RE KANSA GENERAL INTERNATIONAL INSURANCE CO LTD, HONG KONG BRANCH

HCCW 308/1995

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 308 OF 1995

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REASONS   FOR   DECISION

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1.  This is a summons issued by the liquidator of Kansa General International Insurance Company Limited (“the Company”) on 18 July 2006 under sections 200(3) and 206(2) of the Companies Ordinance, Cap. 32.  Only paragraph 1 of the summons has been proceeded with, for reasons that are not necessary to go into.

2.  The liquidator seeks an order that the committee of inspection be reconstituted, with two members – South China Insurance Company Limited and Kansa International Corporation Limited.  The former is a creditor of the Company, the latter is the sole member of the Company.  They have given their consent to serve on the committee.  They are clearly appropriate to be appointed to the committee of inspection if the committee is reconstituted.

3.  There are two matters for consideration on this summons:

(1)     the exercise of the court’s power to reconstitute a committee of inspection; and

(2)     the construction of a relevant provision in the scheme of arrangement relating to the termination of the scheme.

The background matters

4.  The Company was incorporated in Finland and registered as an oversea company under Part XI of Cap. 32.  It is an insurance company, specialising in writing insurance and reinsurance business in Hong Kong, Taiwan, Philippines and other South East Asian countries.

5.  On 30 December 1994, the Company was placed in liquidation in Finland.  In 1995, the Commissioner of Insurance in Hong Kong petitioned to wind up the Company, and on 13 September 1995, the Company was placed into liquidation by an order of the Hong Kong court.  On 19 January 1996, the liquidator was appointed by an order of the court with a committee of inspection consisting of 5 members.

6.  On 6 November 1998, a scheme of arrangement for the Company was sanctioned by the court (“the Scheme”).  The Scheme is typical of a ‘run-off’ or ‘holding’ scheme commonly used between insolvent insurance companies and their creditors.  Such schemes are necessary because at the date of commencement of the winding up, the insurance company may have written policies that run many years into the future and it may not be possible to ascertain who its creditors are at any given point in time.  The purpose of such a scheme is to enable the scheme claims of an insolvent insurance company to be ascertained and to enable dividends to be paid to the scheme creditors as and when they arise, and sooner than would have been the case in a liquidation.

7.  There are two categories of Scheme creditors under the Scheme:

(1)     direct insurance preferential creditors (“DIPCs”); and

(2)     reinsurance preferential creditors (“RIPCs”).

8.  All DIPCs had been paid in full under the Scheme in January 1999.  To date, 2 dividends totalling 40% of the claims have been paid to RIPCs.  An actuarial firm was commissioned by the liquidator to estimate the Company’s liability for future reinsurance claims.

9.  The liquidator has formed the view that the best course is to terminate the Scheme having taken into consideration these matters:

(1)     According to the actuarial report, it is unlikely there are any claims which have not been notified, as it has been 11 years since the last insurance policies were written.  The actuarial firm has also recommended termination of the Scheme.

(2)     All Scheme creditors other than RIPCs have been paid in full.

(3)     The liquidation assets of approximately HK$10.55 million are unlikely to increase in future.

(4)     If the Scheme is maintained, Scheme costs will continue to be incurred and deplete the liquidation assets.

10.  Subject to the approval of the committee of inspection, the liquidator has proposed to terminate the Scheme and make a final distribution of liquidation assets to RIPCs.  The reconstitution of the committee of inspection is a necessary step to effect the termination of the Scheme.

Exercise of the court’s power to reconstitute a committee of inspection

11.  In the Scheme, the committee of inspection under the Scheme is defined as the committee of inspection appointed by the court on 19 January 1996, as constituted from time to time in accordance with Hong Kong law.  This committee of inspection was dissolved by an order made on 6 November 2000, apparently on the footing there would be no further need for supervision of the liquidator given the advanced state of implementation of the Scheme.

12.  The liquidator held separate meetings of creditors and of the sole member of the Company on 12 January 2007, to consider the resolutions of making an application to the court for appointment of a committee of inspection to act with the liquidator, and that the committee should comprise the two members mentioned earlier.

13.  In the notice of the meetings, the creditors and the sole member were informed of the intention and reasons of the liquidator for terminating the Scheme, and that the proposed reconstitution of the committee is the first step taken for this purpose.  The resolutions were passed unanimously in the separate meetings.

14.  I agree with Mr Bartlett for the liquidator that the court has power in this instance to appoint a committee of inspection for the Company, even though the separate meetings on 12 January 2007 were not the first meetings of the creditors and contributories.

15.  The liquidator undoubtedly has power to call the separate meetings in January 2007, whether under his power to summon general meetings of creditors or contributories for the purpose of ascertaining their wishes in section 200(2) and rule 112(1) of the Companies (Winding-up) Rules, or under his power to summon a meeting of creditors or of contributories on a vacancy occurring in the committee under section 207(7).

16.  It is provided in section 207(7) that the meeting may, by resolution, re-appoint the same or appoint another creditor or contributory to fill the vacancy in a committee of inspection.

17.  Under section 287(1), the court may, as to all matters relating to the winding up of a company, have regard to the wishes of the creditors or contributories, as proved to it by sufficient evidence.

18.  Under section 200(3), the liquidator may apply to the court for directions in relation to any particular matter arising under the winding up.

19.  Mr Bartlett submitted that even if the meetings in January 2007 were not the first meetings, the situation can be viewed as falling within the terms of section 206(1) and (2).  Under section 206(2), the court may make an order for the appointment of a committee of inspection and who are to be the members to give effect to the determinations of the separate meetings of creditors and contributories.  Here, the separate meetings of the creditors and the sole member have made a determination for the purpose of section 206(2).  Further or alternatively, section 287 gives the court a discretion to make an order appropriate to the circumstances.

20.  I am inclined to agree with Mr Bartlett that the present situation can be regarded as falling within section 206(2) and it is within the power of the court to order that a committee of inspection be reconstituted.  I have therefore made an order in terms as sought by the liquidator.

Construction of the relevant provision in the Scheme

21.  The relevant provision for termination of the Scheme is clause 7.1.1, which reads as follows:

“Subject to clauses 7.1.2 and 7.2 (which shall survive such termination), the Scheme shall terminate if:

(a)     all the Scheme Claims of the Company have been discharged in full; or

(b)     the Liquidators, with the agreement of the Committee of Inspection has concluded, after due enquiry that the Scheme is no longer in the interests of the Scheme Creditors; and

(c)     a resolution that the Scheme should be terminated is passed at separate meetings of the Scheme Creditors convened in accordance with clause 6.4.”

22.  The question here is whether this clause provides for 3 discrete alternative modes of termination, such that the word “and” at the end of paragraph (b) should be read as “or”, or whether it provides for 2 alternative modes of termination, in that the second alternative provided in (b) must be coupled with the term in (c), due to the use of the word “and” at the end of (b).

23.  I shall refer to the two different interpretations as the “the 3-limb construction” and “the 2-limb construction”.

24.  The liquidator favours the 3-limb construction and has proceeded on that basis in calling the meetings of the creditors and the sole member.  He explained that if the 2-limb construction is upheld, a stalemate would arise and it may not be possible to terminate the Scheme.  The alternative in (a) cannot be achieved, as the Company is insolvent and the claims of RIPCs will not be discharged in full.  If the term in (c) is required to be satisfied as an additional requirement to (b), it is highly unlikely that quorate separate meetings could be held, given that all DIPCs had already been paid off 8 years ago.  Even if DIPCs could still be contacted, it is unlikely that they would be motivated to participate in a meeting of their class.

25.  Mr Bartlett referred to authorities which illustrated the word “and” could be read as “or” and vice versa in certain situations.  The context in which the word is used may show that the author must have by mistake used “and” when he meant “or” (see Morgan v Thomas (1882) 9 QBD 643 at 645 to 646).  In R v Federal Steam Navigation Company Limited [1974] 1 WLR 505, Lord Reid at 509B to C has grouped the situations which could justify substituting one word for another under these 3 heads: “where without such substitution the provision is unintelligible or absurd or totally unreasonable; where it is unworkable; and where it is totally irreconcilable with the plain intention shown by the rest of the deed or statute.”  See also 513E to 514G, per Lord Morris; 520E to H, per Lord Wilberforce; and 523F to 524B, per Lord Salmon.  The question is whether in this particular case it is justified to do so.

26.  Mr Bartlett reminded the court that in construing a scheme of arrangement, the proper test is to apply ordinary principles of construction of contract, with proper regard to the commercial context in which the scheme was approved by the creditors and sanctioned by the court (Re Kenworth Engineering Limited [2005] 2 HKLRD 97 at 109D, paragraph 26).  As the scheme of arrangement is a commercial agreement, the court should approach this by adopting a commercially sensible construction as this will more likely give effect to the intention of the parties (Okachi (Hong Kong) Company Limited v Nominee (Holding) Limited [2007] 1 HKLRD 55 at 67C to E, paragraph 49).

27.  The liquidator has adduced evidence of the termination clauses in 15 insurance ‘run-off’ or ‘holding’ schemes of arrangement in the London market.  The relevance of the London market schemes is that the Scheme was drafted in London and modelled on these insurance ‘run-off’ schemes.  I am given to understand that the scheme for the KWELM group of companies (comprising Kingscroft Insurance Company Limited, Walbrook Insurance Company Limited, El Paso Insurance Company Limited, Lime Street Insurance Company Limited and Mutual Re-insurance Company Limited) set the standard for all the other insolvent insurance ‘run-off’ schemes in the London market.  Without exception, the termination clauses in all the 15 schemes used the word “or” at the end of each option for termination.  Relevant extracts from 5 of these schemes were exhibited and each had provided for the termination of the scheme by the scheme administrator with the agreement of the creditors’ committee as a stand-alone alternative.  Clause 7.1.1 in the Scheme followed the wording in the standard form used in the London market schemes generally, save for the use of the word “and” at the end of paragraph (b), which would seem to be a departure from the common form wording.

28.  Mr Bartlett cited Re Hargraves’ Trust, Leach v Leach [1937] 2 All ER 545 as a case in point where there was departure from a well recognised and settled form.  The court found that a mistake had been made in copying a common form and that words had undoubtedly been left out.  It was therefore justified to construe the settlement in the way it was intended.  It should be read as if the words omitted had been included in the settlement.

29.  I have looked at the explanatory statement, which was prepared after the Scheme was drafted.  The relevant part of the explanatory statement dealing with the termination of the Scheme just mirrored the language of the Scheme and did not throw any light on this.  It is, however, pertinent to note that it was stated that the liquidator considered that the run-off of the liabilities for DIPCs and RIPCs under the Scheme could take in excess of 20 years.  Hence, the liquidator intended to keep the run-off of these liabilities under close review and it was recognised there might come a time several years in the future when the administrative costs of maintaining the Scheme are no longer justifiable.

30.  There is evidence that a mistake was made in using the word “and” instead of “or” in drafting the Scheme which was modelled on the London market precedents.  I am not able to detect any commercial or legal basis for the use of the word “and” at the end of (b) in clause 7.1.1, instead of the word “or” as in the common form wording.  It seems illogical to require both (b) and (c) to be satisfied for the termination of the Scheme; there is no apparent reason to require the termination to be passed at separate creditors’ meetings, as well as with the agreement of the committee of inspection, which is the representative body of the creditors.

31.  If the 3-limb construction is adopted, there is good reason why provision was made in (c) for voting in separate creditors’ meetings to terminate the Scheme, as a discrete and alternative option.  In the life of a ‘run-off’ scheme, there is perceived risk that the role of a committee of inspection may fall into abeyance and it may become defunct by the time the termination of the scheme is contemplated.  There is therefore a need for a default provision for bringing the scheme to an end where no committee of inspection could be called upon, as provided in (c).

32.  The provision in (b) that the liquidator and the committee of inspection may bind Scheme creditors is consistent with certain terms of the Scheme, as in the case of a modification of the scheme (in clause 8.3), a commutation or settlement (clause 2.12), and a proposal of a further scheme following termination (clause 7.1.2(c)).  As mentioned earlier, I can discern no reason for departure from the common form wording.  The 2-limb construction on a literal reading of clause 7.1.1 does not seem to me to make commercial sense.  I am persuaded in this instance that the proper construction of clause 7.1.1 is the 3-limb construction, the interpretation favoured by the liquidator.

33.  I have made a direction at the end of this hearing that the taxation of the bills of the liquidator and his agents, already submitted or to be submitted, is to be conducted on an expedited basis, as the liquidator is not able to make the cut-off payment until after all Scheme costs have been taxed.  It is in the interests of creditors that the Scheme should be terminated without delay and the winding up completed.