RE LEHMAN BROTHERS ASIA HOLDINGS LTD (in liquidation)

HCCW 443/2008

[2021] HKCFI 2137

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 443 OF 2008

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D E C I S I O N

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1.  The sole remaining liquidator of Lehman Brothers Asia Holdings Limited has applied pursuant to s196(2)(b) and s200(3) of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance, Cap 32, for the following order:

“1. Sanction be granted to the Liquidator to retain US$2.9 million from the next interim dividend payment in this liquidation, such amount (‘Retained Amount’)  reflecting a payment from Lehman Brother Holdings Inc., the sole remaining creditor in this liquidation.”

2.  The application is opposed by the Official Receiver.  When the application came on before me I asked Mr Ho [1] what questions the application required to be considered as on the wording of the order it was unclear what the controversy is.  It is not suggested that the Liquidator, Patrick Cowley of KPMG, personally keep US$2.9 million and it is unclear from the summons whether the Court is being asked to determine a part of KPMG’s remuneration.  From the evidence that has been filed by Mr Cowley it is apparent that the payment it is intended be paid to KPMG is in the nature of a bonus agreed by the Company’s sole creditor Lehman Brothers Holdings Inc., because of what the creditor considers to be the Liquidators success in massively reducing various fees that would otherwise have had to be paid in connection with the liquidation to the Government.  The Court originally appointed three liquidators: Paul Jeremy Brough, Edward Simon Middleton and Patrick Cowley (“Liquidators”). Mr Brough and Mr Middleton retired in November 2011 and December 2019 respectively.  Mr Middleton, but not Mr Brough, was a liquidator at the time the events, which it is said justify the payment of a bonus took place.

3.  It is not in dispute that the Liquidators have already been paid in full for their professional services in accordance with the terms, which governed their appointment[2].  As I have already noted the additional payment is in the nature of a bonus to which the Company’s sole creditor agrees in recognition of the fact that the Liquidators managed to negotiate reductions in the ad valorem fee that was payable under the Companies (Fees and Percentages)  Order, Cap 32C (“CFPO”), the interest fee payable under s295(4) of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance, Cap 32 (“Ordinance”)  and the release fee payable under the CFPO.  The savings totalled HK$989,000,000.  The Official Receiver does not dispute that these savings were the result of the Liquidators’ efforts.  It is understandable in my view that the sole creditor may take the view that the Liquidators’ successful efforts to significantly reduce the amounts I have described and thus increase materially the amount payable to the creditor deserve some financial recognition.  I shall proceed to deal with the application on the basis that there is nothing improper in either the reason why the creditor has agreed to the payment of the bonus or the amount of US$2,900,000.

4.  Section 196(2) of the Ordinance provides that “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 court”.  This reflects the common law position, namely, that the Court has “... a parallel inherent jurisdiction ... to fix the remuneration of a liquidator, being one of its officers”[3].

5.  Rule 147 of the Companies (Winding-Up)  Rules, Cap 32H, provides:

“Except as provided by the Ordinance or the rules, a liquidator shall not under any circumstances whatever, make any arrangement for, or accept from any solicitor, auctioneer, or any other person connected with the company of which he is liquidator, or who is employed in or in connexion with the winding up of the company, any gift, remuneration, or pecuniary or other consideration or benefit whatever beyond the remuneration to which under the Ordinance and the rules he is entitled as liquidator, nor shall he make any arrangement for giving up, or give up any part of such remuneration to any such solicitor, auctioneer, or other person” (emphasis added).

6.  On the face of this Rule it is clear that the Liquidators cannot agree to receive a payment in respect of their services beyond that which they are entitled to by virtue of the application of the provisions of the Ordinance or an order of the Court.  The original order appointing the Liquidators provided that “The remuneration of the Joint and Several Liquidators shall be determined by the Court pursuant to under [sic] section 196(2)  of the Companies Ordinance [sic [4]] and be paid out of the assets of the Company.”  It seems to me clear that the language of Rule 147 does not prevent the Liquidators returning to Court and asking the Court to change whatever arrangement has previously governed their remuneration they consider it appropriate or necessary to do so. Rule 147 simply states the consequences of a liquidator being a fiduciary, namely, that he cannot profit from his office unless permitted by statute or an order of the court.

7.  In summary, the Official Receiver objects to the application on the following grounds:

(1)  The bonus is not remuneration and Rule 147 prohibits the payment of any other kind to a liquidator.

(2)  If the bonus is regarded as an increase in remuneration, the Liquidators have to justify the payment by reference to the normal principles that govern the payment of liquidators and this they have not done.

8.  For the reasons that I have already explained in my view the bonus would be remuneration.  However, it is not in dispute that the Liquidators have been paid in full remuneration assessed in accordance with the process that was envisaged at the time the order I have referred to in [6] was made.  The Liquidators are seeking the court’s approval for payment of something additional.

9.  So far as the second objection is concerned the Liquidators argue as follows.  The proposed payment is properly understood as a payment to be made to a fiduciary with the approval of the person to whom he owes his fiduciary duty.  As Birss J explains in Re Portman Estate [5] “Under its inherent jurisdiction, the Court can modify trustee remuneration to ensure that the trust is properly administered for the benefit of the beneficiaries: Re Duke of Norfolk Settlement Trusts [1982] Ch 61.  This can either be done by varying existing powers of remuneration or by conferring a new power of remuneration where there was none previously.”  Therefore, there is nothing in principle objectionable to the Liquidators returning to Court to seek a variation of the original order providing for payment of their costs.

10.  There is also nothing objectionable in principle to a payment to a trustee, and by parity of reasoning a liquidator, if the beneficiary under the trust, and thus the creditors of a company, agree to it voluntarily.  As is explained in Snell’s Equity[6] “There is nothing to prevent trustee from contracting with his beneficiaries (assuming they are all sui juris)  for compensation for the performance of the duties of the trust, even if this compensation is over and above that expressly permitted in the trust instrument.”

11.  In my view this analysis is correct.  There is nothing in principle objectionable to the Court approving a further payment to the Liquidators to which the sole creditor of the Company agrees.  It would appear that the creditor takes the view that the Liquidators have carried out their duties very successfully and as a consequence the return to it has been materially higher than it might otherwise have been.  I can see no reason on the basis of the evidence before me not to conclude that this is a genuinely held view and one which a creditor might reasonably hold.  In these circumstances the question becomes is there any reason for the Court to withhold approval of what the creditor has agreed?

12.  Before turning to consider the Official Receiver’s objections I would make the following preliminary observation.  The facts of this case are unique and I think it unlikely that they would recur and certainly not recur frequently.  No case has been cited to me which deals with a comparable application for additional remuneration by a liquidator.

13.  First, the Official Receiver objects on the grounds that the determination of the Liquidators’ remuneration has to be assessed by reference to the Maxwell [7] principles and the Liquidators have not begun to satisfy them.  This is with respect an artificial analysis in the present context.  Self-evidently the Liquidators have not made an application for an additional payment on the basis of the amount of work they have carried out.  They make it on the basis that the creditor has agreed to the Liquidators being paid a bonus.  If the creditor had not agreed there would have been no basis for the application to be made.  Conversely if the creditor had agreed that the Liquidators be paid a lump sum rather than be required to go through a taxation I can see no reason in principle why the Court would not have agreed it.  Unless the Court had doubts about the genuineness of the agreement, but that is a different matter.  The Maxwell principles apply in cases in which the Court is being asked to assess remuneration.  In my view they do not apply if the Court is satisfied that a taxation is not required.  In the present case a further taxation is clearly not required; it would be a meaningless exercise.

14.  The other reasons go to the undesirability of permitting a liquidator to return to court and ask for an uplift in remuneration because he can credibly argue he has done a particularly good job.  As I have said this is a unique case.  I do not think it can sensibly be objected that by approving the application the Court might appear to condone excessive payments to liquidators or encourage similar applications in the future.  The prospects of a sufficient proportion of creditors in value or number agreeing to pay bonuses to liquidators in the future is so remote as to be fanciful in my view.  Neither can the Court approving a payment to which a company’s sole sophisticated creditor has agreed in my view sensibly be interpreted as approving overly generous remuneration of liquidators generally.  In my view the Official Receiver’s concerns do not justify the Court declining the application.

15.  There is, however, another concern to which in my view the application gives rise.  Mr Cowley says in his 11^th affirmation that the creditor has agreed to pay the bonus to the Liquidators because it is extremely pleased with their performance, particularly with regard to the release fee payable to the Government pursuant to Schedule 2(3) of CFPO, which resulted in a saving of HK$540 million.  The creditor’s confirmation of its agreement to the payment is contained in a short letter dated 18 February 2020, which I quote in full:

“I write in respect of our intended court application in Hong Kong seeking sanction to retain US$2.9 million from the next dividend payment that would otherwise be paid to Lehman Brothers Holdings Inc. (‘LBHI’), with a view to that sum being paid to KPMG as an additional fee for the Liquidators. I have been provided with and read a draft of your 11^th Affidavit (‘Affidavit’)  that is to be filed in support of the intended application.

I, as the CEO of LBHI, which is the sole remaining creditor of LBAH, and principal beneficiary of the efforts your have detailed in the Affidavit, hereby confirm LBHI’s support for the proposed fee, and the application being made in Hong Kong.”

16.  As I explained in [2] the payment will go to KPMG.  It is not clear how this substantial additional sum will be distributed.  The letter seems to envisage that Mr Middleton will be paid a proportion of the US$2.9 million, but I think it is reasonable to assume that this will not be the case.  Although I decline the Official Receiver’s invitation to dismiss the application I do not propose to approve it at present.  I will adjourn the summons to a case management conference in order that directions can be made for the filing of further evidence explaining how the bonus is to be distributed and what precisely the creditor has agreed to.  The Liquidator’s solicitors can write to my clerk to fix a date.