Re The Grande Holdings Ltd

CACV 40/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 40 OF 2015

(ON APPEAL FROM HCCW NO. 177 OF 2011)

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REASONS FOR JUDGMENT

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Hon Cheung JA :

I. Background

1.1Grande Holdings Limited (‘Grande’) is a company listed on the Hong Kong Stock Exchange. It was put into provisional liquidation on 31 May 2011 and on the same day Mr Fok Hei Yu (‘Mr Fok’) and Mr Roderick John Sutton (‘Mr Sutton’) were appointed as provisional liquidators. On 12 September 2013, a winding-up order was made against Grande. 

1.2Grande owed debts to Deutsche Bank AG (‘the Bank’). On 5 March 2014 the Bank assigned all the outstanding debts owed to the Bank by Grande to ASM Hudson River Fund (‘ASM’).  

1.3On 6 March 2014, ASM submitted to the provisional liquidators a proof of debt claiming a balance of US$14,410,190.41 (‘the debt’) previously owed by Grande to the Bank.  The provisional liquidators accepted ASM’s proof of debt. 

1.4Rule 125 of the Companies (Winding-up) Rules (Cap 32H) prohibits a creditor of an unliquidated debt or contingent debt from voting at a meeting of creditors.  

1.5McVitie Group Holdings Limited (‘McVitie’) is another creditor of Grande.  McVitie contended that ASM’s debt is an unliquidated debt and on 25 April 2014 applied before Harris J for, among other things, a declaration that ASM was not entitled to vote at the first meeting of the creditors of Grande and that the votes cast by it were invalid and for an order that the provisional liquidators’ decision to admit ASM’s proof of debt be reversed.

1.6The Judge acceded to McVitie’s request.  ASM appealed against the decision.  We allowed the appeal at the conclusion of the hearing.

II. The provisional liquidators’ view

2.1The debt which was variously described as the ‘Close-out Amount’ or ‘Early Termination Amount’ arose from the termination of interest rate swap transactions (a form of derivative product) entered into between Grande and the Bank.  The calculation of the debt was based on the ISDA Master Agreement published by the International Swaps and Derivatives Association and adopted by Grande and the Bank.

2.2In order to fully understand the issue, it is important to refer to the 18^th affirmation of Mr Fok who was of the view that the debt owed by Grande to the Bank was neither contingent nor unliquidated.  On the contrary, his view was that it was a liquidated debt for a specific amount which had been acknowledged in Grande’s statement of affairs and in respect of which payments had been made on behalf of Grande prior to the appointment of the provisional liquidators.  

‘ 86. Deutsche Bank and Grande entered into an interest rate swap transaction with a trade date of 16 August 2007 (“Transaction 1”), the terms of which were set out in a confirmation dated 24 August 2007 (“Confirmation”), a copy of which is at pages 1 to 12 of Tab 10.

87. The Confirmation provided that (a) once the parties had agreed to an umbrella agreement known as a “ISDA 2002 Master Agreement”, that the Confirmation would “supplement, form part of and be subject to” that agreement; and (b) until the parties had agreed an ISDA 2002 Master Agreement, the Confirmation and all other relevant transactions between Deutsche Bank and Grande would “supplement, form part of and be subject to” the standard form ISDA 2002 Master Agreement.

88. Deutsche Bank and Grande entered into an ISDA 2002 Master Agreement dated 18 September 2007 (“Master Agreement”), a copy of which is at pages 13 to 51 of Tab 10.  As a result, the Confirmations for Transaction 1 came to “supplement, form part of and be subject to” the Master Agreement.

89. Deutsche  Bank  and  Grande  entered into a further swap transaction (“Transaction  2”) which also formed part of the Master Agreement, and which had a trade date of 31 January 2008. A copy of Grande’s board minutes approving entry into Transaction 2 are at pages 52 to 69 of Tab 10.

90. On 6 May 2009, Deutsche Bank and Grande entered into a termination agreement with respect Transaction 2 (“Termination Agreement”), a copy of which is at pages 70 to 73 of Tab 10. The Termination Agreement provided for payment of a termination sum by Grande to Deutsche Bank totaling US$5.25 million, payable in 10 equal monthly instalments of US$525,000, commencing on 15 July 2009.

91. By notice dated 26 August 2009, Deutsche Bank issued a notice of non-payment under Section 5(a)(i) of the Master Agreement to Grande, in respect of the failure by Grande to make a payment of US$4,952,670 due under Transaction 1 on 24 August 2009. A copy of the notice is at page 74 of Tab 10.

92. On 26 November 2009, Deutsche Bank and Grande entered into an agreement with respect of the amount outstanding under Transaction 1 of US$4,952,670, a copy of which is at pages 75 to 77 of Tab 10. This agreement provided for Grande to settle the amount due by a payment of US$2 million on 24 December 2009, with the balance of US$2,952,670 to be paid in four equal monthly instalments of US$738,167.50 commencing on 24 January 2010. Grande’s repayment obligation was to be secured by a pledge of 3,780,600 shares in Emerson.

93. On 24 February 2010, Deutsche Bank issued a notice of non-payment under Section 5(a)(i) of the Master Agreement in respect Grande’s failure to pay the monthly instalment US$525,000, which was due under the Termination Agreement on 15 February 2010. A copy of this notice is at pages 78 and 79 of Tab 10.

94. On 1 March 2010,on the basis ofGrande’s breach of the Termination Agreement, Deutsche Bank issued a “Notice of Early Termination” under Section 6(a) of the Master Agreement.  Grande’s non-payment under the Termination Agreement was an “Event of Default” pursuant to Section 5(a)(i) of the Master Agreement. The Notice of Early Termination designated 2 March 2010 as the “Early Termination Date” (as that term is defined in the Master Agreement) (pages 80 and 81 of Tab 10).

95. Section 6(d)(ii) of the Master Agreement provides that where an Early Termination Date occurs as a result of an Event of Default (as was the case here), the “Early Termination Amount due in respect of [that] Early Termination Date will, together with any amount of interest payable pursuant to Section 9(h)(ii)(2), be payable ... on the day when notice of the amount payable is effective”.

96. The  reference  to  the  “notice of the amount payable”  is  a  reference  to  a  notice under Section 6(d)(i) of the Master Agreement.  Section 6(d)(i) of the Master Agreement provides that:

“... each party will make calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including any quotations, market data or information from internal sources used in making such calculations), (2) specifying ... any Early Termination Amount payable and (3) giving details of the relevant account to which any payment payable is to be made.”

97. Section 6(e)(i) of the Master Agreement provides that:

“If the Early Termination Date results from an Event of Default, the Early Termination Amount will be an amount equal to (1) the sum of (A) the Termination Currency Equivalent of the Close-out Amount or Close-out Amounts (whether positive or negative) determined by the Non-defaulting party for each Terminated Transaction or group of Terminated Transactions, as the case may be, and (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (2) the Termination Currency Equivalent of the Unpaid amounts owing to the Defaulting Party.”

98. The “Close-out Amount” to be calculated by Deutsche Bank was to be determined by Deutsche Bank in accordance with the definition of “Close-out Amount” as set out in Section 14 of the Master Agreement.

99. Deutsche Bank issued a “notice of the amount payable” to Grande on 4 March 2010 setting out Deutsche Bank’s calculation of the “Early Termination Amount” which Grande owed to Deutsche Bank (pages 82 to 95 of Tab 10). Those calculations are extracted in the following table:

1. Close-out Amount (a positive amount) in respect of Transaction 1	US$14,633,543.04
2. Close-out Amount (a positive amount) in respect of Transaction 2	US$1,049,803.79
3. Termination Currency of the Unpaid Amount owed to Deutsche Bank in respect of Transaction 1	US$3,476,335.00
4. Termination Currency of the Unpaid Amount owed to Deutsche Bank in respect of Transaction 2	US$525,000.00
5. Termination Currency of the Default Interest on the Unpaid Amount including 24 December, 2009 (being the coupon payment due under Transaction 1, the “Payment Date”) at the Default Rate to but excluding the Early Termination Date in respect of Transaction 1.	US$5,445.44
6. Termination Currency of the Default Interest on the Unpaid Amount including 15 February, 2010 (being the coupon payment due under Transaction 2, the “Payment Date”) at the Default Rate to but excluding the Early Termination Date in respect of Transaction 2.	US$239.64
Less
7. Termination Currency of the Unpaid Amount owed by Deutsche Bank in respect of the Transactions	US$0.00
8. Termination Currency of the Default Interest of the Unpaid Amount from including the Payment Date at the Default Rate to but excluding the Early Termination Date owed by Deutsche Bank in respect of the Transactions	US$0.00
Total (Early Termination Amount)	US$19,690,366.91

100. The statement was accompanied by correspondence between Deutsche Bank and three other banks (JP Morgan, Credit Suisse and HSBC) none of whom were able to provide a quote on the Close-out Amount. As stated in the letter, the Close-out Amounts were therefore calculated by Deutsche Bank.

101. The date on which a “notice of the amount payable” in respect of the Master Agreement is effective is provided for by Section 9 of the Master Agreement. In the case of the 4 March 2010 letter, this is marked as being delivered by courier and by facsimile. Therefore, the effective date of this notice is (a) in the case of delivery by courier, the date of delivery; or (b) in the case of delivery by facsimile, the date “it is received by a responsible employee of the recipient in legible form”.

102. In light of the above, the Provisional Liquidators consider that after Deutsche Bank served an effective notice setting out the Early Termination Amount on Grande, Grande came under an immediate obligation to pay that fixed money sum (together with accruing interest) to Deutsche Bank. In other words, Grande became indebted to Deutsche Bank for US$19,690,366.91 on or about 4 March 2010.

103. Following delivery of Deutsche Bank’s letter of 4 March 2010, Grande did not dispute its obligation to pay the Early Termination Amount or the calculation of the Early Termination Amount.

104. Rather, the following amounts were received by Deutsche Bank prior to the appointment of the Provisional Liquidators in respect of the Early Termination Amount:

104.1 US$1,151,625.80 in March 2010 from the disposal of 391,199 of the shares in Emerson held by Grande’s subsidiary S&T International Distribution Limited (“Emerson Shares”). Those shares had been pledged to Deutsche Bank for the agreement of 26 November 2009 as referred to in paragraph 92 above. A payment voucher in respect of this amount is at pages 96 and 97 of Tab 10;

104.2 US$2,609,838.77 in March 2010 from a dividend paid on the Emerson Shares. A payment voucher in respect of this amount is at pages 96 and 97 of Tab 10;

104.3 US$500,000 on 4 March 2011, which was paid by The Ho Family Trust on Grande’s behalf. A payment advice in respect of this amount is at pages 98 and 99 of Tab 10; and

104.4 US$1,091,099.02 in April 2011, being a refund of withholding tax on the dividend paid on the Emerson Shares in March 2010, as reflected in a letter from Deutsche Bank to S&T International Distribution Limited dated 4 April 2011, a copy of which is at page 100 of Tab 10.

105. As a result, the outstanding amount owing to Deutsche Bank at the time of the appointment of the Provisional Liquidators on 31 May 2011 was US$14,337,803.32.

106. That Grande’s former directors did not dispute this amount is further reflected in:

106.1 Grande’s Statement of Affairs dated 31       May 2011, affirmed by Mr Ho, which records a debt owing to Deutsche Bank for the balance of the Early Termination Amount of HK$116,120,889 (being the Hong Kong dollar equivalent of US$14,929,402), a copy of which is at pages 101 to 116 of Tab 10; and

106.2 an email dated 12 November 2012 from Christopher Chiang, Grande’s former company secretary and Group Chief Financial Officer, to Joe Cheng of the Provisional Liquidators, copied to Mr Ho and others. The email confirms that Grande was in Mr Chiang’s view indebted to Deutsche Bank for US$14,337,803.32. A copy of email is at page 117 of Tab 10; and

107. In March 2013, the Provisional Liquidators entered into a settlement agreement with Deutsche Bank to obtain the release of the remaining Emerson Shares held by Deutsche Bankassecurity.  Pursuanttothe settlement agreement, Grande paid Deutsche Bank US$96,731.41 being the outstanding amount secured by the Emerson Shares.  Accordingly, the total amount claimed by Deutsche Bank was reduced to US$14,241,071.91.

108. Deutsche Bank assigned its claim against Grande to ASM by way of a debt transfer agreement dated 5 March 2014, a copy of which is at pages 118 to 127 of Tab 10. There is nothing on the face of the debt transfer agreement that caused the Provisional Liquidators to doubt the validity of the assignment.

109. On the basis of the debt transfer agreement, ASM submitted a proof of debt for the balance previously owing to Deutsche Bank of US$14,410,190.41 (US$14,241,071.91 plus interest of US$169,118.50), which I admitted in full for voting purposes at the First Creditors’ Meeting on 14 March 2014.

110. Subsequent to the First Creditors’ Meeting, in order to obtain additional assurance as to Deutsche Bank’s calculation of the “Close-out Amount” due by Grande, I requested Mr John Balce of FTI Consulting to calculate the Close-out Amount in respect of Deutsche Bank’s claim. Mr Balce has extensive experience in the finance industry. He is a Certified Public Accountant, a CFA Charterholder, and a member of the CFA Institute, the CFA Society of the Philippines and the Philippine Institute of Certified Public Accountants. Mr Balce specialises in financial modelling and valuations, and is experienced in transaction advisory, corporate restructuring, valuations, financial due diligence and asset management.

111. Mr Balce’s calculations substantially agreed with Deutsche Bank’s. In particular, Mr Balce calculated the “Close-out Amount” in respect of Transaction 1 (which was the largest part of the claim) at US$14,365,810, as against Deutsche Bank’s calculation of US$14,633,543.04.  Mr Balce’s email to me and other members of my team dated 28 March 2014 and his accompanying calculation, is at pages 128 to 133 of Tab 10. The email attaches Mr Balce’s detailed workings which have not been exhibited but can be provided electronically on request.

112. Mr Balce’s email further confirms my view that there is no basis upon which Grande could dispute Deutsche Bank’s debt, and that it was correct to admit ASM’s POD in full for voting purposes at the First Creditors’ Meeting.’

2.1Mr Fok in his 19^th affirmation further clarified the matter concerning the alleged inconsistency of the figures :

‘ C.2 ASM’s proof of debt

34. Paragraph 67 of Will 4 [i.e. affirmation filed on behalf of McVitie] states that there is an inconsistency in paragraphs 105 and 106.1 of Fok 18 with respect to the amounts recorded as owing by Grande to Deutsche Bank. In particular:

34.1 paragraph 105 states that at 31 May 2011 the amount owing to Deutsche Bank was US$14,337,803.32; and

34.2 paragraph 106.1 refers to Grande’s Statement of Affairs affirmed by Mr Ho which puts the value of the debt owing to Deutsche Bank on 31 May 2011 at US$14,929,402.

35. I confirm that the amount owed by Grande to Deutsche Bank at 31 May 2011 is correctly stated at US$14,337,803.32 in paragraph 105 of Fok 18.

36. I have reviewed Grande’s books and records and identified the reason for the different figure recorded in the Statement of Affairs. In around March 2011, Grande and Deutsche Bank were in discussions to settle the amount owed to Deutsche Bank. A draft settlement agreement was prepared which correctly identified the Early Termination Amount but incorrectly recorded the value of the outstanding debt as US$14,929,402. This amount was reflected in Grande’s Statement of Affairs as prepared by Mr Ho on behalf of the Board of Directors of Grande dated 31 May 2011. A copy of the draft settlement agreement is at Tab 5.

37. Since receipt of Will 4, I have further reviewed Grande’s books and records and confirm that the payments received by Deutsche Bank are correctly set out in paragraph 104 of Fok 18 and the balance of the debt owed to Deutsche Bank at 31 May 2011 was US$14,337,803.32.

D  Conclusion

38. In the circumstances, the Provisional Liquidators maintain our view that:

38.1 ….

38.2 ASM’s proof of debt should be admitted for voting purposes at the first creditors’ meeting.’

III. ISDA Master Agreement

3.1The relevant provisions of the ISDA Master Agreement are as follows :

“ 6. Early Termination; Close-Out Netting

(a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the “Defaulting Party”) has occurred and is then continuing, the other party (the “Non-defaulting Party”) may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, “Automatic Early Termination” is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(l), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).

…

(c) Effect of Designation.

(i) If notice designating an Early Termination Date is given under Section 6(a) or 6(b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing.

(ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 9(h)(i) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date will be determined pursuant to Sections 6(e) and 9(h)(ii).

(d) Calculations; Payment Date.

(i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including any quotations, market data or information from internal sources used in making such calculations), (2) specifying (except where there are two Affected Parties) any Early Termination Amount payable and (3) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation or market data obtained in determining a Close-out Amount, the records of the party obtaining such quotation or market data will be conclusive evidence of the existence and accuracy of such quotation or market data.

(ii) Payment Date. An Early Termination Amount due in respect of any Early Termination Date will, together with any amount of interest payable pursuant to Section 9(h)(ii)(2), be payable (1) on the day on which notice of the amount payable is effective in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default and (2) on the day which is two Local Business Days after the day on which notice of the amount payable is effective (or, if there are two Affected Parties, after the day on which the statement provided pursuant to clause (i) above by the second party to provide such a statement is effective) in the case of an Early Termination Date which is designated as a result of a Termination Event.

(e) Payments on Early Termination. If an Early Termination Date occurs, the amount, if any, payable in respect of that Early Termination Date (the “Early Termination Amount”) will be determined pursuant to this Section 6(e) and will be subject to Section 6(f).

(i) Events of Default. If the Early Termination Date results from an Event of Default, the Early Termination Amount will be an amount equal to (1) the sum of (A) the Termination Currency Equivalent of the Close-out Amount or Close-out Amounts (whether positive or negative) determined by the Non-defaulting Party for each Terminated Transaction or group of Terminated Transactions, as the case may be, and (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (2) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If the Early Termination Amount is a positive number, the Defaulting party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of the Early Termination Amount to the Defaulting Party.

…

(v) Pre-Estimate. The parties agree that an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks, and except as otherwise provided in this Agreement, neither party will be entitled to recover any additional damages as a consequence of the termination of the Terminated Transactions.’

3.2Once a determination has been made on the Early Termination Amount pursuant to the ISDA Master Agreement, it is final and binding on the parties: Firth, S., Derivatives: Law and Practice (looseleaf) paragraph 11.175.

IV. The Judge’s decision

4.1The Judge relied on his earlier judgment inPanSinoInternationalHoldingLimited unrep.) HCCW 144/2009, 27 May 2010 in which he considered what constitutes a liquidated claim in the context of rule 125 :

‘ 7. Neither the Ordinance nor the Rules define “unliquidated”. In paragraph 6/2/4 of volume 1 of the Hong Kong Civil Procedure 2010 the distinction between liquidated and unliquidated is explained in the following terms:

“A liquidated demand is in the nature of the debt, i.e., a specific sum of money due and payable under or by virtue of a contract. Its amount must either be already ascertained or capable of being ascertained as a mere matter of arithmetic. If the ascertainment of a sum of money, even though it be specified or named as a definite figure, requires investigation beyond mere calculation, then the sum is not a “debt or liquidated demand, but constitutes damages”.”

8. Mr. Wong who appeared for Lawrence accepted this distinction.  He argued that the claim was for a liquidated sum because its assessment was merely a matter of arithmetic.  His client had demonstrated, so he argued, the time that it had recorded for the work it had carried out and no evidence had been filed to show the records were false or inaccurate and therefore assessing the claim was simply a matter of multiplying time by charging rates.  I disagree.  Lawrence has failed to appreciate the following.  The assessment of the proof for the purpose of voting at a meeting convened in accordance with Rule 124 of the Rules is not the same as the examination of the proof under Rule 94 for the purposes of admitting or rejecting the proof for the purposes of determining distribution of assets.  The latter is likely only to take place if sufficient assets have been realised to justify the process.  It is presumably because the liquidator is not expected to undertake a definitive assessment of the proof that Rule 125 provides that a creditor shall not vote any unliquidated or contingent debt, the determination of which might require considerable work.  Assessing whether or not Lawrence is entitled to proof for the amount it claims by way of professional fees for the services that it has provided involves a consideration of the work it has done and whether or not the number of hours claimed are justified.  This goes beyond an arithmetical exercise and is not the kind of task that a liquidator is to be expected to undertake in order to determine whether or not to admit a proof for voting purposes. In my view Lawrence’s claim was correctly treated as an unliquidated claim.’

4.2The Judge then stated why he considered the debt in question is not a liquidated debt :

‘ 12. It is clear from clause 6(d)(i) that the calculation of the Early Payment Amount involved identifying quotations and market data and a calculation that was potentially complicated. McVitie has filed an affidavit made by Mr. Fiachra O’Driscoll containing opinion evidence concerning the characteristics of the swaps and the difficulties in valuing them. Mr. O’Driscoll describes the swaps in paragraphs 15 and 16 of his affidavit. His description was not contested by the Provisional Liquidators or ASM.

“15. ASM Hudson River Fund’s creditor claims arise from the Termination Amounts calculated by Deutsche. These were calculated after Grande’s default on two swaps traded between Deutsche and Grande pursuant to an ISDA Master Agreement between them dated 18 September 2007. The two swaps are (a) a spread-dual range accrual Swap with trade dated 15 August 2007 (the “Range Accrual Swap”) and (b) a United States Dollar (“USD”) Interest Rate Swap linked to the Deutsche Bank FRB Basket Quanto Index traded on 31 Jan 2008 (the “FRB Basket Swap”).

16. These interest rate swaps are a form of derivative instrument and are known as “exotic” derivatives. While certain derivatives have so-called “closed form” solutions to their values, meaning that one can use a mathematical formula (such as the “Black-Scholes” formula referred to below) to derive the price, “exotic” derivatives have no such formulas because they require “stochastic calculus”–that is, integration and differentiation of processes involving random movements, such as currency exchange rates.  This distinction and classification of derivatives is important for calculating and valuating Close-out Amounts as explained in more detail below.”

13. As I understand it stochastic calculus is used to determine values of instruments that contain variables the value of which change randomly, for example, future floating interest rates. The calculation of the Early Termination Amount does not involve a calculation that is a matter of mere arithmetic. The mere fact that what is being determined is a “value” indicates this.  Assessing the nature of what DB calculated is not helped by the fact that it has not produced a calculation of the sort required by clause 6(d)(i).  This is absent, as I understand, it because it probably contains some commercially valuable information used to calculate the Early Termination Amount, which itself tends to suggest that we are not dealing with a simple arithmetical calculation.’

V. ASM’S submission

5.1Ms Linda Chan SC, who did not appear below, submitted on behalf of ASM that the Judge’s holding is inconsistent with the established meaning of ‘unliquidated debt’ under rule 125, which has been construed by the Courts as ‘includes not only all cases of damages to be ascertained by a jury, but beyond that, extends to any debt where the creditor fairly admits that he cannot state the amount’ (In re Dummelow, ex parte Ruffle (1873)8ChApp997,at1001; In re Canadian Pacific Colonization Corpn [1891]WN122; Buckley on the Companies Acts, 14th ed., Vol  2, p.  l707; Palmer’s Company Precedents,17^thed.,Part2,  p.  151; Re Rickett; Ex parte Insecticide Activated Products Ltd v Official Receiver [1949] 1AllER737, 741-742). 

5.2Ms Chan argued that the Judge erred in holding ASM’s claim does involve more than checking arithmetic in order to determine its veracity and thus is a claim for an unliquidated debt for the purpose of rule 125 and should, therefore, not be admitted for voting purposes, having regard to the following facts and matters:

1) a creditor is not expected to state the amount of the debt with absolute certainty, but is required to make an affidavit that at least so much is due to him.  Such a statement should be taken by the Court as sufficient evidence of the debt and the creditor should be admitted as a creditor for the sum named (In re Dummelow, at 1000; Buckley, p.l707; Palmer’s Company Precedents, p.l51; Re STX Pan Ocean (Hong Kong) Co., Ltd, HCCW 324/2013, 26 September 2014, at paragraph 26),

2) where, some further inquiry is required before allowing a creditor to vote (In re Dummelow, at 1001), it is permissible for the provisional liquidators to take into account the facts and matters known to them as part of that inquiry including the matters stated in the following paragraph,

3) the amount of the debt, the subject matter of ASM’s claim, was never in dispute and, indeed, had been repeatedly acknowledged by Grande both before and after its liquidation by:

a) the partial payment of the Early Termination Amount made by Grande between March 2010 and April 2011 in the amount of US$5,352,563.59 to the Bank, the assignor of the debt;

b) Christopher Ho, the Chairman and director of Grande, stated in the Statement of Affairs dated 31 May 2011 that Grande owed HK$116,120,889 (equivalent to US$14,929,402) to the Bank, being the balance of the Early Termination Amount payable to the Bank; and

c) Christopher Chiang, the company secretary and Group Chief Financial Officer of Grande, in his email dated 12 November 2012 to the provisional liquidators, confirmed that Grande was indebted to the Bank for US$14,337,803.32.

VI. Liquidated debt

6.1Rule 125 provides, among other things, that :

‘ A creditor shall not vote in respect of any unliquidated or contingent debt, or any debt the value of which is not ascertained…’

6.2The United Kingdom Bankruptcy Act 1869 contained similar provisions.  In In re Dummelow, a liquidating debtor was indebted to a creditor in £357 recovered by a verdict at law, and costs, which had not been taxed.  The creditor attended the first meeting of creditors, and stated in his affidavit that the debtor was indebted to him in £357 on the verdict and an amount of costs which he estimated at £200; and claimed to vote in respect of the aggregate amount.  The creditor had been restrained by injunction from taking any further proceedings in the action.  It was held that the estimated amount of untaxed costs was an unliquidated debt within the Bankruptcy Act, 1869, section 16, sub-section 3, and the creditor could not vote in respect thereof.  Mellish LJ stated that :

‘ The fair construction of the clause seems to me this: “a contingent debt” refers to a case where there is a doubt if there will be any debt at all; “a debt, the value of which is not ascertained,” means a debt the amount of which cannot be estimated until the happening of some future event; and “an unliquidated debt” includes not only all cases of damages to be ascertained by a jury, but beyond that, extends to any debt where the creditor fairly admits that he cannot state the amount.’ (emphasis added)

6.3I agree with Mr Victor Joffe (together with Ms Queenie Lau) as counsel for McVitie, that Mellish LJ was simply stating what is included as unliquidated debt rather than seeking to give an exhaustive definition.  The untaxed costs in that case clearly cannot be a liquidated amount because it had not been ascertained before taxation. 

6.4In McPherson’s Law of Company Liquidation, 3^rd Ed at paragraph 12―025 it is stated that :

‘ In general terms, a claim which is unliquidated simply involves one which cannot be ascertained in money terms. In Ex p. Ruffle. (In re Dummelow) Mellish L.J. said that an unliquidated debt includes all cases of damages where a jury must ascertain the quantum and those debts where the creditor fairly admits that the amount cannot be stated.

Others have sought to be more technical in their explanation of the meaning of unliquidated.  It has been said that an unliquidated debt may be described as a debt which is not for a specific amount, but one which involves a calculation of elements the selection of which depends on a court’s ruling.  For there to be a liquidated claim the claimant must be able to point to a scale of charges or some positive data which makes clear the amount of the claim. If an action involves a claim where no one can say positively beforehand whether the claimant will recover a set amount then the claim is unliquidated.’

6.5In my view, a more useful statement on the meaning of a debt for a liquidated sum is that it is a pre-ascertained liability under the agreement of the parties.  This includes a contractual liability where the amount due is to be ascertained in accordance with a contractual formula or contractual machinery.  This can be found in the judgment of Patten LJ in McGuinness v Norwich and Peterborough Building Society [2012] 2 All ER (Comm) 265.  After reviewing the authorities, Patten LJ stated that:

‘ [36] These authorities indicate and I think establish that a debt for a liquidated sum must be a pre-ascertained liability under the agreement which gives rise to it. This can include a contractual liability where the amount due is to be ascertained in accordance with a contractual formula or contractual machinery which, when operated, will produce a figure. Ex p Ward is the obvious example of that. Claims in tort are invariably unliquidated because they require the assistance of a judicial process to ascertain the amount due by way of damages. In some cases the calculation of the award will be straightforward and obvious but the unliquidated nature of the claim excludes it from being a good petitioning creditor’s debt which satisfies the requirements of s 267.

[37] The most obvious use of the term ‘liquidated’ has been in relation to liquidated damages. ‘Liquidated’ has been defined judicially as meaning the sum which the parties have by their contract assessed as the damages to be paid for its breach: see Wallis v Smith (1882) 21 Ch D 243 at 267 per Cotton LJ. If a genuine pre-estimate of loss the provision is enforceable according to its terms. I would therefore regard a claim for liquidated damages as one for a liquidated sum within the meaning of s 267 unless a claim in damages is excluded by the use of the word ‘debt’.’ (emphasis added)

6.6In Ex parte Ward (1882) 22 Ch D 132, a broker had failed to settle the sums due on the purchase by him of shares traded on the London Stock Exchange.  Rule 170 of the Stock Exchange provided that :

‘ “In every case of failure the official assignee shall publicly fix the prices current in the market immediately before the declaration” (of default), “at which prices all persons having accounts open with the defaulter shall close their transactions by buying of or selling to him such stocks, shares, or other securities as he may have contracted to take or deliver, the differences arising from the defaulter’s transactions being paid to or claimed from the official assignee.” ’

6.7The broker was declared a defaulter in accordance with the rules.  Under the rules, his liability to the vendor was assessed at £5,623.  The vendor petitioned for the broker’s petition but was met with a plea that the claim was not for a liquidated sum but was a claim for unliquidated damage.  Cotton LJ at 135 stated that :

‘ …Rule 170 in the case of a defaulter really alters the original contract, and provides a new contract as between the defaulter and his creditor, and then the amount of the liability is fixed and ascertained in accordance with that altered contract. It is said that this is only for the purposes of the Stock Exchange, and particularly with reference to the domestic distribution of what I may call the “House Fund.” But the difference once ascertained is the difference for all purposes, notwithstanding that the rule only provides for its payment out of a particular fund. In my opinion this demand is for a liquidated sum.’

6.8In the present case the debt was ascertained in accordance with a contractual formula or contractual machinery.  The mere fact that stochastic calculus was involved, which contained ‘variables the value of which change randomly, for example, floating interest rates’, does not mean that the amount was not so ascertained. 

6.9Mr Joffe distinguished Ex  parte  Ward and submitted that in that case the price which the official assignee was to fix could easily be ascertained from the then existing transactions in the market whereas in the present case, the ascertainment of the sum involved taking future floating interest rates into account.

6.10I disagree.  One may ask, realistically, what is the difference between the official assignee fixing the prices current in the market immediately before the default as in Ex parte Ward and the ascertainment of the values of the derivative instrument in a modern setting as in this case?  The common factor in both cases is that both were based on provisions under the contract for the purpose of ascertaining the required sum.  The fact that in the present case, future floating interest rates may have to be considered does not distract from the basic principle that the sum was calculated in accordance with a contractual formula or machinery.

6.11In Revenue and Customs Comrs v Maxwell and another [2011] Bus LR 707, without going to details, the Inland Revenue’s (‘HMRC’) claims were for corporation tax of over £8.7 million.  At the initial meeting of creditors, the administrator who chaired the meeting admitted HMRC’s vote as creditor but only to the extent of £1.5m, a figure reached as a gesture of goodwill, the chairman having valued the liquidated and ascertained debts owed to HMRC at only £609,247.  HMRC voted against the administrators’ proposals for achieving the purpose of the administration but those proposals were nevertheless passed, which they would not have been if HMRC had been admitted to vote for the full amount it claimed which exceeded £8.7 million.  HMRC appealed to the Court under rule 2.39(2) of the Insolvency Rules 1986 against the chairman’s decision to accord it only £1.5 million votes at the creditors’ meeting.  The judgment of Lord Neuberger of Abbotsbury MR is instructive :

‘ 57 Just how clearly quantified a debt has to be before it is liquidated and ascertained is not a question which it is easy to answer. It is clear from rule 2.39(3) that it does not have to be undisputable. Some guidance may be found in Ex p Ruffle; In re Dummelow (1873) LR 8 Ch App 997, 1001 (a case concerning section 16(3) of the Bankruptcy Act 1869 (32 & 33 Vict c 71)), where Mellish LJ said that

“ ‘an unliquidated debt’ includes not only all cases of damages to be ascertained by a jury, but beyond that, extends to any debt where the creditor fairly admits that he cannot state the amount. In that case there must be some further inquiry before he can vote.”

However, there is little subsequent authority which takes matters much further.  A claim for damages and a contingent claim have (unsurprisingly) been held to be unliquidated or unascertained claims: see In re Cranley Mansions Ltd [19941] 1 WLR 1610; Doorbar v Alltime Securities Ltd [1996] 1 WLR 456 and In re Newlands (Seaford) Educational Trust [2006] BPIR 1230.

58 In this case, HMRC rely on the point that, as at the date that the company went into administration, the facts relating to the income and expenditure of the company were known for all the six relevant periods.  Accordingly, runs their argument, it would have been possible, effectively as a matter of arithmetic, to calculate how much was owing by way of corporation tax in respect of those periods, and the total tax owing was therefore a liquidated and ascertained sum, subject always to the right of the company to challenge it. I see the force of that argument, but it seems to me that, as a matter of ordinary language, as at 9 September 2009, the amounts owing by way of corporation tax were not ascertained and liquidated (at least over and above the amounts specified in the company’s self-assessments).  In order to calculate what was owing, one would have had to trawl through figures in the company’s accounts, investigate the law relating to EBTs and payments to directors, and carry out calculations which were not straightforward. In many damages claims, one could work out the amount likely to be assessed by the court, but that does mean that an unresolved damages claim is a liquidated or ascertained debt.

59   Thus, in my opinion, in respect of all six periods, any corporation tax claimed to be due, over and above the self-assessments, was not a liquidated ascertained sum, until HMRC had issued notices of amendment.  However, once such notices were issued, I consider that the sums therein were liquidated and ascertained sums, in the amounts specified in the amendments (albeit subject to the possibility of challenge by appeal for tax purposes and assessment for voting purposes at meetings): Taxes Management Act 1970, sections 59D(1) and 55(1)(a)(2)(a). The fact that the sums so specified were subject to appeal and stay applications would not, in my view, undermine that conclusion: to hold otherwise would involve confusing ascertainment with unchallengeability.

60   Thus, as at the date the company went into administration, I consider that the sums claimed to be due as corporation tax in respect of the six periods in issue were not liquidated ascertained debts, but they had become so by the date of the meeting. As they must be characterised for the purposes of rules 2.38 and 2.39 as at the date of the administration, they fell within rule 2.38(5).  Thus, so far as the issues involving interpretation of the 1986 Rules are concerned, I agree with the conclusions reached by the judge.’  (emphasis added)

6.12As Lord Neuberger observed, the sum does not have to be undisputable in order to be a liquidated sum and the fact that the sums so ascertained may be subject to dispute would not undermine that conclusion because ‘to hold otherwise would involve confusing ascertainment with unchallengeability’.

6.13Mr Joffe further argued that quantification of the Early Termination Amount is clearly not a matter of arithmetic, but instead involves the parties exchanging and considering evidence they could collate in support of the quantifications they respectively contended for.  He argued that the Bank had not produced a calculation of the sort required by clause 6(d)(i) as it probably contains some commercially valuable information.  Without such data from the Bank, any attempt to calculate the Close-out Amount is merely speculation or a best estimate.

6.14I disagree.  As disclosed in the evidence of Mr Fok in his 18^th affirmation, the notice of amount payable calculated by the Bank was accompanied by correspondence between the Bank and three other banks (JP Morgan, Credit Suisse and HSBC) but none of these three banks were able to provide a quote on the Close-out Amount.  The Bank then calculated the Close-out Amount.  In light of this calculation, the Close-out Amount can hardly be described as speculation or a best estimate. Further, Grande had clearly accepted the figure by its express confirmation and by partial payment it had made which were detailed in paragraphs 106 and 107 of Mr Fok’s 18^th affirmation.

6.15Mr Joffe argued that the provisional liquidators are obliged independently and objectively to review the nature and quantum of ASM’s claim, and it is not simply a matter of whether a liquidator has a ‘basis’ for admitting a particular debt for the purpose of voting.  Even if Grande were estopped (which is denied), the provisional liquidators are not.  In Ex    parte Kibble (1875) 10 Ch. App. 373 at page 376, James LJ, made these observations :

‘ It is the settled rule of the Court of Bankruptcy, [and, of course, that also applies now in liquidations] on which we have always acted, that the Court of Bankruptcy can inquire into the consideration for a judgment debt. There are obviously strong reasons for this, because the object of the bankruptcy laws is to procure the distribution of a debtor’s goods among his just creditors. If a judgment were conclusive, a man might allow any number of judgments to be obtained by default against him by his friends or relations without any debt being due on them at all; it is therefore necessary that the consideration of the judgment should be liable to investigation.’

6.16In re Van Laun. Ex parte Pattullo [1907] 1 K.B. 155 at 162 Bigham J stated :

‘ The trustee’s right and duty when examining a proof for the purpose of admitting or rejecting it is to require some satisfactory evidence that the debt on which the proof is founded is a real debt. No judgment recovered against the bankrupt, no covenant given by or account stated with him, can deprive the trustee of this right. He is entitled to go behind such forms to get at the truth, and the estoppel to which the bankrupt may have subjected himself will not prevail against him.’

6.17In In re Exchange Securities Financial Services Ltd. (in Liquidation) [1988] 1 Ch 46, Harman J referred to Ex parte Kibble and held at page 59 that :

‘ That observation seems to me apt and relevant to this case. As Mr. Joffe observed, if it were not so, a debtor instead of suffering ten judgments by his friends and relations immediately before he went into bankruptcy could create ten estoppels against himself by representations and thereby cause his estate to be heavily depleted in favour of his friends and relations to the detriment of his true creditors.’

6.18Harman J went on to hold (on the same page) that the estoppel would not operate against the liquidator or trustee in bankruptcy :

‘ If an estoppel were allowed to operate or a judgment or other binding obligation allowed to operate against the liquidator or trustee in bankruptcy, he would be prevented from exercising his statutory duty to consider the true liabilities of his debtor.’

6.19Ms Chan accepted these statements.  However, in this case, the provisional liquidators had actually considered how the debt was ascertained and came to the conclusion that it was in the nature of a liquidated sum.  In my view, there really is no contrary evidence to fault their view.  Mr Joffe also submitted that there were errors in the figures but Mr Fok’s 19^th affirmation had addressed this point.  In my view the debt claimed by ASM is in the nature of a liquidated sum which entitled it to vote at the creditors’ meeting.

VII. Leave to appeal

7.1Mr Joffe had taken a preliminary point that the Judge’s decision was an interlocutory decision and leave to appeal is required.  This is because 

1) McVitie’s summons was taken out in the winding-up proceedings, HCCW 1139/2004, not by an originating summons in separate proceedings.

2) The determination of McVitie’s summons, subject of the decision and this appeal, deals only with the questions of whether ASM was entitled to vote at the first creditors’ meeting, and whether the provisional liquidators’ decision to admit ASM’s proof of debt for the purpose of voting at the first creditors’ meeting ought to be reversed.

3) The determination of these questions clearly do not dispose of the action, and do not determine any of the issues in the petition (or cross-petition, if any).  Nor do these questions constitute ‘a substantive part of the final trial’ or ‘a crucial issue in the case’ or ‘a point that goes to the root of the case or a dominant feature of the case’.

7.2Mr Joffe submitted that the substantial right of a creditor is to receive dividends at the winding-up of a company.  By contrast, a decision to accept a creditor’s proof for voting purposes is not binding or conclusive for other purposes: Re Assico Engineering Ltd [2002] B.C.C. 281.  Reference was also to Re Days International Ltd [2014] 1 HKLRD 20 at paragraph 9 where Harris J held :

‘ 9. The decision to admit or reject a proof for voting purposes under r.128 of the Companies (Winding-up) Rules (Cap.32H, Sub.Leg.) at the first meeting of creditors is not a final determination of the creditor’s claim to prove in the liquidation. It is a preliminary assessment and it is not uncommon for a liquidator who has doubts about a debt to value it at HKD1 for voting purposes. The test which a liquidator should apply when assessing a proof for voting purposes is whether, on balance, the claim against the company is established and, if so, in what amount. I agree with Mr Chain that this involves a relatively broad, macroscopic assessment.＇

7.3Reliance was placed on the well-known judgments of Shell Hong Kong Ltd. v. Yeung Wai Man Kiu Yip Co. Ltd. & Another (2003) 6 HKCFAR 222, paragraph 31 where Chan PJ stated that :

‘ 31. In my view, what one can extract from these cases is that where an order or judgment given in an application does not finally dispose of the whole action but only an issue in the action, it is necessary to consider the purpose and substance of the application, the issue dealt with and determined by the court and the effect of a determination of this issue on the rights of the parties, the further conduct of the proceeding and the final disposal of the whole action. A broad commonsense approach should be adopted. If the issue dealt with and determined by the court is “a substantive part of the final trial” (Holmes v Bangladesh Biman Corp [1988] 2 Lloyd’s Rep 120 at p.124); or “a crucial issue” in the case or a point “that goes to the root of the case” (First Pacific Bank Ltd v Robert HP Fung [1990] 1 HKLR 527 at p.532), or “a dominant feature of the case” (Korso Finance Establishment Anstalt v Wedge & Others (unrep., 15 February 1994) at p.7), then the order or judgment, even if it does not finally dispose of the whole action, should nevertheless be regarded as a final judgment.’

7.4Mr Joffe submitted that as ASM had failed to obtain leave to appeal, it cannot appeal against the judgment. 

7.5I disagree.  Order 59 rule 21(1)(a) provides that section 14AA(1) of the High Court Ordinance does not apply and an appeal lies as of right from ‘a judgment or order determining in a summary way the substantive rights of a party to an action’.

7.6Ms Chan rightly pointed out that an application by way of summons in the winding-up proceedings can be made by the provisional liquidators or liquidators, creditors, contributories or persons having interests in Grande after it was wound-up in respect of issues arising from or relating to the liquidation of Grande.  Both the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap 32) (‘CWUO’) and the Companies (Winding-up) Rules (Cap 32H) (‘Rules) contain provisions which permit such application to be made in the winding-up proceedings.  For example:

1) Rule 7(2) requires any application made by summons be served on ‘every person against whom the order is sought’, such person does not have to be party to the original winding-up proceedings.

2) Rules 95 to 97 allow a creditor or contributory to appeal against the liquidator’s decision rejecting or admitting a proof of debt.

3) Rule 128 allows a creditor to appeal against the decision of the chairman in admitting or rejecting a proof for the purpose of voting.

4) Section 200(5) of CWUO permits ‘any person aggrieved by any act or decision of the liquidator’ to apply to the Court to reverse or modify the act or decision complained of.

7.7The summons issued by McVitie (which was not a party to the original winding-up petition) was an application under rule 128.

7.8I do not consider the form of the application is determinative.  In the context of winding-up, there may well be matters which if decided one way or the other is conclusive and final of the substantive rights of the parties.  The relief sought by McVitie in the summons are (1) a ‘declaration’ that ASM was not entitled to vote at the first creditors’ meeting and (2) an order to reverse the provisional liquidators’ decision to admit ASM’s claim for voting at such meeting.  The substantive right of ASM to vote at the first creditors’ meeting was determined by the Judge.  While the proof of debt may not be conclusive and final, a determination of the right to vote which may have huge implication on how the rights of the creditors are to be resolved, is in my view final in nature.  As Lord Scott of Foscote in GFN SA v Bancredit Cayman Ltd [2010] Bus LR 587, paragraph 26 stated :

‘ …An interlocutory application designed to regulate or assist in some way the conduct of the substantive action between the parties would not, in my opinion, constitute “proceedings” for the purpose either of s.74 or 0.23. On the other hand, an application which, although interlocutory in form, raised issues as to the rights of the parties which were in substance independent of the issues in dispute in the parent action would, in my opinion, normally constitute in substance “proceedings” for those purposes.’

7.9Chu JA referred to this judgment in Re Lehman Brown Ltd at paragraph 14.  Reference is also made to Re Legend International Resorts Ltd [2011] 5 HKLRD 668 where the liquidators applied for security for the costs of the application to remove them.  In the context of deciding whether the application to remove liquidators is ‘proceedings’ within the meaning of Order 23, rule 1 of the Rules of the High Court,Deputy Judge Linda Chan considered that the application:

‘ raises and seeks the final determination of the issue of the fitness of the incumbent liquidators to continue with the liquidation of the company. This application will result in the determination of the liquidators’ rights to continue with the liquidation which are, in substance, independent of the issues in the liquidation.

7.10The Deputy Judge held that the application is not interlocutory but final in nature.

7.11Applying the test in Shell Hong Kong Ltd, the order made by the Judge was one which finally disposed of the whole application between McVitie, the provisional liquidators and ASM.  In my view, no leave to appeal is required.  Further, as indicated at the hearing, if leave is indeed required, then this Court would readily grant leave to ASM as the substantial arguments on the appeal had already been fully canvassed by counsel in their submissions and Mr. Joffe accepted that such an order is within the remit of this Court.

VIII.  Leave to adduce new evidence

8.1ASM asks for leave to adduce evidence which showed that after the judgment, there has been a major development in Grande in that a proposed scheme of arrangement had been approved by the Stock Exchange and a Court meeting was directed to be held in a few days after the hearing of this appeal in October 2015 for the scheme creditors to consider and vote on the scheme.  The provisional liquidators have indicated that in light of the Judge’s decision, they would not admit ASM’s claim which is the largest claim in value amongst the independent creditors entitled to vote at the Court meeting. 

8.2This evidence was objected to by McVitie but was admitted provisionally at the appeal.  Whilst I agree that, given the imminence of the Court meeting at which creditors would consider and vote on the scheme, it is prudent for ASM to inform the Court of this major development, the ultimate question that this Court has to decide is whether the debt is a liquidated sum, a determination based on law and the factual context of the case.  This being the case it was not necessary to decide whether the new evidence fulfilled the Ladd v Marshall requirement.  Accordingly no order was made on the summons to adduce new evidence. 

IX. Conclusion

9.Accordingly, the appeal was allowed and the Judge’s order dated 9 January 2015 is set aside.  We made an order that paragraphs 3 and 4 of McVitie’s summons dated 25 April 2014 be dismissed.  We made no order on ASM’s summons for leave to adduce new evidence.

X. Costs

10.As directed at the hearing, the parties shall submit written submissions on costs.  McVitie’s submission is to be submitted within seven days after the handing down of these reasons.  The submissions from ASM and the provisional liquidators are to be submitted within seven days thereafter.

Hon Yuen JA :

11.I agree with the reasons for judgment of Cheung JA.

Hon Chu JA :

12.I agree with the reasons for judgment given by Cheung JA.

Ms Linda Chan SC, instructed by Li, Wong, Lam & W. I. Cheung, for ASM Hudson River Fund, a creditor

Mr Victor Joffe and Ms Queenie Lau, instructed by Wong & Lawyers, for McVitie Group Holdings Limited, a creditor

Mr Val Chow, instructed by Lipman Karas, for the Provisional Liquidators