RE MF GLOBAL HONG KONG LTD

CACV 251/2012 & CACV 252/2012

(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 251 OF 2012

(ON APPEAL FROM HCCW 356 OF 2011)

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AND

CIVIL APPEAL NO 252 OF 2012

(ON APPEAL FROM HCCW 357 OF 2011)

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J U D G M E N T

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Hon Yuen JA:

1. I agree with the judgment of Barma JA and the orders he proposes to make.

Hon Barma JA:

Introduction

2. On 4 October 2012, Harris J made orders in the winding up of each of MF Global Hong Kong Limited and MF Global Holdings HK Limited (“the Companies”), by which he ordered, on the application of a creditor of each of the Companies made under section 209A of the Companies Ordinance (“CO”), that the liquidation of the each of the companies, which had until then been conducted as a winding up by the court, should, from the date of the order, be conducted as if it were a creditors’ voluntary winding up.  By his orders, Harris J also made certain further orders in relation to the continued conduct of the liquidations.  These included an order, made on the application of the provisional liquidators of the companies (who were in both cases Mr Patrick Cowley, Mr Fergal Thomas Power and Ms Yee Man Lui), appointing the provisional liquidators to be the liquidators of the two companies.  Also included (at paragraph 4), was an order that realisations made by the provisional liquidators up to that point (which had been paid by them, on a without prejudice basis, into the Companies’ Liquidation Account) should be paid to them as liquidators “without any deduction being made in respect of ad valorem fees pursuant to the Companies (Fees and Percentages) Order, such fees not being payable by a provisional liquidator appointed under section 193 of the [CO]”.

3. This appeal was brought by the Official Receiver against the last-mentioned part of Harris J’s orders.  By this appeal, the Official Receiver asks that, in substitution for the orders made by Harris J, there be orders made that each of the Companies “shall pay the ad valorem fee on the assets realised and brought to credit by its provisional liquidators up to 4 October 2012, being the date when its liquidation was converted into a creditors’ voluntary winding up, in accordance with the percentages prescribed in Item 1 of Table B of Schedule 3 of the Companies (Fees and Percentages) Order …” (“the Order”).

4. The difference between the parties was, therefore, whether or not the ad valorem fees prescribed by the Order should be paid on the assets of the companies realised and brought to credit by the provisional liquidators in the period up to the conversion of the liquidations from compulsory liquidations to creditors’ voluntary windings up.  If payable, such fees would be substantial, as the provisional liquidators had, during that period, realised some HK$171.5 million in assets in respect of MF Global Hong Kong Limited, and HK$32 million in assets in respect of MF Global Holdings HK Limited, on which the scale fees would amount to some HK$2,550,000 and HK$975,000 respectively.

The relevant statutory provisions

5. The authority to prescribe and charge the ad valorem fee is provided by section 296 of the CO, subsections (3) to (5) and (7) of which are relevant here.  They provide as follows:

“(3) There shall be paid in respect of proceedings under this Ordinance, where no fee is otherwise fixed, such fees as the Chief Justice may, with the approval of the Legislative Council, by order direct, and he may direct by whom and in what manner the same are to be collected and accounted for.

(4) The amount of any fees prescribed under this section shall not be limited by reference to the amount of administrative or other costs incurred or likely to be incurred by the Official Receiver in the winding up of companies or of any particular company.

(5) Without prejudice to the generality of subsection (4), fees referred to in that subsection may be fixed by reference to a scale of fees and percentages.

…

(7)  No fee prescribed under this section shall be invalid by reason only of the amount of that fee.”

6. Paragraphs 6 and 7(2) of the Order provide for the charging of the ad valorem fee and its payment to the Official Receiver.  They are in the following terms:

“6. The fees and percentages set out in Schedule 3 in respect of proceedings in the winding up of companies shall be taken in the office of the Official Receiver or of the Registrar of Companies, as the case may be.

7. …

(2) The percentages prescribed in number I of Table B of Schedule 3 shall be paid by a liquidator upon submission of his accounts to the Official Receiver, or where the Official Receiver is acting as liquidator, before he is released under section 205.

   …”

7. The scale on which the ad valorem fee is charged, by which the amount of the fee can be calculated in any given case, is set out in Item I of Table B of Schedule 3 to the Order, which provides:

“I. On the aggregate amount of assets realized and brought to credit by a liquidator (including the Official Receiver when he is acting as liquidator), after deducting any sums paid to secured creditors, other than holders of floating charges, in respect of their securities and any sums spent out of money received in carrying on the business of the company, a fee according to the following scale –

(a) On the first $500,000 or fraction thereof, $100 on every $1,000 or fraction thereof;

(b) On the next $500,000 or fraction thereof, $75 on every $1,000 or fraction thereof;

(c) On the next $4,000,000 or fraction thereof, $65 on every $1,000 or fraction thereof;

(d) On the next $5,000,000 or fraction thereof, $37.50 on every $1,000 or fraction thereof;

(e) On the next $40,000,000 or fraction thereof, $20 on every $1,000 or fraction thereof;

(f)  On all further amounts, $10 on every $1,000 or fraction thereof.”

8. Section 209A of the CO gives the court power to order that the winding up of a company ordered to be wound up by the court shall be conducted as if the winding up were a creditors’ voluntary winding up.  Where such an order is made, section 209B of the CO provides for certain consequences to follow.  For present purposes, the relevant consequence is that relating to the payment of (among other things) the ad valorem fee, provided for by paragraph (d) of section 209B.  That paragraph provides:

“(d) the fees of the liquidator and any charges or expenses due and payable under section 296 or under any other provision in this Ordinance up to the date of the order made under section 209A shall be paid forthwith out of the assets of the company in priority to all the other claims”

9. Section 203(1) of the CO provides for the submission of accounts by a liquidator in a winding up by the court to the Official Receiver, at such times as may be prescribed, but not less than twice during each year he remains in office.  As will be noted from paragraph 7(2) of the Order, the scale fee prescribed under item I of Table B of Schedule 3 to the Order is ordinarily payable on submission of such accounts.

10. Section 202(1) of the CO was also referred to by the parties, and its interpretation appears to have been regarded by the Judge as being of importance in determining whether or not scale fees were payable on realisations made by the provisional liquidators up to the point when the liquidations were converted to creditors’ voluntary windings up.  That subsection provides, so far as material:

“(1) Every liquidator other than the Official Receiver of a company which is being wound up by the court shall, in such manner and at such times as the Official Receiver directs, pay the money received by him to the Companies Liquidation Account at the bank where such account is kept …”

11. It will be observed that in each of the statutory provisions mentioned, reference is made to “the liquidator” of a company.  Section 2(1) of the CO, introduced in 2000, defines “liquidator” as including “a provisional liquidator holding such office by virtue of section 194” unless the context otherwise requires.

12. Provisional liquidators are provided for in sections 193 and 194 of the CO.

13. Section 193 gives the court power to appoint a liquidator provisionally at any time after the presentation of a winding up petition, but before the making of a winding up order.  The powers of such a provisional liquidator may be limited and restricted by the order appointing him, and it is usual for such an order to be made until the determination of the winding up petition or further order in the meantime.  Such a provisional liquidator clearly does not hold office pursuant to section 194, and therefore cannot fall within the definition of liquidator in section 2(1).  The main function of a provisional liquidator appointed prior to the determination of the winding up petition is to preserve the assets of the company where these are at risk.  As the petition may ultimately be resolved without a winding up order being made, it is no part of his function to liquidate the company and realise its assets for the purpose of distribution on a pari passu basis to its creditors.  That said, there may be circumstances in which it will be necessary for such a provisional liquidator to realise some of the assets of the company – for example, where that is required in order to secure or preserve them.  If, exceptionally, assets are realised by such a provisional liquidator, he will simply hold them pending the resolution of the winding up petition, and will, depending on the outcome of the petition either return them to the control of the company and its management (if the petition is dismissed) or pass them on to the provisional liquidator or liquidator of the company (if a winding up order is made).

14. However, section 194 of the CO goes on to provide for the office of a provisional liquidator for the period between the making of a winding up order and the appointment of a liquidator following the holding of meetings of creditors and contributories.  Section 194 in its present form envisages three possibilities in relation to such a provisional liquidator.  First, section 194(a) provides that (subject to paragraph (aa) and subsection (1A)) on the making of a winding up order, the Official Receiver shall become the provisional liquidator of the company concerned until he or some other person becomes the liquidator. Second, section 194(1)(aa) provides that where someone other than the Official Receiver has been appointed as provisional liquidator under section 193, that person shall “continue to act” as the provisional liquidator until he or some other person becomes the liquidator.  Third, section 194(1A) provides that where the Official Receiver is the provisional liquidator pursuant to section 194(1)(a), but is of the opinion that the property of the company is not likely to exceed HK$200,000 in value, he may appoint one or more persons to be provisional liquidator in his place.

15. Each of the three types of provisional liquidators provided for by sections 194(1)(a), 194(1)(aa) and 194(1A) could be covered by the definition of liquidator in section 2(1).  The provisional liquidators in the present case were appointed as provisional liquidators pursuant to section 193, shortly after the presentation of the winding up petitions against the Companies, but before the making of the winding up orders.  On the making of the winding up orders, they “continued to act” as provisional liquidators (section 194(1)(aa)).  The provisional liquidators contended before Harris J that, having been appointed under section 193, they are not to be considered as holding office by virtue of section 194, and thus do not fall within the section 2(1) definition of liquidator, and are not obliged to pay the substantial ad valorem fees on the amounts realised by them while acting as provisional liquidators, whether before or after the making of the winding up orders.

The judgment below

16. Harris J accepted this argument.  He did so in reliance on an earlier decision of mine in Re Lehman Brothers Securities Asia Ltd (No 2) [2010] 1 HKLRD 58.  Lehman Brothers (No 2) was concerned with the question of what regime was to govern the assessment of the remuneration of provisional liquidators who had been appointed under section 193 during the period after the making of the winding up order, but before they (or other persons) were appointed as liquidators of the company concerned – that applicable, pursuant to the court’s inherent jurisdiction, to the period before the making of the winding up order, or the system of taxation of liquidator’s bills applicable pursuant to the provisions of the CO after a liquidator is appointed.  I held that the former regime was to continue to apply, on the basis that liquidators appointed prior to the making of a winding up order under section 193 who continued in office after the making of the winding up order were not to be regarded as holding office by virtue of section 194, and so were not caught by the section 2(1) definition.  As appears from paragraphs 26 to 33 of my judgment in that case, I was of the view that there was an ambiguity in relation to the phrase “holding office by virtue of section 194”, and that having regard to the legislative history and parliamentary materials behind the introduction of the section 2(1) definition, that definition should be read as applying only to provisional liquidators appointed under section 194(1A).

17. In his judgment, the Judge regarded the question of whether or not the provisional liquidators were liquidators within the meaning of section 202(1) of the CO as being determinative of the issue before him, and concluded, applying Lehman Brothers (No 2), that they were not, leading him to make the order in paragraph 4 of his orders of 4 October 2012 against which the Official Receiver now appeals.

The parties’ contentions

18. Before us, Ms Chan SC, appearing for the Official Receiver, contended that the Judge was wrong to so decide.  She submitted that:

(1)  The Judge erroneously focused on section 202(1), which was not in fact material for present purposes, the relevant statutory provisions being sections 209B(d) and 296(3) of the CO, paragraph 7(2) of the Order and Item I of Table B of Schedule 3 to the Order.

(2)  In any event, the Judge erred in following Lehman Brothers (No 2), as the restricted interpretation of the section 2(1) definition adopted in that case was unjustified, in that the definition was not ambiguous, and in any event the legislative history and parliamentary materials did not call for it to be construed so as to be limited to provisional liquidators appointed under section 194(1A).  Thus, whether in the context of the provisions mentioned in the previous sub-paragraph, or in the context of section 202(1), the term “liquidator” should be understood, in accordance with section 2(1), as covering all three types of provisional liquidators mentioned in section 194 of the CO.

(3)  The important distinction was between the office of provisional liquidator under section 193 before the making of the winding up order, and that of provisional liquidator after the making of the winding up order, whether under section 194(1)(a), 194(1)(aa) or 194(1A).  Having regard to this, there was no reason to distinguish between the three sorts of provisional liquidators identified in section 194, in terms of their powers, obligations and duties, unless the context of the particular statutory provision called for such a distinction to be drawn.

19. Mr Maurellet, who appeared for the respondents, in essence contended that Lehman Brothers (No 2) was correctly decided, and that the Judge was right to follow it.  He submitted that:

(1)  The relevant statutory provisions all referred to liquidators and not provisional liquidators.

(2)  So far as the definition in section 2(1) was concerned, there was indeed an ambiguity as to what was meant by “holding … office by virtue of section 194”, so that it was permissible to have regard to the legislative history and parliamentary materials in order to resolve it.

(3)  The legislative history was that initially, only the Official Receiver could become provisional liquidator under section 194.  In 1997, section 194 was amended by the addition of section 194(1)(aa) to enable provisional liquidators appointed under section 193 to continue to act as provisional liquidators after the making of the winding up order.  However the section 2(1) definition of “liquidator” did not exist in 1997 or before, so that even after the introduction of section 194(1)(aa), neither the Official Receiver, nor the previously appointed provisional liquidators who continued to act as provisional liquidators were regarded as liquidators for the purposes of the CO.  However, the definition was introduced in 2000, at the same time as the introduction of section 194(1A), and it should therefore be regarded as being limited to provisional liquidators appointed under section 194(1A) as there was no apparent intention on the part of the legislature to make a more extensive change to the pre-existing law so as to make all the statutory provisions affecting liquidators applicable to the other two types of provisional liquidators under section 194, who had not previously been subject to such statutory provisions.

(4)  Mr Maurellet also submitted that the function of a provisional liquidator differed fundamentally from that of a liquidator, in that the former was appointed to preserve the assets of the company, whereas the latter was charged with the duty of winding it up, and that this supported the limited scope that he contended should be given to the definition in section 2(1).

Discussion

20. I would agree with Ms Chan that the appropriate focus should have been on sections 209B(d) and 296 of the CO, and the relevant parts of the Order, rather than on section 202(1).  However, it seems that the reason the Judge focussed on section 202(1) was because of the way the matter was presented to him, where both parties seemed to regard that section as of relevance.  This was apparently because it is the Official Receiver’s practice to calculate the amount of the assets realised (and so ascertain the amount of the ad valorem fees payable) by reference to the amounts paid in to the Companies Liquidation Account in respect of a particular liquidation.  Notwithstanding that practice, however, the liability to pay the ad valorem fees arises under the sections and other provisions identified by Ms Chan.  At the end of the day, given that those sections and provisions also refer only to the “liquidator”, the same question of construction arises for determination.

21. Having given the matter much consideration, I am persuaded that Ms Chan is right, and that the interpretation which I placed on section 2(1) in Re Lehman Brothers (No 2) should no longer be adopted.  I would accept that the language of section 2(1) is apt to include all three types of provisional liquidators mentioned in section 194, and can cover section 193 provisional liquidators continuing to act as provisional liquidators after the making of a winding up order, pursuant to section 194(1)(aa). Such provisional liquidators can be said to hold their office “by virtue of section 194” in that, absent section 194(1)(aa), they would have had to vacate their position as provisional liquidators on the making of the winding up order (to be replaced by the Official Receiver or his appointee under section 194(1A)), and would not hold that office any longer.

22. Although I would agree with Mr Maurellet that there is little in the legislative history or the parliamentary materials to suggest that it was intended to make as extensive a change as this interpretation would involve, I am persuaded that having regard to the difference in the position of the company and of a provisional liquidator prior to the making of the winding up order and after such an order is made, and the fact that there does not seem to be any very clear reason to distinguish between the position of the three types of provisional liquidators identified in section 194, the better reading of the definition in section 2(1) is to read it as extending to all three, subject to the possibility that the context of a particular provision in the CO may call for the definition not to apply to that provision.

23. The making of the winding up order marks a fundamental change to the status of the company concerned.  Before it, even though the company will be significantly affected by the appointment of a provisional liquidator following the presentation of a winding up petition, the company continues in existence and can pursue its general operations, subject to some constraints.  However, once a winding up order is made, the position of the company changes – it will no longer exist as a going concern, able to carry on business as before.  Instead, it only continues to exist for the purpose of being wound up – for its assets to be realised and applied to satisfy its debts so far as possible, on a pari passu basis.  This change in status underlies the difference between the section 193 provisional liquidator and the provisional liquidator under section 194.  The former’s role is to preserve the company’s assets so that they are available for distribution if a winding up order is made, but not actually to realise them (save where this might be necessary to preserve their value).  The latter holds office at a time when it is known that the company is to be wound up, and can be regarded as being little different from the liquidator eventually appointed, although his position is temporary, pending the appointment of a liquidator (which may be himself – so that his position can be said in this sense to be provisional) having held meetings of the creditors and contributories in order to ascertain their views as to who should be appointed.

24. It is perhaps odd that notwithstanding the significant difference in the status of the company, and hence the nature of the office, that the same title of “provisional liquidator” is used in respect of both the pre- and post- winding up office holders.  The use of the same terminology to describe the office holder in both cases tends to downplay the demarcation between them.  The distinction between them is also, I think, blurred by the reference in section 194(1)(aa) to the provisional liquidator appointed under section 193 “continuing to act” as such.  Similarly, the reference, in the opening words of sections 199(1) and (2) of the CO, which deal with the powers of a liquidator, to such powers being subject to section 193(3), also tends to have this effect.

25. Despite this, I would accept that the difference between the position of provisional liquidator in the periods before and after the making of the winding up order is such that all three types of post-winding up provisional liquidators should be treated as being essentially similar in nature, and so subject to the same treatment under the CO.  It follows that I would reject Mr Maurellet’s suggestion that the function of a provisional liquidator is different in nature from that of a liquidator, as that does not, with respect, take account of the difference in the nature of the office of provisional liquidator under section 193, and that under section 194, respectively.

26. Nor do I think that there is anything in Mr Maurellet’s reliance on the use of the term “liquidator” rather than “provisional liquidator” in the provisions of the CO with which we are concerned.  Given the existence of the definition in section 2(1), this point does not really take matters anywhere.

27. I would however, say that notwithstanding the view to which I have come as to the interpretation of the definition of “liquidator” in section 2(1), I would nonetheless regard the result in Re Lehman Brothers as correct, on the basis that in the context of the remuneration of post-winding up provisional liquidators who had earlier been appointed under section 193, their remuneration should be assessed on the same basis as when they were acting as section 193 provisional liquidators, having regard to the fact that section 194(1)(aa) treats them as continuing in office.

28. Thus, for the foregoing reasons, I would respectfully differ from Harris J (who was, as will be apparent from what I have said, doing no more than agreeing with my previous view) and hold that notwithstanding that the provisional liquidators here were initially appointed under section 193, following the making of the winding up orders in respect of the Companies, they held their office as post-winding up provisional liquidators by virtue of section 194, and so are caught by the provisions of sections 209B(d) and 296 of the CO, and paragraph 7(2) and item I of Table B of Schedule 3 to the Order.

29. I also note that a substantial portion of the realisations were effected in the period prior to the making of the winding up order, when the provisional liquidators were clearly in office only by virtue of section 193.  I do not think, however, that this provides a justification for exempting the realisations made in that period from the ad valorem fee. While in office under section 193 prior to the determination of the winding up petitions, the liquidators made and held such realisations for the purpose of preserving the Companies’ assets pending the outcome of the petitions.  It is only after the making of the winding up order (when they will be holding office by virtue of section 194) that they would have brought such realisations to account in the respective liquidations.

30. I would therefore hold that all the realisations made by the provisional liquidators in these liquidations are chargeable with the ad valorem fee, and make the orders sought by the Official Receiver’s notices of appeal.

31. So far as costs are concerned, I would make an order nisi that the respondents are to pay the Official Receivers costs here and below, to be taxed on the party and party basis if not agreed, but that such costs should be paid out of the assets of the Companies, as the respondents were properly acting in the Companies’ interests in making the applications below in the terms in which they were made.

Hon McWalters JA:

32. I agree.