METROPLEX BERHAD v. FERNANDO GASPER AND ANOTHER

CACV 58/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 58 OF 2011

(ON APPEAL FROM HCCW 1139/2004)

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REASONS FOR JUDGMENT

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Hon Cheung CJHC:

1.  On 4 January 2012, we dismissed the appeal by the applicant from Fok JA’s order and judgment dated 7 March 2011. Sitting as an additional judge of the Court of First Instance, Fok JA dismissed the application by the applicant to remove the respondents from their office as the joint and several liquidators of Legend International Resorts Limited (“the Company”), which is and was at all material times in the process of being wound up under a regulating order made under section 227A of the Companies Ordinance (Cap 32). The judge also dismissed the applicant’s application to discharge, rescind or vary the regulating order. However, the judge ordered the respondents to furnish to all creditors and contributories of the Company (including the applicant) a written report as to the conduct of the liquidation. The judge also made a costs order against the applicant.

2.  We now give our reasons for dismissing the appeal with costs, as well as our decision on the basis of taxation of costs.

Facts

3.  The Company was incorporated in Hong Kong.  It used to own and operate a hotel, resort and casino complex in Subic Bay in the Philippines on premises leased from Subic Bay Municipal Authority (“SBMA”). The casino operated under a licence from the Philippine Amusement and Gaming Corp (“PAGCOR”).  The applicant is the largest shareholder of the Company and is also a creditor of the Company.  On its case, it is a creditor for 10% to 16% of the Company’s debts.

4.  By early to mid 2000s, the Company was “hopelessly insolvent”.

5.  In the Philippines, the Company successfully obtained a corporate rehabilitation order under certain rehabilitation proceedings.  There was a rehabilitation plan proposing a restructuring scheme in respect of the Company’s debts.  A rehabilitation receiver was appointed in respect of the rehabilitation proceedings.

6.  In Hong Kong, the Company was wound up on the ground of its insolvency on 8 June 2006.  The petition was made by Morgan Stanley Emerging Markets Inc (“MSEMI”).  It was supported by two other creditors, namely Philippine Asset Investment (SPV‑AMC) Inc (“PAII”) and Asset Pool A (SPV‑AMC) Inc (“APA Inc”).

7.  According to a schedule submitted by MSEMI to the Court of Appeal in February 2006, the debts claimed by MSEMI, PAII and APA Inc together accounted for 95.8% of the Company’s debts to creditors (excluding the contributories) and 79.7% of the total debts of the Company, based on figures provided by the Company itself regarding its liabilities in the rehabilitation plan.  MSEMI, PAII and APA Inc have been referred to as “the financial creditors”.  In monetary terms, the indebtedness due to the financial creditors is substantial, being approximately US$90,000,000.

8.  When she made the winding up order on 8 June 2006, Kwan J (as she then was) ordered that the winding up proceedings be regulated under section 227A of the Companies Ordinance.  She ordered that the summoning of the first creditors’ and contributories’ meeting for the purpose of considering the appointment of a liquidator and of a committee of inspection be dispensed with under section 227B(1)(a) of the Ordinance.  Instead, she ordered that Messrs Kelvin Flynn and Cosimo Borelli of Alvarez & Marsal Asia Limited be appointed as joint and several liquidators of the Company under section 227B(1)(b) of the Ordinance.  The judge made the exceptional order so that immediate steps could be taken in the Philippines to challenge various writs of attachment executed by PAGCOR on almost all of the assets of the Company in the Philippines, which could potentially constitute a preferential advantage to PAGCOR to the exclusion of all the other creditors of the Company.

9.  In December of the same year, the two liquidators left Alvarez & Marsal Asia Limited and they were replaced by the respondents of the same firm as joint and several liquidators of the Company.

10.  According to the evidence filed by Mr David Maund, the liquidators’ overriding concern has always been to maximize the creditors’ benefit and, if possible, their recovery.  Their work had and still has the support of the financial creditors, who the liquidators regard as the major creditors.  However, throughout the liquidation process, the available options to the liquidators have also depended to a large extent on the positions adopted by other parties, notably PAGCOR, SBMA and the rehabilitation receiver appointed in the Philippines.

11.  In short, according to Mr Maund, the liquidators had taken all reasonable steps that they could to keep the hotel business going and to restart the casino business, the licence for which was revoked by PAGCOR in May 2006 due to outstanding payments to PAGCOR.  Mr Maund explained that a significant difficulty the liquidators encountered was the expiry of the lease over a number of the Company’s business premises, including amongst others, the premises occupied by the Grand Seasons Hotel and Casino. After the expiry of the lease, there was little the liquidators could do to stop the premises being repossessed by SBMA as the landlord in the absence of a lease renewal, which was not forthcoming.

12.  However, according to Mr Maund, the liquidators managed to maintain the core Legenda, Legenda Suites and El Centro hotel businesses in operation for two and a half years – that is from January 2007 (when the liquidators were able to take practical control of the business) until July 2009 (when SBMA’s actions subsequent to the termination of the rehabilitation proceedings in February that year finally rendered further trading of the business impractical).  According to the liquidators, they were able to continue with the business of the Company during the two and a half years through careful management of the remaining hotel operations and the implementation of various cost rationalization measures, at all times without any external funding.

13.  In the meantime, there were intense efforts by the liquidators, according to Mr Maund, to negotiate a solution amongst the Company’s key stakeholders towards the granting of a new gaming licence accompanied by a compromise of the Company’s debts and a future sale of the revitalized business.  However, after extensive negotiations, PAGCOR and SBMA eventually took the decision not to pursue a negotiated outcome and withdrew their support.  That withdrawal of support took away any real prospect of a resumption of the Company’s gaming operations.  According to the liquidators, this was not something within their control.

14.  The liquidators’ only choice left was to focus on the potential sale of the hotel business as a going concern, which would hopefully lead to better recoveries than in a piecemeal and forced sale. However, despite efforts, including a tender process and negotiations with a number of interested parties, the sale as a going concern turned out to be quite impossible, primarily due to the lack of support from certain of the Company’s creditors.

15.  The liquidators also pointed out that the concurrent rehabilitation receivership added “another layer of complexity to the situation”.  The rehabilitation proceedings came to an end in February 2009.  Terminated at the same time was a moratorium imposed under Philippines law in respect of the Company.  As a result, there was no longer any restriction on SBMA to repossess the premises where the Company used to carry out business.

16.  The liquidators were therefore left with the job of divesting the remaining assets of the Company under their control in an effort to recover the most out of them for the benefit of the estate, apart from handling various outstanding litigations in the Philippines.

Applicant’s complaints

17.  The applicant has found the handling of the liquidation by the liquidators wholly unsatisfactory.  As mentioned, they unsuccessfully sought the removal of the liquidators before Fok JA and they renewed their attempt before this court.  Essentially, this was put on two bases.  First, actual or apparent bias; second, dereliction of duties.

18.  At the hearing of the appeal, Mr Y W Hew relied principally on three matters in support of the serious allegation of actual or apparent bias.

Calling for proofs of debt

19.  First, he argued that the liquidators were under a duty to call for and adjudicate proofs of debt, but failed to do so.  The judge was wrong to hold that no such duty existed when the winding up was conducted under a regulating order.

20.  I disagree.  I do not think the judge made any such holding at all.  More importantly, I fail to see the relevance of this point in the context of the argument, namely, actual or apparent bias. Whether the liquidators (or for that matter, the judge) was right or wrong on this point, it is no evidence of actual or apparent bias.

21.  In any event, so far as the duty in the present case is concerned, the question is not so much whether such a duty exists, but rather when or at what stage proofs of debt should be called for. That must be a fact sensitive question.  On the facts, Kwan J has specifically dispensed with the calling of the first meeting of creditors and contributories.  That was done for a very good reason, namely the urgent need to take steps in the Philippines to protect and preserve the essential assets of the Company.  The Company’s funds were very limited, and the liquidators must prioritize the items on their agenda.  Proofs of debt can be most expensive and in some cases, such as the present one – where there is no realistic hope of distribution for creditors (much less so the contributories), wholly academic.  More importantly, there really is nothing in the voluminous materials that have been filed by the applicant in support of the application to even suggest that the financial creditors are not genuine creditors of the Company, or that they are not the majority creditors.

22.  That, in my view, is a complete answer to Mr Hew’s argument that the liquidators cannot conduct any informal consultation with the majority creditors (ie the financial creditors) unless and until they have determined whether they really are creditors and indeed the majority creditors of the Company.  I should add that the applicant, being previously in control of the management of the Company’s business, is in the best position to tell the court, if that be the case, that the financial creditors are not true creditors of the Company or are not the majority creditors.

Breach of undertakings

23.  Mr Hew then argued that the liquidators had breached certain undertakings given to them through their solicitors (JSM) in correspondence which led to the withdrawal of an earlier summons taken out in 2007 for similar relief.  In short, Mr Hew argued that in the correspondence, in exchange for the applicant’s withdrawal of its earlier summons, the liquidators had undertaken to provide to the applicant with “any and all reports and information sent to the creditors of the Company” and that the applicant would be “advised of the convening of the forthcoming meeting of creditors [in around February 2008]” (JSM’s letter dated 17 December 2007 to the applicant’s former solicitors).

24.  I reject counsel’s argument.  First, I again fail to see how this is relevant to the allegation of actual or apparent bias.  It would be a quantum leap to equate the suggested breach of undertaking with actual or apparent bias on the part of the liquidators.

25.  In any event, I disagree that there has been any breach of undertaking.  It is plain from the correspondence and the known background of the earlier 2007 summons that the liquidators have not undertaken to produce a report or to call the creditors’ meeting, although at one stage that indeed was their intention.  Mr Maund has explained the reasons why, as a result of a change of circumstances in January/February 2008, the liquidators changed their minds and did not hold a creditors’ meeting or issue the intended report : paragraphs 39 to 44 of the seventh affidavit of Mr David Maund dated 9 August 2010.  Mr Hew did not challenge the explanation given by Mr Maund but said that the liquidators should have informed his client of their change of mind.  That is true, but equally true is the fact that the applicant never asked.  More importantly, I fail to see how this argument of counsel can found an allegation of actual or apparent bias.

26.  Mr Hew argued that there was a clear breach of undertaking to supply “information” to the applicant, which was supplied to other creditors (that is, the financial creditors).  In my view, counsel has read too much into the letter of 17 December 2007 written by JSM.  When JSM stated in their letter that the applicant would be provided with “any and all reports and information sent to the creditors of the Company”, they were clearly, in the context, referring to information to be contained in the contemplated report or any other information supplied together therewith.  However, the idea of doing so was, as explained, dropped by the liquidators due to a change of circumstances.

External funding

27.  A third matter relied on by Mr Hew is the question of funding.  In short, counsel argued that the liquidators had relied on funding provided by the financial creditors and this had compromised their appearance of impartiality. In this regard, the applicant sought leave to adduce a report dated 1 April 2011 prepared by the liquidators in support of its case. Paragraph 71 of the report stated that an amount of US$50,000 was made available by the financial creditors pursuant to a certain facility shortly before the liquidators took control of the business.  The funds were “repaid in full (plus interest, pursuant to the approved terms of the Facility) in March 2007”.  By that time, according to the report, the liquidators had been able to form a detailed view of the business and develop plans to allow it to continue to trade without recourse to external funding in the short term. Counsel argued that this contradicted Mr Maund’s and JSM’s earlier denials of external funding by the financial creditors.

28.  With respect, this is a complete non‑point. First, as Mayer Brown JSM have explained in their letter dated 26 May 2011, “the funds were returned un‑used, given the cash that the liquidators recovered in Legend’s various accounts once they took control of the business”.  There is simply no contradiction between what the report says and what Mr Maund and JSM have previously said. Secondly and in any event, the facility as well as the borrowing were expressly sanctioned by Kwan J in paragraph 3 of her order dated 12 December 2006.  The amount involved was very small and the supposed funding took place at the very early stage of the liquidation.  I fail to see how they could evidence any actual or apparent bias on the part of the liquidators.

No actual or apparent bias

29.  Those were the main arguments relied on by Mr Hew in support of the first ground for removal.  There were subsidiary matters relied on in the written submissions which counsel did not press orally at the hearing.  I see nothing in those subsidiary matters either.

30.  For these reasons, I reject the applicant’s argument based on actual or apparent bias.  All I would add here is my endorsement of the general principles enunciated by the judge in paragraphs 27 to 35 of his careful judgment in relation to the court’s power and discretion to remove a liquidator.  I will not repeat the principles here.  Suffice it to say the applicant had a substantial burden, and it has failed to discharge it in relation to the actual or apparent bias ground.

Dereliction of duties

31.  The second ground relied on by Mr Hew was dereliction of duties.  Again, the burden was squarely on the applicant to make good its case.

32.  The first matter relied on by counsel in support of the allegation of dereliction of duties was the alleged failure to call for and adjudicate proofs of debt.

33.  For the reasons given above, I reject this argument.

Loss of the lease and sale of assets

34.  Mr Hew then complained about the loss of the lease and the sale of assets, in breach of the moratorium ordered under the rehabilitation proceedings.

35.  The judge has dealt with this in paragraph 67 of his judgment.  Moreover, as mentioned, Mr Maund has explained what actually happened in paragraphs 32 to 35 of his seventh affidavit.  The expiry of the lease over a number of the Company’s business premises, including the premises of Grand Seasons Hotel and Casino which Mr Hew relied on particularly, was a matter beyond the liquidators’ control.  The refusal to renew the lease after negotiations by SBMA was again a matter beyond the liquidators’ control.  The applicant’s criticism that the liquidators had adopted the wrong negotiation strategy, even if substantiated, is neither here nor there.  As Neuberger J (as he then was) said in AMP Enterprises Ltd v Hoffman [2003] 1 BCLC 319, para 27 (referred to by the judge in paragraph 35 of his judgment), it is all too easy for an insolvency practitioner, who has not been involved in a particular liquidation, to say, with the benefit of the wisdom of hindsight, how he could have done better.  As his Lordship pointed out, once a liquidation has been conducted for a time, no doubt there can almost always be criticism of the conduct, in the sense that one can identify things that could have been done better, or things that could have been done earlier.  Matters of judgment can hardly be sufficient to substantiate an allegation of dereliction of duties which, by definition, is a serious allegation against a professional in the present type of context.

Lack of contact with the applicant

36.  Mr Hew then complained about the lack of contact and consultation by the liquidators with the applicant.

37.  The reality is that the financial creditors are the majority creditors, whereas the applicant is a minority creditor and contributory of the Company.  The two groups do not see eye to eye with each other.  In those circumstances, I see nothing wrong with the liquidators seeking the views of the financial creditors.  As a matter of fact, their various actions had the support of the financial creditors.  The liquidators were entitled to take the view that consultation with the applicant would be counterproductive given that the applicant and the financial creditors, amongst others, all had their own and indeed conflicting agendas.  Furthermore, there is simply no or insufficient evidence to suggest that the liquidators have refused to communicate with the applicant.

Seeking assistance from former management

38.  Likewise, I see nothing in the applicant’s point that the liquidators have failed to enlist the help of the former senior management of the Company in their attempts to continue with the business of the Company.  In my view, that is really a matter of judgment for the liquidators.

The Geahin Segregation Motion etc

39.  As regards Mr Hew’s reliance on the liquidators’ “non‑response” to the Geahin Segregation Motion or the dismantling of the Grand Legenda structure by SBMA, Mr Maund has explained this matter in paragraphs 45 to 47 of his seventh affidavit.  According to Mr Maund, the liquidators formed the view that there was little point in incurring further expense in resisting the Geahin Segregation Motion or the attempt to dismantle the Grand Legenda structure given the minimal value attributable to the structure and bearing in mind that the land was, consistent with all of the Company’s premises in Subic Bay, leased from SBMA.  Again, this is really a matter of judgment.  Notably, counsel did not press the argument orally at the hearing.

Personal circumstances of the liquidators

40.  Then counsel argued that Mr Gaspar, the other joint and several liquidator, has taken up full‑time employment in the Philippines and Mr Maund has, for various reasons, been unable to travel to the Philippines to oversee the liquidation work.  Counsel argued that these were matters which the liquidators should have disclosed to the court. Mr Gaspar should have resigned from his office.

41.  Again, Mr Maund has fully explained these matters in paragraphs 55 to 62 of his affidavit.  More importantly, these were matters which the judge was fully aware of and took into account in deciding whether to exercise his discretion to remove the liquidators.  This being a matter of discretion for the judge, I fail to see any ground for this court’s interfering with the judge’s exercise of discretion.

Mr Maund’s intended resignation

42.  Finally, Mr Hew sought leave to adduce evidence to the effect that post judgment, Mr Maund had applied to resign from his office, apparently for the purpose of retirement.  Mr Hew argued that this could not have been a hasty decision on the part of Mr Maund, and the matter should have been disclosed to the judge.  Mr Hew reminded the court that the judge did take into account the potential cost to the liquidation if the liquidators were to be replaced at this advanced stage of liquidation.

43.  As Mr Hew fairly accepted at the hearing, there is a world of difference between removal and voluntary resignation on the ground of retirement.  As for the potential cost of replacement of liquidators at this late stage, this was just one of the many matters that the judge took into account.  In my view, given the rejection of the other grounds relied on by the applicant in support of the removal application, even assuming that the intention to resign had been formed (and made known to the judge) at the time of hearing, I do not see how that could have materially affected the judge’s eventual conclusion on the application to remove.

Conclusion on removal application

44.  Those were the main matters pressed by counsel at the hearing in support of the allegation of dereliction of duties.  For the reasons given above, I reject counsel’s arguments.  I also see nothing in the miscellaneous matters and arguments found in the materials filed and the written submissions of counsel.

45.  For these reasons, I have come to the conclusion that there is no ground for disturbing the judge’s exercise of discretion in rejecting the removal application.

Discharge of regulating order

46.  As regards the appeal against the judge’s refusal to discharge, rescind or vary the regulating order, again I see nothing in Mr Hew’s argument.  Essentially, counsel argued that the original reason for the regulating order had gone and there was no further justification for the regulating order.  He relied, in particular, on the matters which were raised in support of the allegation of apparent or actual bias and of dereliction of duties in support of his present argument that the regulating order should be rescinded.

47.  However, for the reasons given above, I am not with counsel on the question of bias or of dereliction of duties.  That, therefore, removes a major plank of counsel’s argument for the rescission of the regulating order.

48.  In any event, I agree with the judge’s reasoning given in paragraphs 78 to 80 of his judgment which led to his conclusion that the regulating order should not be disturbed.  The judge took into account that the liquidation had proceeded to a relatively advanced stage.  The judge was mindful that discharging that order in its entirety now could be wasteful of costs.  The judge was skeptical about the utility of holding a creditors’ meeting to discuss about the so‑called “2010 consultation matters”.  The judge also took into account the fact that it was quite clear that the liquidators had offered to meet with the applicant and the offer had not been taken up by the applicant.

49.  The judge thought it sufficient simply to direct the liquidators to furnish a report to the applicant and all others whom the liquidators had been treating or accepted as creditors and contributories of the Company.  As mentioned, that has been done.

50.  In my view, there was nothing which entitled this court to interfere with the judge’s exercise of discretion.  I should add that even if one were to take into account the intended resignation of Mr Maund (which  has yet to be approved by the court), it would still be quite impossible to say that the regulating order should be discharged.

Further report

51.  Finally, as regards the further written report on the conduct of the liquidation (paragraph (c) of the order sought in the Amended Notice of Appeal), I see no basis for making such an order, particularly in view of the detailed report produced by the liquidators pursuant to Fok JA’s order.

Basis of taxation of costs

52.  Those were my reasons for dismissing the appeal of the applicant with costs, including the costs of the application to adduce further evidence.

53.  As regards the basis of taxation, Mr Richard Zimmern, for the respondents, asked for costs on an indemnity basis.  He argued that if this had been an interlocutory matter, no leave would have been granted.  He further said that it would be unfair for any unrecovered costs (under party and party taxation) to be shouldered either by the liquidators personally or by the Company.

54.  I can see the force of the argument.  The appeal clearly lacks merits.  However, the court has seen many worse cases.  This is a borderline one.  Looking at the matter in the round, it would be fair to order taxation on a common fund basis.

Hon Tang VP:

55.  I have had the benefit of reading the judgment of the Chief Judge.  I agree with it and have nothing to add.

Hon Bharwaney J:

56.  I agree with the reasons expressed by Cheung CJHC in his judgment and with the order that the respondents’ costs be taxed on a common fund basis.