at the hearing, Mr Jat developed this point by referring to the terms of section 196(2), which, he said, clearly conferred on the court the power to assess the amount of the remuneration payable to any liquidator or provisional liquidator other than the Official Receiver. Mr Jat contended that the words “subject to subsection (1A)” appearing at the beginning of subsection (2) simply made it clear that, in assessing such remuneration, the court should have regard to the basis for remuneration fixed by the Official Receiver in the exercise of his power under subsection (1A).

14.   I think that this is right. Section 196(1A) clearly refers to the fixing of the basis of remuneration rather than the actual assessment of the level of remuneration allowed. It is perfectly possible to read sections 196(1A) and (2) together harmoniously in the case of a section 194(1A) provisional liquidator by allowing the basis of his remuneration to be determined by the Official Receiver (by whom he is appointed) pursuant to section 196(1A), but, subject thereto, leaving the actual level of remuneration to be allowed to be assessed by the court, as is the position for other provisional liquidators and liquidators.

15.   Mr Ho helpfully indicated that this interpretation was supported by the Chinese version of section 196(2), in that the words “subject to” are translated as “so far as not inconsistent with”. By way of contrast, Mr Ho drew my attention to the fact that in section 194(1)(a), the words “subject to” are translated as “except as otherwise provided [by sections 194(1)(aa) and (1A)]”. Thus, said Mr Ho, in section 194(1)(a), “subject to” was used in a sense that connoted mutual incompatibility between section 194(1)(a) on the one hand, and sections 194(1)(aa) and 194(1A) on the other, whereas in section 196(2), “subject to” did not connote mutual incompatibility with section 196(1A).

16.   I agree that this supports Mr Jat’s proposed construction, in that it highlights the fact that sections 196(1A) and (2) are not mutually exclusive.

17.   Mr Jat’s second and third points can be taken together. In essence the argument was that a provisional liquidator appointed by the Official Receiver pursuant to section 194(1A) took the place of the Official Receiver as provisional liquidator, and was therefore just as much an officer of the court as a liquidator appointed in a winding up by the court, or a provisional liquidator appointed under section 193, a conclusion which is supported by the fact that the court clearly has powers of control over such a provisional liquidator pursuant to section 199 of the Ordinance.

18.   In my view, there can be no doubt that a provisional liquidator appointed under section 194(1A) in a compulsory winding up is just as much an officer of the court as any other provisional liquidator or liquidator.

19.   Mr Jat contended that in the case of a liquidator other than the Official Receiver, the court’s power to fix the amount of his remuneration could not be disputed – it arose from the terms of section 196(2). In the case of a provisional liquidator appointed under section 193, Mr Jat submitted that in respect of the period prior to the making of a winding up order, his remuneration would be assessed by the court in the exercise of its inherent jurisdiction over its officers (see Re Peregrine Investment Holdings Ltd [1998] 2 HKLRD 670). For the period after the making of the winding up order, when such provisional liquidator continued to hold office by virtue of section 194(1)(aa), Mr Jat suggested that prior to the amendments made in 2000, his remuneration was similarly assessed by the court pursuant to its inherent jurisdiction (see Re Peregrine Investment Holdings Ltd (No. 4) [1999] 2 HKLRD 722), although following such amendments, the assessment would take place pursuant to section 196(2) rather than the inherent jurisdiction. Mr Jat suggested that it would be highly anomalous for the remuneration of a provisional liquidator appointed under section 194(1A) to be removed from the purview of the court, when in every other case, the court had jurisdiction to fix the amount of its officer’s remuneration (subject to the possibility that such remuneration might be agreed between the liquidator and the committee of inspection where there was one).

20.   Mr Ho, in his submission, made a similar point. He, too, submitted that a section 194(1A) provisional liquidator was an officer of the court, and suggested that that being so, the court’s jurisdiction to determine the level of his remuneration could only be removed by clear and unambiguous language, which was lacking here.

21.   I think that these points provide further support for the interpretation of sections 196(1A) and (2) that I have held to be the correct one in paragraph 14 above.

22.   I should just add, however, that I do not wish, in this judgment, to express a final view as to the correctness of Mr Jat’s suggestion that in the case of a section 193 provisional liquidator continuing in office after the making of a winding up order, his remuneration falls to be assessed by the court under section 196(2) rather than under its inherent jurisdiction. This is not a point that requires determination in this application, and it seems to me that there may well be persuasive arguments in favour of the contention that even after the amendments of 2000, such a provisional liquidator’s remuneration continues to be subject to assessment by the court under its inherent jurisdiction rather than under section 196(2). In either case, the point remains that the remuneration of such a provisional liquidator, who is undoubtedly an officer of the court, is fixed by the court (whichever is the true basis for doing so).

23.   I am therefore satisfied that section 196(1A) does not have the effect of excluding the court’s jurisdiction to examine and fix the level of remuneration of a section 194(1A) provisional liquidator.

24.   There was, however, one further question that was canvassed at the hearing, as to which Mr Jat and Mr Ho differed. This related to the role of the Official Receiver in the process of assessment of a section 194(1A) provisional liquidator’s remuneration. Mr Ho suggested that it would be good practice for the Official Receiver to scrutinize the provisional liquidator’s bill before it was submitted to the court for taxation, pursuant to his responsibility to monitor the conduct of liquidators in compulsory winding ups pursuant to section 204 of the Ordinance. This, he said, was likely to reduce the burden on the court of having to deal with a potentially large number of taxations of provisional liquidators’ remuneration, in that the court would be able to place some reliance on the scrutiny brought to bear by the Official Receiver. He invited me to indicate that this was the appropriate course of practice to adopt in relation to taxations of the fees of section 194(1A) provisional liquidators.

25.   Mr Jat disagreed. He contended that there while the Official Receiver clear had the right to scrutinize the bills of section 194(1A) provisional liquidators, this was not as a result of any provision in the Ordinance requiring or authorizing him to do so, but a purely contractual arrangement as between the Official Receiver and the provisional liquidators concerned, arising out of the terms of the tender by which the provisional liquidators were appointed. He said that although the Official Receiver did, from time to time, scrutinize the bills of section 194(1A) provisional liquidators, and of liquidators in other liquidations, this was not done in every case. He indicated that to require the Official Receiver to undertake this task in respect of all section 194(1A) provisional liquidators would involve a considerable strain on the resources which he had available. He also submitted that there appeared to be no reason in principle why the procedure should differ at different stages of a single liquidation – if Mr Ho’s suggestion were right, it would mean that in the case of a section 194(1A) provisional liquidator, his fees would have first to be considered by the Official Receiver, whereas upon his becoming liquidator (which might be expected to happen in most cases) this would not be required any longer.

26.   In my view, the Official Receiver’s obligation to monitor the conduct of a liquidator pursuant to section 204 does not require him to scrutinize his bills in every case involving a section 194(1A) provisional liquidator. It is not, I think, suggested that section 204 obliges the Official Receiver to scrutinize the bills of every liquidator in every compulsory winding up. That being so, it is difficult to see why he should have this responsibility in every compulsory winding up in which a provisional liquidator has been appointed by him under section 194(1A). That said, I have no doubt that if, in a particular case, the court desired the input or assistance of the Official Receiver in relation to the assessment of the fees of a section 194(1A) provisional liquidator (or indeed, of any other provisional liquidator or liquidator), such input and assistance would be readily provided.

27.   Fortunately, based on the information provided by the Official Receiver, the assessment of the remuneration of section 194(1A) provisional liquidators may prove not to be excessively burdensome – although there have been nearly 6,400 cases in which provisional liquidators were appointed by the Official Receiver pursuant to section 194(1A) in the eight and a half years since its enactment, in the vast majority of cases, it is not necessary to assess the provisional liquidators’ fees. This is because where the assets of the company concerned are less than HK$40,000, experience has shown that the provisional liquidators will have to resort to the subsidy for payment of their fees, since such assets will be used up in meeting other costs and expenses which have priority over the provisional liquidators’ fees. Further, even in relation to cases with more than HK$40,000 in assets, a considerable number, for one reason or another, do not require assessment of the provisional liquidator’s fees. It seems that over the last eight and a half years, only slightly over 5% of cases in which a section 194(1A) liquidator was appointed would require that the provisional liquidator’s fees be assessed. This amounts to some 40 odd cases per year.

28.   I also agree with Mr Jat that there is no compelling reason, whether as a matter of construction of the Ordinance or as a matter of practicality, for the remuneration a provisional liquidator appointed under section 194(1A) after the making of a winding up order to be subject to a different procedure than that of other liquidators appointed after the making of a winding up order. On the contrary, it would be more convenient and thus preferable to have as few differences as possible in respect of the procedure for the assessment of their remuneration

29.   I am therefore of the view that section 194(1A) provisional liquidators’ remuneration is to be assessed in the same manner as that of liquidators other than the Official Receiver, pursuant to section 196(2) of the Ordinance, but having regard to the basis of remuneration fixed by the Official Receiver under section 196(1A).

30.   Finally, as these proceedings were not adversarial in nature, no question of costs arises, and I make no order as to costs.