Re The Grande Holdings Ltd

HCCW 177/2011

[2018] HKCFI 507

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 177 OF 2011

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J U D G M E N T

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1.On 4 May 2017 Master Hui made an order in the taxation of the fees of the former joint and provisional liquidators of The Grande Holdings Limited (“Company”), that the provisional liquidators produce to the Company, Sino Bright Enterprises Co, Ltd (“Sino Bright”) the documents and information listed in Schedules 1 and 2 to a summons filed on 29 April 2016 (“Order”) be provided to the Company and Sino Bright, and directions that:

(1)   Sino Bright and the Company do have leave to file a further list of objections within 56 days.

(2)   Representatives (including law costs draftsmen) of Sino Bright, the Company and the provisional liquidators do have a meeting within 28 days thereafter to narrow down the issues by setting out matters in agreement and those remaining in dispute.

The provisional liquidators appeal the Order.  

2.The taxation has come about in the following unusual circumstances.  On 14 December 2015, Sino Bright, McVitie Group Holdings Limited, the Company, and the provisional liquidators signed an Amended Restructuring Agreement (“Agreement”) intended to govern the progress of the restructuring of the Company, which is listed on the Stock Exchange of Hong Kong Limited.  The Agreement provides as follows:

“3.2 The Provisional Liquidators agree that the costs and expenses of the Company and fees of the Provisional Liquidators incurred after 16 December 2013 in and about the finalization and/or implementation of the Restructuring Proposal, including the reasonable fees and expenses of the legal advisers, auditors, valuers, financial adviser, independent financial adviser, internal control consultant, share registrar, share transfer agent and other professionals and agents necessarily engaged by the Company in connection therewith and all filing and recordal fees and charges necessitated thereby, whether in relation to satisfying the requirements of the Stock Exchange or any other regulator, or the Takeovers Code shall be capped at HK$45 million (the ‘Costs and Expenses’).

…

3.4 Subject to taxation (if not agreed), Sino Bright covenants to bear all Costs and Expenses up to a maximum of HK$20 million. …

3.5 Subject to taxation (if not agreed), the balance of the Costs and Expenses shall be borne by the Company, …

3.6 Any taxation of costs required by McVitie, Sino Bright or the Company will be conducted on an inter partes basis, with the paying party to be permitted to attend and make submissions at the taxation, but otherwise such taxation will take place by reference to the format as outlined in the Procedural Guide for Taxation and Determination of Bills in Liquidation Process and in accordance with the Maxwell principles as outlined in the judgment delivered by the Honourable Madam Justice Le Pichon on 25 June 1998 in the case of Re Peregrine Investments Holdings Limited, HCCW20,22 & 32/1998.”

3.As is apparent from these provisions, it was envisaged that the provisional liquidators would carry out a considerable amount of work.  This was additional to the work that they had carried out up to December 2014 as provisional liquidators of the company.  As I understand the evidence, the provisional liquidators’ total fees paid to date are as follows:[1]

“9.1. The Former PLs have confirmed that they alone have already received approximately HK$98.1 million in respect of Liquidation Costs.

…

9.3. By an Order made on 4 May 2017 (viz. the same day as the Discovery Order) (‘Interim Payment Order’), Master Hui ordered further interim payment of 70% of the fees of the Former PLs and 90% of those of their third party agents sought under the 3 Taxation Packages of Restructuring Costs in the amount of HK$14.5 million and HK$6.1 million respectively.

9.4. In total, the Former PLs and their agents have incurred at least HK$166.5 million in costs (inclusive both Restructuring Costs and Liquidation Costs), of which HK$158.7 million has already been paid and received.”

4.On 7 September 2015, Master Hui ordered that the provisional liquidators provide their time costs entry in an Excel format on a CD-ROM.  The provisional liquidators did so.  On 8 January 2016, Master Hui ordered that the Excel spreadsheet be reformatted in chronological order.  This was done.  The spreadsheet is divided into items identifying the time charges claimed and the column headed narratives describing the activities that incurred the time charges.  By way of illustration, item 1 is as follows:

Classification	Index #	Date	Matter#	First Name	Last Name	Bill Hrs	Bill Amount	Narrative
Preparation and publication of announcement in relation to the Resumption Proposal	2185 1476	09/01/2014	428230.0001	Wai Shing Daniel	Chow	6.10	30,396.30	- Reviewing and revising the draft announcement; perusal of the previous announcements, annual reports and resumption proposal; e-mailing the revised announcement to Sidley Austin; perusal of the e-mail correspondence with Deloitte’s; seeking information from Deloitte’s on the draft announcement. (2.8 hours) - Attending to the issue and arrangement for internal control review. (2.3 hours) - Perusal of the draft reply to the Listing Division and collating the information. (1 hour)
	subtotal of Wai Ching [Shing] Daniel Chow					6.10	30,396.30

5.The Schedules referred to in the Order take this information, and add a column identifying “Particulars of documents/information required”.  The first item of Schedule 1 is as follows:

Item no.	Classification	Index #	Date	Narrative	Particulars of documents/information required
1.	Preparation and publication of announcement in relation to the Resumption Proposal	2185 1476	9/1/2014	- Reviewing and revising the draft announcement; perusal of the previous announcements, annual reports and resumption proposal; e-mailing the revised announcement to Sidley Austin; perusal of the e-mail correspondence with Deloitte’s; seeking information from Deloitte’s on the draft announcement. (2.8 hours) - Attending to the issue and arrangement for internal control review. (2.3 hours) - Perusal of the draft reply to the Listing Division and collating the information. (1 hour)	- Announcement; - Previous announcements; - Annual reports; - Resumption proposal; - email to Sidley Austin; - email correspondence with Deloitte’s - email to Deloitt [Deloitte]; and - draft reply to the Listing Division.
		subtotal of Wai Ching [Shing] Daniel Chow

6.The provisional liquidators’ grounds for appealing the Order are summarised in [5] and [6] of Mr Charles Manzoni SC’s skeleton argument filed on behalf of the provisional liquidators.  Those paragraphs read as follows:

“5. The PLs are appealing the Discovery Order on the basis that it is unnecessary, disproportionate and oppressive, especially given:

5.1. Sino Bright and Grande both have a copy of the 1^st Taxation Package, which was prepared in accordance with the Procedural Guides and the ‘Maxwell Principles’ as per the terms of the Amended Restructuring Agreement;

5.2. Sino Bright and Grande also have received a vast amount of additional information in regard to the costs of the PLs, however, they have not properly considered that information or the other information that was already in their possession, custody or control;

5.3. Sino Bright and Grande were well apprised of the tasks performed by the PLs and their agents throughout the restructuring of Grande including during the period covered by the 1^st Taxation Package; and

5.4. compliance with the Discovery Order will require the production of at least 24 bank’s boxes of documents containing not less than 90 three-inch box files.

6. The nature and breadth of the Discovery Order raises significant concern as it ultimately leads to a line-by-line taxation of each time entry of the PLs and opens the door for subsequent taxations to be conducted in a similar manner, which is incompatible with the established practice of the Companies Court.”

7.Clause 3.6 of the Agreement refers to the “Procedural Guide for Taxation and Determination of Bills in Liquidation Process” (“Guide”) and the Maxwell principles as outlined in the judgment delivered by Le Pichon J (as she then was) on 25 June 1998, in the case of Re Peregrine Investments Holdings Limited.[2]

8.Peregrine concerns the fees and disbursement of provisional liquidators and how they should be assessed by the court.  In that case, the company was in insolvent liquidation, and the assessment was to be undertaken by the court on an ex parte basis.  There was no creditor involvement.  Le Pichon J’s judgment is a comprehensive review of the relevant principles.  It starts at p 677G, with a consideration of the statutory basis of remuneration, which is not directly relevant in the present case in the light of the provisions of the Agreement.  However, the consideration of the general principles is relevant.  It is convenient to quote from Le Pichon J’s judgment starting with her Ladyship’s reference to what was commonly referred to as the Maxwell principles, which are familiar to practitioners in this area:[3] 

“The Maxwell principles

Mirror Group Newspapers Plc v Maxwell & Others [1998] BCC 324 establishes (at pp.333E-334F) that:

(1) Administrators, liquidators, receivers, trustees in bankruptcy or other officers (office-holders) are fiduciaries charged with the duty of protecting, getting in, realizing and ultimately passing on to others assets and properties which belong not to themselves but to creditors or beneficiaries of one kind or another. They are appointed because of their professional skills and experience and they are expected to exercise proper commercial judgment in the carrying out of their duties. Their fundamental obligation is a duty to account, both for the way in which they exercise their powers and for the property which they deal with.

(2) The allowance of remuneration to officer-holders represents an exception to the rule that a trustee must not profit from his trust which rule applies to all kinds of person who are in a fiduciary position. This exception inevitably involves a conflict between the interests of the fiduciary who is to receive such remuneration and the interests of those to whom the fiduciary duties are owed, who will bear whatever remuneration is allowed.

(3) It is for the office-holder who wishes to be remunerated at a particular level to justify his claim:

(a) Office-holders must give full particulars to justify the amount of any claim for remuneration. Where they seek to be remunerated upon the basis of time spent, they must do significantly more than list the total number of hours spent by them or other fee earning members of their staff and multiply this total by a sum claimed to be the charging rate of the individual whose time was spent. They must explain the nature of each main task undertaken, the considerations which led them to embark upon that task or to persevere in it. The time spent must be linked to this explanation so that it can be seen what time was devoted to each task.

(b) Office-holders must keep proper records of what they have done and why they have done it. Without contemporaneous records of this kind, they will be in difficulty in discharging their duty to account. Retrospective reconstructions are unlikely to be as reliable as contemporaneous records. Office-holders whose records are inadequate are liable to find that doubts are resolved against them because they are unable to fulfill their duty to account for what they have received and to justify their claim to retain part of it for themselves by way of remuneration.

(c) The test is whether a reasonably prudent man, faced with the same circumstances in relation to his own affairs, would lay out or hazard his own money in doing what the office-holders have done. It is not sufficient for office-holders to say that what they have done is within the scope of the duties or powers conferred upon them. They are expected to deploy commercial judgment, not to act regardless of expense. Transactions carried out at a high cost in relation to the benefit received will be subject to close scrutiny.

Mr Yu submitted that as a corollary, a provisional liquidator is not entitled to remuneration in respect of work which a reasonably prudent man faced with the same circumstances in relation to his own affairs would not have laid out his own money. Costs and expenses incurred unnecessarily should be disallowed. Re Kal Assay Southern Cross Pty Ltd (in Liquidation) (1992) 9 ACSR.245, pp.262–3 and Re Silver Valley Mines (1882) 21 Ch D 381, p.392. Further, a provisional liquidator should also be deprived of costs occasioned by a want of reasonable skill on his part. Equally, he should not be entitled to remuneration for services rendered in breach of his duties. Re Kal Assay Southern Cross Pty Ltd (in Liquidation) (1992).9 ACSR.245 at p.263.

As I understand it, Mr Fok, counsel for the provisional liquidators, accepts the general principles set out above save in the following respects:

First, Mr Fok takes issue with the suggestion that a failure to keep contemporaneous records would disentitle the provisional liquidators to remuneration. He submitted that one should approach the matter with ‘practical realism’, that the purpose of the exercise is not to apply bureaucratic red tape to make recovery impossible so that doubts ought not be resolved against the provisional liquidators, at least not until after they have been afforded an opportunity to explain.

On a proper reading, I do not accept that the judgment of Ferris J goes anywhere near to saying that office-holders who do not keep contemporaneous records are disentitled to remuneration. The burden is upon them to justify the remuneration claimed. They may do so by means other than contemporaneous records although, as Ferris J pointed out, contemporaneous records are likely to be a more reliable form of proof.

Second, as to the need to justify every dollar claimed, it was submitted that in taxation, the underlying acceptance is that what a solicitor says he has done was done. Therefore the court should accept the word of the provisional liquidators at face value and be very slow to disbelieve them or question the integrity of their assertions.

I have some difficulty in accepting this last proposition for the reason that a clear conflict of interest exists. A similar argument was put forward in Mirror Group Newspapers Plc v Maxwell & Others [1998] BCC 324 which was rejected by Ferris J (at pp.338H339C):

A particular argument against assessment of remuneration by a taxing officer which was presented by Mr Purle is that the receivers in this case are insolvency practitioners unused to taxation procedures, and that although they have records of the amount of time spent in the receivership by them and their employees these records do not show, as the records of a solicitor would do, how much time was spent by any particular individual on a particular task. The suggestion was that it would be unreasonable for insolvency practitioners to be required to justify their charges in the same way that a solicitor would have to justify his charges on the taxation of costs.

I have to say that I find this argument wholly unacceptable. Although court-appointed receivers are officers of the court and, in the absence of positive misconduct on their part, are entitled to support and protection from the court, when they seek to have their remuneration fixed they must, as I have already indicated, justify their claim. In the present case this claim is based exclusively on time expended charged at hourly rates. …

As Mr Yu pointed out, the court cannot take the provisional liquidators’ say so at face value since it is not the court’s money that is in issue but somebody else’s money. The effect of any approval is to allow the provisional liquidators to take money away from their principals. It is for that reason that office-holders are required to attain the same high standard that fiduciaries are required to attain when they charge remuneration.

…

As noted above, it is not now suggested that the Mirror Group Newspapers Plc v Maxwell & Others [1998] BCC 324 principles do not apply where express provision has been made for remuneration to be on a time basis. This is because the basis of remuneration does not alter the fundamental principle that provisional liquidators, like other office-holders, are fiduciaries and have an obligation to account.”

9.I did not understand Mr Manzoni to dispute, as regards both the Company and Sino Bright, the provisional liquidators were fiduciaries, and that these principles applied to the assessment of their fees.  The Guide was developed to assist both insolvency practitioners and taxing Masters in the assessment of provisional liquidators’ fees during a period in which their appointment was becoming increasingly common, as a consequence of the impact of the Asian financial crisis at the end of the 1990s. 

10.Paragraph 3.1(B) of the Guide specifies what needs to be lodged with the court by a liquidator with the first bill:

“3.1 …

(B) For each case if it is the first bill lodged for taxation after this procedural guide has come into operation:

(i) a copy of the Court Order for the appointment of the Liquidator;

(ii) a source document prepared and duly signed by the Liquidator in the form of a report containing the following information:

(a) a brief paragraph containing an introduction to the company in question, e.g. incorporation, size, etc;

(b) a brief paragraph stating the main business activities carried on by the company before liquidation;

(c) the ground for winding-up (e.g. insolvency, just & equitable, etc.);

(d) if a provisional liquidator was appointed, the grounds given for such appointment of the provisional liquidator;

(e) an ‘Assets Schedule’ showing

– the nature

– location

– estimated value and likelihood of recovery

of each of the assets of the company (other than those with minimal value) at the commencement of the liquidation.

Please note that the above (B) documents are required to be lodged once only and the lodging of all subsequent bills for taxation need not be accompanied by such document unless, there are changes.  In such case lodging an update relevant document to highlight the changes is necessary.”

11.Sub-paragraph (C) specifies that similar documents and information have to be filed with subsequent bills. 

12.The Guide is directed to taxations that will normally be conducted ex parte.  It does not require production of contemporaneous documents evidencing the work described in the narratives.  It seems to me, however, that there is nothing to prevent a taxing Master who thinks that he would be assisted by seeing some contemporaneous material to require its production.  More generally, in my view, both the principles explained in Peregrine[4] and the procedure to be found in the Guide are flexible.  Their precise application may vary depending on the facts of each particular case.  The fact that no reference is made in either Peregrine or the Guide to the production of documents does not mean that Clause 3.6 of the Agreement [5] restricts the Company and Sino Bright by Agreement from seeking the production of contemporaneous documents that evidence the type and extent of the work done in relation to the various items in the schedule. 

13.As demonstrated by the passages I have quoted from Mr Manzoni’s skeleton, the provisional liquidator’s criticism of the Order focuses on its suggested oppressive consequences.  In my view, this is to approach the issue from the wrong starting point, and ignores the consequences of the fiduciary character of the provisional liquidator’s office.  As Ferris J explains in Mirror Group Newspapers Plc v Maxwell & Others,[6] the provisional liquidators have a duty to account to those whose assets they were appointed to protect and justify the remuneration they seek to be paid.  This, in my view, allows creditors or beneficiaries to require the provisional liquidators to account strictly for the work for which they seek to be paid, and to produce relevant documents and information supporting their claim. 

14.Mr Manzoni took me to a number of authorities which show how the court has dealt with applications by those charged with paying provisional liquidators’ fees to be involved in the taxation process. It is only necessary to refer to the judgment of Kwan J (as she then was) in Re Boldwin Construction Company Limited.[7] Kwan J rejected the provisional liquidators’ appeal from Registrar Chan’s decision, allowing the company (which was solvent), to participate in the taxation.  Kwan J said this:

“15. The Procedural Guide, as its name suggests, gives guidance to practitioners on the preparation of documents to be lodged with the court for the determination of bills, and the steps to be followed after the necessary documents are lodged with the court. The practical and pragmatic approach adopted in the Procedural Guide is designed to streamline the documents required to be submitted by provisional liquidators and liquidators for the assessment of their fees, to ensure that a sufficient amount of information is placed before the taxing master and that the court would not be overburdened with unnecessary materials. So time sheets are not required to be produced to the court in the first place, in the interests of cost-effectiveness, and would only be called for if the master needs to query any point (paragraph 3.1). As Mr Harris, SC pointed out, the documents and information required to be provided under the Procedural Guide would not be as detailed and comprehensive as those envisaged and discussed in Re Peregrine Investments Holdings Limited [1998] 2 HKLRD 670 at 684F to J.

…

17. It seems to be common ground that the procedure for the determination of provisional liquidators’ bills envisaged in the Procedural Guide is an ex parte procedure in the sense that only the provisional liquidator is present. In most situations, and if a winding-up order is made on the petition, it is not expected that the company or any one else would take part in the determination of the provisional liquidators’ fees. Nevertheless, the Procedural Guide is only for guidance, it is not law. I would need to consider if cogent reasons are made out why the application should be heard ex parte, without the presence of the party that is to pay the costs to be assessed. I agree with Mr Grossman, SC, for the companies, that one instinctively recoils at the notion that any one may be financially encumbered without the opportunity to be heard, as natural justice demands it.

…

26. As for the objection taken on the basis that Dr Chan was the subject of investigation by the provisional liquidators and it would be inappropriate to allow him to take part in the determination of fees, the allegations of wrongdoing have been withdrawn as Dr Chan and Madam Law have settled their disputes.  The confidentiality of the investigation work against Dr Chan should not be an issue here.  And if Dr Chan should object to the reasonableness of work done merely or primarily because he was the subject of investigation, no doubt the taxing master would disregard any objection he considers unhelpful or without substance.  Similarly, if the companies should ask the provisional liquidators to provide information which is oppressive or unnecessary for the exercise of the determination of fees, the taxing master would not entertain such requests.”

With this, I respectfully agree. 

15.However, what is oppressive or unnecessary has to be considered in the light of the special position of the provisional liquidators as fiduciaries seeking payment from those to whom they owe those duties.  In the present case, the provisional liquidators do not argue that the documents are irrelevant.  They argue that in their view, providing them would be very time-consuming (they estimate they consist of approximately 90 conventional 3-inch box files, although the documents are largely in electronic form) and expensive (they estimate the cost of providing them at approximately HK$2 million). 

16.The provisional liquidators’ argument needs to be assessed with regard to the nature of the taxation before Master Hui.  The Guide was intended for ex parte taxations, and took into account the limitations both of resources and knowledge in the High Court.  The present taxation is inter partes, and adversarial.  Normally, it is in the interests of both parties to a taxation to co-operate and agree as much as possible.  However, if the Company and Sino Bright wish to scrutinise the bill item by item, and if they are to challenge particular items or parts of particular items it will be necessary to consider the contemporaneous documents and the taxing Master will need to have regard to their content when determining each objection.  It seems to me likely that Master Hui, who has considerable experience of taxing liquidator’s fees, was aware of this.  It also seems to me that the level of fees is relevant when considering whether the request is oppressive and requires work and additional costs out of proportion to the sums involved.  Given the very high level of fees involved in this case, it seems to me that it is not.

17.Finally it also is relevant, in my view, that in determining the costs of the taxation, the Master can properly have regard to the extent of the work that the provisional liquidators were put to and whether it is appropriate that the cost of such work is paid by the Company or by Sino Bright.

18.I will therefore dismiss the provisional liquidators’ notice of appeal dated 18 May 2017.

Ms Theresa Chow, instructed by K & L Gates, for Sino Bright Enterprises Co, Ltd

Mr Bernard Man SC and Mr Jason Lee, instructed by Johnnie Yam, Jacky Lee & Co, for the Company

Mr Charles Manzoni SC, instructed by Lipman Karas, for the former provisional liquidators