Re G W Electronics Co Ltd

CACV 82/2021 & CACV 367/2021 (Heard together) [2022] HKCA 1590 CACV 82/2021 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 82 OF 2021 (ON AN APPEAL FROM HCCW NO 81 of 2016) ____________   IN THE MATTER of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32)   and   IN THE MATTER of G W Electronics Company Limited（弘威電子有限公司） ____________ CACV 367/2021 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO 367 OF 2021 (ON AN APPEAL FROM HCCW NO 81 of 2016) ____________   IN THE MATTER of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32)   and   IN THE MATTER of G W Electronics Company Limited（弘威電子有限公司）

_____________

(Heard together)

Before:  Hon Kwan VP, Yuen and G Lam JJA in Court

Date of Hearing:  23 September 2022

Date of Judgment:  23 September 2022

Date of Reasons for Judgment and Decision on Costs: 21 October 2022

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REASONS FOR JUDGMENT
AND
DECISION ON COSTS

__________________________________

Hon G Lam JA (giving the Reasons for Judgment and Decision on Costs of the Court):

Introduction

1.These two appeals have arisen out of unusual circumstances relating to the stay of the winding up of G W Electronics Co Ltd (“Company”).  The Official Receiver, who also acted as provisional liquidator of the Company, had omitted to mention the ad valorem fee chargeable under Item I of Table B of Schedule 3 to the Companies (Fees and Percentages) Order (Cap 32C) (“ad valorem fee” and “CFPO”) when she informed the court and the parties of her fees and expenses, and on that basis the court granted a permanent stay of the winding up.  The question that has arisen is whether notwithstanding that the omission the Official Receiver should be allowed to withhold the ad valorem fee from the assets of the Company.

2.At the end of the hearing we allowed the principal appeal (CACV 367/2021) and made no order on the other one (CACV 82/2021).  We now give the reasons for our judgment and our decision on costs.

Background

3.The Company was incorporated in Hong Kong.  It engaged in business as a distributor of Toshiba brand semi-conductor products sourced from Toshiba Electronics Asia Limited (“TEAL”).  On 15 March 2016, TEAL presented a petition to wind up the Company on the ground that it was unable to pay its debts.  The Company applied to strike out the petition but failed,[1] and was wound up shortly afterwards on the hearing of the petition on 9 January 2017.[2]  Pursuant to section 194(1)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“Ordinance”) the Official Receiver automatically became the provisional liquidator upon the winding up order being made.

4.The first meetings of creditors and contributories were held on 7 March 2017, but as there was a difference between the creditors and contributories as to who should be appointed the liquidator, the Official Receiver continued to act as provisional liquidator under section 194(1)(a).

5.The Company appealed against both the dismissal of its strike-out application and the winding up order.[3]  One of its directors, in his capacity as a creditor, applied for an interim stay of the winding up order pending the appeals.  TEAL did not oppose the stay, as a substantial part of its debt had been secured in the funds held by the Official Receiver.  On 27 March 2017, the court[4] granted an interim stay, the effect of which, as confirmed by the court subsequently,[5] was that the control over the Company’s affairs reverted to its board of directors pending the appeals.  As a consequence, no application was made to the court for the appointment of liquidator and the Official Receiver remained the provisional liquidator.

6.On 29 December 2017, in anticipation of the hearing of the appeals, the Official Receiver filed her 3^rd report recording that assets in the sum of $124,139,861.55 had been recovered.  It also set out the fees and costs of the Official Receiver and Provisional Liquidator on a time-cost basis and stated that in the event the appeals were allowed, the fees and costs would be $56,443.50.  This was correct as far as it went, because if the winding up order was set aside on appeal, there would be no winding up proceedings and no ad valorem fee would be payable.

7.On 2 April 2020, the Court of Appeal handed down its judgment in the appeals,[6] rejecting the Company’s arguments against the refusal to strike out the petition,[7] but noting that the Company had been able to recover certain receivables and become solvent.[8]  After receiving supplementary submissions, the Court of Appeal issued a further decision on 20 May 2020, noting that there was apparently a surplus of assets but that this was disputed by TEAL.[9]  Accordingly, the court ordered that the winding up order be stayed for 28 days, and that, if an application was made in that period for a permanent stay of the winding up, the interim stay be extended pending the determination of that application.

8.Within the prescribed period, on 17 June 2020, Leader First Ltd (“Leader First”), one of the two contributories of the Company, duly issued a summons for permanent stay of the winding up under section 209 of the Ordinance, with the support of the other contributory. The summons was served on TEAL and the Official Receiver.  The reason advanced for the stay was that terminating the liquidation would facilitate the Company’s recovery of substantial receivables from a debtor in the Mainland called “DTT”.

9.Prior to that summons, on 5 June 2020, the Official Receiver had, in reply to Leader First’s enquiry, stated that apart from the amount mentioned in her 3^rd report (i.e. $56,443.50), there was no other cost or fee incurred to date, but that if an application for permanent stay was made, estimated costs of about $28,000 would be incurred. It appears that the Official Receiver (or, rather, her staff handling the matter) had at that time forgotten the ad valorem fee.  The correspondence was produced in Leader First’s evidence filed in support of the application for stay.

10.After the summons for stay was issued, the Official Receiver wrote a letter to the court dated 23 June 2020 (copied to Leader First and TEAL), stating that she was not aware of any misconduct in the Company’s affairs and that a stay of the winding up would not therefore prejudice any investigation.  The Official Receiver took a neutral stance and did not propose to appear at the hearing unless the court otherwise directed. The letter went on to state:

“ ORPL has provided an estimate on her fees and costs in the December 2017 Report. In the event that the applications are allowed and assuming that she is not required to appear at the above hearing, ORPL would seek her fees and costs in a total of HK$64,443.50 (HK$33,443.50 + HK$23,000 being her claimed costs as per the summary of costs dated 28th December 2017 + HK$8,000 being her claimed costs for the present applications) or such amount as the Court may determine shall be borne by the party as the Court deems appropriate. A summary of costs is attached for assessment.”^[10]

11.TEAL, by then the only creditor of the Company (as the other creditors had withdrawn their proofs), opposed the application for stay, on the ground, inter alia, that the Company had liability for interest on the principal debt accruing from the date of the winding up order under section 264A of the Ordinance.

12.The application for stay was heard on 12 November 2020 before Linda Chan J (“Judge”).  The Official Receiver did not appear.  Based on the evidence before the court, the Judge recorded the Company’s assets and liabilities, leaving aside statutory interest, as follows:[11]

	Assets	Liabilities
Cash held by OR	$126,165,373.29
Recovery from DTT, held by Array Electronics (China) Ltd	$5,510,000.00
Costs on account	$69,500.00
OR’s fees and expenses		$64,443.50
Costs incurred in enforcement action against DTT		$2,628,112.27
Debt		$118,747,146.65
Untaxed costs of winding up proceedings		$7,586,956.80
Total	$131,744,873.29	$129,026,659.22

13.The arguments and the Judge’s reasoning can be seen from her Reasons for Decision subsequently handed down on 18 November 2020.[12] The Judge stated that leaving aside the question of statutory interest, there was no dispute that the Company’s assets exceeded its liabilities leaving a surplus of $2,718,214.07.  Leader First had undertaken to pay the net amount recovered from DTT, in the sum of $2,881,887.73, directly to TEAL.  The main argument between Leader First and TEAL was whether the Company was still solvent after taking into account statutory interest.  Accepting Leader First’s submissions, the Judge held that section 264A made statutory interest payable out of the surplus after the payment of debts proved but did not create an obligation to pay interest beyond the surplus available.  TEAL’s entitlement to statutory interest was limited to the amount of surplus, and it would therefore not be prejudiced by a stay if it was conditional upon the surplus being paid over to it.  Accordingly, the Judge made an order at the hearing, which, as subsequently drawn up, read as follows (“Conditional Stay Order”):

“ UPON the application of Leader First Limited …

AND UPON reading… the letter from the Official Receiver’s Office to the Court dated 23 June 2020 …

…

IT IS ORDERED THAT:-

1. …

2. The winding up proceedings of the Company be stayed permanently (“the Stay”) upon the Applicant’s Undertaking^[13] and the following conditions having been complied with:

(1) The liquidation costs and the fees, costs and expenses of the Official Receiver of and arising out of the winding up of the Company (“Liquidation Expenses”) be paid out of the cash fund in the liquidation account of the Company (“the Liquidation Account”) held by the Official Receiver as the Provisional Liquidator of the Company (“ORPL”);

(2) The ORPL shall as soon as reasonably practicable apply the balance of the cash in the Liquidation Account, after payment of the Liquidation Expenses, to discharge the Untaxed Costs in the sum of HK$7,586,956.80 and Debt in the amount of US$15,263,129.39 owed by the Company to the Petitioner; and

(3) The ORPL shall as soon as reasonably practicable pay the entire surplus (i.e. the cash after payment of the Liquidation Expenses, Untaxed Costs and the Debt) in the Liquidation Account to the Petitioner.

3. Upon written confirmation by the Applicant's Solicitors that all the conditions in paragraph 2(1) to (3) above have been complied with, the Applicant shall apply to the Honourable Madam Justice Linda Chan on paper for an order (i) to stay the winding up proceedings permanently; and (ii) to release the ORPL as provisional liquidator of the Company;

4. There be liberty to apply; …”

14.On 17 November 2020, the Official Receiver, having received a draft order, wrote to the parties seeking clarification as to whether payment of the cash balance held by her to TEAL was a condition of the stay.  The letter stated again that her costs and fees as at 23 June 2020 were $64,443.50.

15.It therefore came as a surprise that the Official Receiver wrote to the court on 25 November 2020, copied to the parties, stating that it had been discovered that the ad valorem fees chargeable in the winding up of the Company “had all along been inadvertently omitted” in her 3^rd report and her letter to the court dated 23 June 2020, for which she apologised.  The Official Receiver stated that the ad valorem fee on the realisation of $124,139,861.55 (as stated in the 3^rd report) amounted to $2,076,400, and should be included in the “Liquidation Expenses” referred to in the Judge’s Reasons for Decision.  The Official Receiver suggested that the Judge require the parties to report to the court upon the compliance of the undertaking and conditions and to defer the stay until the court was satisfied of their compliance.

16.On the next day (26 November 2020), the Official Receiver wrote to the parties seeking clarification as to whether credit should be given for the sum of $2,881,887.73, which had been paid by Leader First to TEAL, in calculating the balance of the principal debt and the costs of TEAL.  The Official Receiver held a cash balance that was insufficient to pay the debt and costs combined without giving credit.  TEAL’s solicitors also wrote to the court, pointing out that the subject of ad valorem fees had never been brought up until the Official Receiver’s letter of 25 November 2020 and asking for an opportunity to be heard and make submissions on that matter.  They also replied to the Official Receiver, stating that it would be sufficient for her to pay over the entire cash balance held after deducting $64,443.50 as her expenses.

17.That afternoon, by letter to the parties, the Judge indicated her view that it was too late for the Official Receiver to raise the matter and that it did not appear that the ad valorem fee was payable since the winding-up proceedings had been subject to an interim stay and would soon be stayed permanently.

18.On 1 December 2020, the Official Receiver wrote to the court, accepting that there was no excuse for not having raised the issue of the ad valorem fee earlier, and apologised again for the omission.  She submitted, however, that the omission was not a ground for dispensing with the duty to charge and pay the ad valorem fee, and that the ad valorem fee was payable notwithstanding the interim stay granted before and any permanent stay to be granted.

19.In response, the Judge directed on 3 December 2020:

“ 1. If the Official Receiver has any applications to make, a proper application should be made. The Court will not deal with the ‘submissions’ on paper.

2. In the meantime, the order made on 12 November 2020 has already taken effect and should be complied with by all parties, notwithstanding the belated ‘submissions’ made by the Official Receiver in correspondence.  The order will be sealed so as not to delay the permanent stay ordered by the Court.”

20.On 4 December 2020, the Conditional Stay Order was sealed.  The Official Receiver had prepared a summons on the same day, which was filed on the following Monday, 7 December 2020, seeking the following orders:

“ 1. The Liquidation Expenses as stated in paragraph 2(1) of the Order made by the Honourable Madam Justice Linda Chan dated 12th November 2020 (“the Order”) do include the ad valorem fees (“AV fees”) chargeable in these winding up proceedings as provided in Item I of Table B of Schedule 3 to the Companies (Fees and Percentages) Order (Cap.32C);

2. The payment of the surplus, calculated on the basis of the Liquidation Expenses being inclusive of the AV fees, by the Official Receiver to the Petitioner shall be regarded as compliance with the requirement on the Official Receiver under paragraph 2(3) of the Order”

Adopting the terminology used below, we shall refer to this as the “1^st Summons”.

21.Directions on the evidence and hearing of the 1^st Summons were given by the Judge by consent on 18 December 2020. By agreement, the cash balance held by the Official Receiver, after deducting $64,443.50 as her fees and costs and withholding $2,076,400 on account of the ad valorem fee claimed, was transferred to TEAL on 31 December 2020.

22.By letter to the court dated 2 February 2021, Leader First stated that TEAL had received amounts exceeding its principal debt and untaxed costs, and that but for the Official Receiver’s belated claim for ad valorem fees, all the conditions in the Conditional Stay Order had been complied with.  Leader First stated that the ad valorem fee did not affect the court’s reasons for granting the permanent stay because even if the fee was payable, there remained a surplus.  On this basis, Leader First applied for an order of permanent stay, submitting that this need not await the hearing of the 1^st Summons.

23.The Official Receiver responded by letter to the court the next day, submitting that compliance with the conditions in §2 of the Conditional Stay Order depended on the outcome of the 1^st Summons and that pending the disposal of that summons, the conditions had not yet been complied with, and that a permanent stay order would be premature.

24.By the court’s letter dated 4 February 2021, the parties were informed that the Judge had made an order for stay, which, as subsequently drawn up, read as follows (“Permanent Stay Order”):

“ AND UPON reading the letter of the Solicitors for Leader First Limited (the ‘Applicant’) dated 2 February 2021, and the letter from the Official Receiver’s Office dated 3 February 2021

IT IS ORDERED that:-

1. The Applicant has complied with the conditions stated in paragraph 2(1) to (3) of the Order dated 12 November 2020;

2. The winding up of the Company pursuant to the Order of the Honourable Mr. Justice Harris dated 9 January 2017 to wind up the Company be stayed permanently, and the Official Receiver as the Provisional Liquidator of the Company be released as provisional liquidator;

3. There be no order as to costs of this application.”

25.On 3 March 2021, the Official Receiver lodged an appeal (CACV 82/2021) against this order.  We shall refer to this as the “first appeal”.

26.On 27 April 2021, the Official Receiver, out of caution, issued a further summons in the winding up proceedings (“2^nd Summons”), seeking the following relief:

“1. Notwithstanding the terms of the Order made by the Honourable Madam Justice Linda Chan on 12th November 2020 (granting conditional permanent stay) and the Order made by the Honourable Madam Justice Linda Chan on 4th February 2021 (recording compliance with conditions for permanent stay), ad valorem fees (“AV fees'”) imposed under Section 296 Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32): Sections 6 to 7 and Item I of Table B of Schedule 3 of the Companies (Fees and Percentages) Order (Cap 32C) in the amount of HK$2,076,030 became due and payable on realisations of HK$124,102,769.90 made in 2017 in this liquidation, as set out in the attached schedule;

2. The above mentioned Orders are unaffected by the AV Fees, which equate to and are to be met by the funds in the amount of HK$2,076,030 retained and presently held by the Official Receiver”

27.The 1^st and 2^nd Summonses came before the Judge for hearing on 4 May 2021.  By her Decision handed down on 29 June 2021,[14] the Judge dismissed both summonses with indemnity costs for TEAL and Leader First.  The Official Receiver duly lodged another appeal against this order (CACV 367/2021).  We shall refer to this as the “second appeal”.

The Judge’s reasons

28.The Judge’s reasons for dismissing the 1^st and 2^nd Summonses as expressed in her Decision of 29 June 2021 may be summarised as follows:

(1)  In determining the stay application, one of the issues the court had to consider was the solvency of the Company.  Leader First and TEAL relied upon the information supplied by the Official Receiver, and on that basis the court concluded the Company was solvent and had a surplus after discharging its liabilities.  The amount of expenses payable to the Official Receiver formed part of the factual foundation.  The Official Receiver is barred by issue estoppel from re-litigating the issue of her fees.  In so far as necessary, it was also considered that the matter was res judicata since the Conditional Stay Order determined the amount of fees payable to the Official Receiver.[15]

(2)  It was an abuse of process for the Official Receiver to raise in the 1^st and 2^nd Summonses the issue of ad valorem fees when that issue could and should have been raised in the stay application.  The Official Receiver was seeking not merely recognition of what was imposed by the CFPO, but an order to allow her to pay the ad valorem fee out of the funds in the liquidation account.  Had the Official Receiver raised the issue in the stay application, it was possible the parties would have challenged the fee as being grossly excessive.  It would be unfair and oppressive to the other parties, in particular TEAL, to be vexed again on that question.  It would also be unfair to other court users to reopen the issue as it would take up additional court time.  It would moreover set an undesirable precedent.[16]

(3)  Once the Conditional Stay Order was sealed on 4 December 2020, the court was functus officio and no longer had jurisdiction to review the amount payable to the Official Receiver.[17]

(4)  The court had no jurisdiction to entertain the 2^nd Summons, which was issued after the Permanent Stay Order, and therefore after the winding up proceedings had come to an end and the Official Receiver had been released as provisional liquidator: see Re Conso Electronics (Far East) Ltd [1996] 1 HKLR 1, 6F-G.[18]

Statutory framework for the payment of fees and expenses

29.Before dealing with the parties’ contentions on the appeals, it is convenient to set out the relevant statutory provisions.

30.Section 296 of the Ordinance is headed “General rules and fees”.  Subsections (2) to (8) provide:

“ (2) All rules and orders made under this section shall be judicially noticed, and shall have effect as if enacted by this Ordinance.

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

(3A) ……

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

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

(6) Rules or orders made under this section may authorize the court to fix any fee or to vary the amount of any fee otherwise prescribed.

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

(8) Fees required to be paid under rules or orders made under this section shall be recoverable as debt.”

31.The CFPO, made under section 296, provides as follows:

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

7.      (1) The fees and percentages prescribed in Schedule 3 shall be taken in money.

(2) The percentages prescribed in number I of Table B of Schedule 3 shall be paid by a liquidator upon submission of his accounts to the Official Receiver under section 203, or where the Official Receiver is acting as liquidator, before he is released under section 205.

(3) …

8. Wherever practicable the money shall be paid in respect of every fee before the proceeding is had in respect of which the fee is payable.

9. Where the head office of the company being wound up is situate in Hong Kong, and the liquidation takes place partly in Hong Kong and partly elsewhere, or where the court has sanctioned a reconstruction of the company or a scheme of arrangement of its affairs, or where for any other reason the Official Receiver satisfies the court that the fees or percentages in Table B in Schedule 3 would be excessive, such reduction may be made in the said fees or percentages as may, on the application of the Official Receiver, be sanctioned by the court.”

32.Table B of Schedule 3 to the CFPO contains nine items as follows:

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

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

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

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

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

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

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

II. Where the Official Receiver acts as provisional liquidator only—

(a) Where no winding-up order is made upon the petition, or where a winding-up order is rescinded, or all further proceedings are stayed prior to the summoning of the statutory meetings of creditors and contributories; or

(b) Where a winding-up order is made but the Official Receiver is not continued as liquidator after the statutory meetings of creditors and contributories,

such amount as the court, on the application of the Official Receiver, may consider reasonable to be paid by the petitioner, or by the company, as the court may direct, in respect of the services of the Official Receiver as provisional liquidator.

III. Where the Official Receiver acts as liquidator of the company and a special manager is appointed (to include the Official Receiver’s services as provisional liquidator)—

such amount as the court, on the application of the Official Receiver, may consider reasonable.

IV. In all other cases where the Official Receiver acts as liquidator of the company (to include his services as provisional liquidator)—

(1) In respect of every 10 members, creditors and debtors, and every fraction of 10 .....................$620

(This fee is to include cost of official stationery, printing, books, forms and postages in Hong Kong).

(2) On every payment made into the Companies Liquidation Account under section 202 ..........$170

The payment referred to in this paragraph does not include any of the following—

(a) where the Official Receiver collects, calls or realizes property for debenture holders—the total assets, including the produce of calls on contributories, realized or brought to credit by the Official Receiver;

(b) money received in carrying on the business of the company.

(3) On the amount distributed in dividend or paid to contributories, preferential creditors, and debenture holders by the Official Receiver, 5%.

V. Where the Official Receiver collects, calls or realizes property for debenture holders, the following fees are to be paid out of the proceeds of the calls or property—

(1) On the total assets, including the produce of calls on contributories, realized or brought to credit by the Official Receiver, after deducting the amount spent out of the money received in carrying on the business of the company, 10%.

(2) The same fee as under number IV(3) of this Table.

VI. Where the Official Receiver realizes property for secured creditors other than debenture holders, the following fee is to be paid out of the proceeds of the property—

On the total assets, including the produce of calls on contributories, realized or brought to credit by the Official Receiver, after deducting the amount spent out of the money received in carrying on the business of the company, 10%.

VII. Where the Official Receiver performs any special duties not provided for under the foregoing numbers in these Tables—

such amount as the court, on the application of the Official Receiver, may consider reasonable.

VIII. Travelling, keeping possession, law costs, and other reasonable expenses of the Official Receiver—the amount disbursed.

IX. Notwithstanding the fees and percentages prescribed in number I and numbers III to VII of this Table, where the Official Receiver acts as liquidator of the company, the total fees under those numbers shall not be less than $11,250.”

The contentions on the appeals

33.Although the first appeal is lodged against the Permanent Stay Order, the Official Receiver does not attack the stay as such but merely seeks an order that irrespective of the order for permanent stay and her release as provisional liquidator, the 1^st Summons and the ad valorem fee issue be permitted to proceed to a substantive determination.  As Mr Jeremy Bartlett SC puts it on behalf of the Official Receiver, the first appeal was filed as a precautionary measure to ensure that the Permanent Stay Order does not shut out the Official Receiver from being heard on the issue of ad valorem fee. 

34.In the second appeal, the Official Receiver seeks an order in terms of either the 1^st Summons or the 2^nd Summons.  The principal arguments advanced in support of the second appeal may be summarised as follows:

(1)  The Judge erred in treating the 1^st and 2^nd Summonses as dependent on the court’s permission or approval to impose or collect the ad valorem fee.  The imposition of ad valorem fees occurs automatically pursuant to the statutory scheme at the time realisations are made.  Their collection by the Official Receiver is a mandatory statutory duty requiring no approval from the court.  This is an “overarching point” which affects each of the other grounds.

(2)  The Judge erred in holding the ad valorem fee issue was res judicata because there was no mention or any determination of ad valorem fee in the hearing on 12 November 2020.  The finding on solvency did not involve any determination on ad valorem fee and is not being challenged as the Company is solvent with or without the imposition of the ad valorem fee.

(3)  In holding that the 1^st and 2^nd Summonses should be dismissed as an abuse of process, the Judge failed to have regard to the overarching point and the fact that the ad valorem fee issue was raised on 25 November 2020 before the Conditional Stay Order was sealed and not in subsequent proceedings.  The Judge was wrong to treat the normal collection of the ad valorem fee as a prejudice to TEAL, and failed to appreciate that the non-collection of the fee would contravene the statutory scheme, prejudice the Official Receiver and the public purse, and result in a windfall for TEAL.  The Judge erred in relying on the possibility, which no one had raised, that TEAL could have challenged the Official Receiver’s decision not to apply for reduction of the ad valorem fee.  The Judge failed to have regard to the fact that the Company’s solvency was unaffected by the ad valorem fee, that TEAL had urged the Official Receiver to make the relevant realisations and the parties had previously expected the imposition of the ad valorem fee.  In considering there was unfairness to other court users in taking up further court time, the Judge failed to appreciate that the imposition of the ad valorem fee was a simple matter.  The administration of justice is as likely or more likely to be brought into disrepute by not engaging with the issue of ad valorem fee than by engaging with it.

(4)  The Judge was not functus officio against the background that the Official Receiver had raised the ad valorem fee issue by letter on 25 November 2020 and on 3 December 2020 the Judge had directed that any application on the ad valorem fee should be made by formal application, which the Official Receiver did by the 1^st Summons.  The Judge subsequently gave directions for determining the 1^st Summons with the parties’ consent.  The functus principle can accommodate an exception in the public interest in imposing ad valorem fees.

(5)  The Judge erred in holding there was no jurisdiction to entertain the 2^nd Summons.  The 2^nd Summons did not introduce any additional issue or evidence but offered an alternative formulation of the relief sought.  The Official Receiver has a right of access to the court as its officer and a statutory role in overseeing the collection of ad valorem fees.  Re Conso Electronics does not preclude entertaining the 2^nd Summons since the Official Receiver retained standing by reason of her statutory roles.  A permanent stay does not mean nothing further can be done post-stay.

35.For his part, Mr Samuel Chan, appearing on behalf of TEAL, supports the Judge’s reasons.  TEAL has in addition filed a respondent’s notice, contending that in the event that the Official Receiver is allowed to pursue either summons, the Judge’s decision should be varied to the extent that the amount of the ad valorem fee should be $64,443.50 instead of $2,076,400.  It is submitted that where the Official Receiver has acted as provisional liquidator only, her fees are governed by Item II, rather than Item I, of Table B.  Item II is not automatic but requires the determination of the court.  The proper amount to be allowed under Item II in this case is $64,443.50, the amount allowed by the Judge.

Discussion

Whether the ad valorem fee is payable

36.We deal first with the point raised by the respondent’s notice.  The ad valorem fee is payable on the amount of assets realized and brought to credit “by a liquidator (including the Official Receiver when he is acting as liquidator)”.  Although Item I refers to “liquidator”, section 2(1) of the Ordinance, which sets out the definitions of various terms, provides that unless the context otherwise requires, “liquidator” includes “a provisional liquidator holding such office by virtue of section 194(1)(a) or (aa) or (1A)”.  It is not in dispute that section 2(1) applies for the purposes of interpreting the CFPO, which is a piece of subsidiary legislation made under the Ordinance: see section 31(1) of the Interpretation and General Clauses Ordinance (Cap 1).

37.The question of whether Item I applies to assets realised and brought to credit by provisional liquidators arose in Re MF Global Hong Kong Ltd [2015] 2 HKLRD 325.  There insolvency practitioners were appointed provisional liquidators of two companies pursuant to section 193 of the Ordinance, shortly after winding up petitions were presented.  On the making of the winding up orders, they automatically continued to act as provisional liquidators pursuant to section 194(1)(aa).  The liquidations were subsequently ordered to be conducted as if they were creditors’ voluntary winding up pursuant to section 209A of the Ordinance, and the provisional liquidators were, at the same time, appointed liquidators in the voluntary winding up (presumably under section 209A(5)).  A dispute arose as to whether the realisations hitherto made by the provisional liquidators attracted ad valorem fees under Item I of Table B.  It was argued that as the provisional liquidators were initially appointed under section 193 and continued to act as provisional liquidators after the winding up orders pursuant to section 194(1)(aa), they were not provisional liquidators “holding such office by virtue of section 194”,[19] and that therefore liability for the ad valorem fee did not arise.  The Court of Appeal,[20] disapproving the previous decision of the Court of First Instance in Re Lehman Brothers Securities Asia Limited (No 2) [2010] 1 HKLRD 58, rejected that argument.  It held that the definition of “liquidator” in section 2(1) of the Ordinance as including “a provisional liquidator holding such office by virtue of section 194” was apt to cover all three types of provisional liquidators mentioned in section 194(1)(a), (1)(aa) and (1A), and that provisional liquidators appointed under section 193 who continued to act under section 194(1)(aa) did hold their office “by virtue of section 194”.  The court explained that the making of the winding up order marked a fundamental change to the status of a company.  The role of a provisional liquidator appointed under section 193 is to preserve the company’s assets but not actually to realise them, whereas a provisional liquidator who holds office under section 194 can be regarded as being little different in function from the liquidator eventually appointed.  The statutory provisions on ad valorem fees applied to the realisations made by the provisional liquidators of the two companies, including the realisations made prior to the winding up orders, because they were brought to account in the liquidations after the making of the winding up orders.

38.MF Global thus decided specifically that the ad valorem fee under Item I is payable in respect of realisations made by provisional liquidators who were appointed under section 193 and continued to act after the winding up order pursuant to section 194(1)(aa), even where no liquidator had ever been appointed in the compulsory liquidation before it was brought to an end.  The word “liquidator” in the phrase “On the aggregate amount of assets realized and brought to credit by a liquidator” in Item I includes such a provisional liquidator.  The court’s reasoning, however, seems to us to extend, beyond the facts of that case, to a provisional liquidator who holds office by virtue of section 194(1)(a) (i.e. the Official Receiver acting as provisional liquidator) and section 194(1A).  There does not seem to be any material difference between the functions and duties of a “private” provisional liquidator and those of the Official Receiver qua provisional liquidator under section 194.  Barma JA, giving the main judgment with which both Yuen and McWalters JJA agreed, stated that “the language of s 2(1) is apt to include all three types of provisional liquidators mentioned in s 194”;[21] that “there does not seem to be any very clear reason to distinguish between the position of the three types of provisional liquidators identified in s 194”;[22] and “all three types of post-winding up provisional liquidators should be treated as being essentially similar in nature, and so subject to the same treatment under the [Ordinance]”.[23]

39.In the present case, the Official Receiver became the provisional liquidator of the Company, upon the winding up order, pursuant to section 194(1)(a).  Applying MF Global, the Judge stated that for the purpose of the CFPO, “liquidator” includes a provisional liquidator.[24]  She considered that but for the Official Receiver’s omission to raise the matter, the ad valorem fee would be payable. 

40.Mr Chan challenges the Judge’s holding.  He submits that MF Global was a case where the provisional liquidators were private practitioners, and is distinguishable from the present case where the provisional liquidator was the Official Receiver.  He submits that Table B may be divided into three categories: where the Official Receiver acts as liquidator (Items I, III and IV); where the Official Receiver acts as provisional liquidator only (Item II); and where the Official Receiver performs special duties (Items V, VI and VII).  Item I has its origin as an audit fee, and presupposes the preparation of a liquidator’s accounts either by a private liquidator or by the Official Receiver for her release as liquidator under section 205.  Item II is the category applicable where the Official Receiver acts as provisional liquidator only and, here, Item II(b) is applicable.  The fee under Item II is such amount as the court may consider reasonable.  The definition in section 2(1) of the Ordinance applies “unless the context otherwise requires”, as recognised in MF Global at §22.  Construing Item I in its proper context, it does not apply where the Official Receiver has acted as provisional liquidator only.  Within Item I, the word “liquidator” in the phrase “On the aggregate amount of assets realized and brought to credit by a liquidator” includes a provisional liquidator acting under section 194, but the word “liquidator” in the following phrase “including the Official Receiver when he is acting as liquidator” excludes such a provisional liquidator.

41.We are, with respect, unable to accept this argument.  As explained above, while MF Global was a case involving private practitioners as provisional liquidators, the court’s reasoning there is not confined by that feature and extends to a case where the Official Receiver acts as provisional liquidator under section 194(1)(a).  It would in our view be anomalous if realisations made by a private provisional liquidator attract ad valorem fees whereas realisations made by the Official Receiver as provisional liquidator do not.  It would be a contorted reading of Item I to construe it to cover liquidators, including the Official Receiver, as well as post-winding up provisional liquidators but excluding the Official Receiver.  We can find no support for that construction either from the language or the purpose of the provisions.

42.It is true that Item II specifically deals with the situation where the Official Receiver acts as provisional liquidator only, but Item II is an amount considered reasonable “in respect of the services of the Official Receiver as provisional liquidator”.  This may be compared to the corresponding Items III and IV, which appear to cover the services of the Official Receiver acting as liquidator (specifically including the Official Receiver’s services as provisional liquidator).

43.Item II is not mutually exclusive with Item I, which, as is common ground, is not intended to remunerate the Official Receiver specifically for work done as liquidator or provisional liquidator but rather as a levy to support the services provided by the Official Receiver’s Office generally to the administration of liquidations in Hong Kong: Re STX Pan Ocean (Hong Kong) Co Ltd (in liq) (No 2) [2018] 4 HKLRD 826, §28.  There is no reason in principle or policy to confine Item I to the situation where there is a liquidator (being either private practitioners or the Official Receiver) or where there is a post-winding up provisional liquidator who is a private practitioner, to the exclusion of the situation where the Official Receiver is the post-winding up provisional liquidator.

44.Mr Chan relies in addition on Item IX, which prescribes a minimum aggregate fee with reference to Items I and III to VII where the Official Receiver acts as liquidator, but in our view it does not assist him.  Assuming that it shows that the legislature has not prescribed a minimum fee where the Official Receiver acts as the provisional liquidator only, it gives no indication whether Item I is applicable in that situation.

45.The history of Item I may be seen from Re STX Pan Ocean at §§17-19.  It may be that historically Item I was connected to the audit of accounts.  But the reform in 1987 replaced the audit fees by a new scale of ad valorem fees based on the Insolvency Fees Order 1986 of the UK and made the Official Receiver’s audit of liquidators’ accounts discretionary rather than mandatory.[25] Moreover subsections (4) – (8) were added to section 296 of the Ordinance which, inter alia, expressly authorise fixing fees by reference to a scale and provide that the amount of fees shall not be limited by reference to the amount of administrative or other costs incurred or likely to be incurred by the Official Receiver.  The legislative history in our view provides no basis for limiting the present charge to a situation where liquidators’ accounts have to be or have been prepared. 

46.Mr Chan also prays in aid paragraph 7(2) of the CFPO in support of his construction but it seems to us that that paragraph is concerned with the timing of the payment rather than whether the ad valorem fee is payable at all.  Although under paragraph 7(2) of the CFPO the ad valorem fee is to be paid upon the submission of a liquidator’s accounts to the Official Receiver, or where the Official Receiver is the liquidator, before she is released under section 205 of the Ordinance, it has been held that the liability accrued earlier, as soon as the assets were realised: Re Starbay International Ltd [2012] 1 HKLRD 508.  There the question arose whether realisations made by compulsory liquidators prior to the conversion of the winding up into a voluntary liquidation pursuant to section 209A of the Ordinance gave rise to ad valorem fees under Item I of Table B. Recorder Ambrose Ho SC held that the liability for ad valorem fees arose as soon as the assets were realised, and not only upon submission of the liquidators’ accounts under section 203 as mentioned in paragraph 7(2) of the CFPO.  Accordingly, the ad valorem fees on pre-conversion realisations had in that case become “due and payable” within the meaning of section 209B(d) of the Ordinance and must be paid forthwith out of the assets of the company.  TEAL has not submitted that Starbay was wrongly decided.  It may further be noted that where the Official Receiver acts as liquidator, paragraph 7(2) simply provides that the ad valorem fee is to be paid before she is released under section 205, without specifying exactly when.

47.On this basis it seems to us Mr Bartlett is correct in submitting that the imposition of the ad valorem fee, at least as a contingent liability, occurs when the relevant realisations are made.  The precise quantum of the fee depends on the aggregate amount of realisations brought to credit after the deductions specified in Item I, and may therefore be ascertainable only at a later stage.  Paragraph 7(2) of the CFPO does not have the effect of confining the ad valorem fee to a case where there are accounts submitted by a liquidator or where the Official Receiver is released as liquidator under section 205.  It does not lend support to TEAL’s contention that the ad valorem fee is not chargeable where the Official Receiver acted as provisional liquidator under section 194(1)(a) without ever becoming the liquidator.

48.Section 2(1) prima facie means that Item I applies to the assets realized and brought to credit by a liquidator including a provisional liquidator holding such office by virtue of section 194(1)(a) or (aa) or (1A), and this includes the Official Receiver when he is acting as liquidator or such provisional liquidator.  In our view, there is nothing in the context that suggests, still less requires, the contrary interpretation advanced by TEAL.  The contention in the respondent’s notice is therefore rejected.

Whether the Official Receiver should be permitted to reopen the matter

49.It is regrettable that the ad valorem fee of $2,076,400 was not brought to the attention of the court and the parties prior to the hearing of the stay application and that, instead, the Official Receiver misled them into thinking that her fees amounted only to $64,443.50.  The omission was, as the Official Receiver has admitted, inexcusable, and the Judge was understandably indignant and critical.  But the mandatory and automatic nature of the ad valorem fee has to be taken into consideration in the exercise of the court’s powers.  The liability for the fee which is created and fixed by law binds TEAL and Leader First and, indeed, the court, as much as the Official Receiver.

50.Section 296(2) of the Ordinance stipulates that the rules and orders made under that section – and they include the CFPO – “shall be judicially noticed” and have effect as if enacted by the Ordinance.  Section 296(3), authorising the charge, provides: “There shall be paid … such fees as the Chief Justice may … by order direct …”  Paragraph 6 of the CFPO provides that the fees and percentages set out in Schedule 3 “shall be taken in the office of the Official Receiver”, thereby imposing a duty on the Official Receiver to collect them.  Paragraph 7(1) specifies that the fees and percentages shall be taken in money, and paragraph 7(2) prescribes the time or latest time of payment.  By section 296(8) of the Ordinance, the fees required to be paid are recoverable as debt.

51.Item I of Table B is a fixed scale, allowing for no discretion on the part of the Official Receiver and requiring no determination by the court.  Paragraph 9 of the CFPO confers power on the court, on the application of the Official Receiver, to sanction a reduction of the fees or percentages in Table B where they would be excessive.  But neither the Official Receiver nor the court has on its own the power to waive or reduce the amount of the prescribed fees: see Re Suen Kin Ning [2011] 1 HKLRD 982 at §§25 & 30 in the context of the equivalent scale fees in bankruptcy. As we understand his submissions, Mr Chan does not dispute that the ad valorem fees are charged by law automatically and that the Official Receiver has a statutory duty to collect them. 

52.In the present case, when the Official Receiver eventually raised the matter of the ad valorem fee by letter of 25 November 2020, it was late, but not so late as to be beyond any remedy.  Before an order is sealed there is undoubtedly jurisdiction for the court to hear a party and open up the decision for further consideration, though the circumstances in which a court will entertain such an application are very limited indeed: Association of Expatriate Civil Servants of Hong Kong v Secretary for the Civil Service & another (CACV 260/1995, 28 November 1997); Andayani v Chan Oi Ling [2000] 4 HKC 233, 237-238; In re Barrell Enterprises [1973] 1 WLR 19; Sun Jianqiang v Trans-Island Limousine Service Ltd (CACV 20/2003, 17 November 2003), §§23-33.

53.The Conditional Stay Order was subsequently sealed but it is to be noted that whilst it required the Official Receiver to pay the “Liquidation Expenses” and TEAL’s debt and untaxed costs out of the funds held by her as provisional liquidator, and thereafter to pay the surplus to TEAL, it did not specify what the Liquidation Expenses comprised or its amount.  It is true that at the time of the hearing and the decision given orally by the Judge, everyone thought that the amount was $64,443.50, but this was not spelt out in the order.  By the time the order was sealed on 4 December 2020, the question of the ad valorem fee had been raised by the Official Receiver; TEAL had asked for an opportunity to be heard; and the Judge had stated that if the Official Receiver had any application to make, a formal application should be made.  The Judge directed that the order be sealed forthwith “so as not to delay the permanent stay”, and not for the purpose of depriving the court itself of jurisdiction to deal with an expected application by the Official Receiver.  Viewed objectively, the meaning of the order and in particular the precise amount of the Liquidation Expenses depended on the resolution of that outstanding question.  An application to resolve it was anticipated, and the order expressly gave “liberty to apply”, which is apt where the working out of the terms of the order involves matters on which it may be necessary to obtain the decision of the court: Cristel v Cristel [1951] 2 KB 725.  The 1^st Summons did not seek to alter the wording of the Conditional Stay Order in any way whatsoever, but to clarify its meaning with respect to the ad valorem fee.  The exceptional jurisdiction to reopen the argument after the decision was preserved.  In our view, the 1^st Summons fell within the jurisdiction of the court below, which was not functus for that purpose.

54.Nor was the 1^st Summons absolutely precluded by res judicata, issue estoppel or the abuse of process doctrine under the Henderson v Henderson[26] line of cases.  These principles are not apt to deal with the real question here, which is whether or not the Official Receiver should in the court’s discretion be allowed, by way of the 1^st Summons, effectively to re-open the matter of her fees and expenses after the hearing of the stay application.  The Judge, taking the view that the Official Receiver was precluded as a matter of law from doing so, did not consider the question, which entitles this court to exercise our own discretion. 

55.Plainly a party should not be lightly permitted to reopen the argument after the hearing and, a fortiori, after a decision has been given.  The quantum of the Official Receiver’s fees and expenses was a relevant matter for the court in deciding the stay application. It should have been accurately presented to the court.  Had the question of the ad valorem fee been raised before the hearing, there would have been argument such as that subsequently raised and the Judge would have ruled on it.  In the circumstances that unfolded the Judge was rightly concerned with the very important public interest in the finality of litigation and the potential prejudice to the other parties from being vexed by further argument.

56.We are satisfied, however, that there are good grounds for entertaining the 1^st Summons in the exceptional circumstances of this case.  The first and by far the most important point is that, as explained above, the ad valorem fee is payable on the assets realised and brought to credit by the Official Receiver acting as provisional liquidator of the Company.  It is imposed by law in an amount fixed by the law.  Its payment is mandatory and the Official Receiver has a statutory duty to collect it.  Neither the court nor the Official Receiver has any power to waive it, outside the mechanism for reduction in paragraph 9 of the CFPO which has never been invoked in this case.  It would be an error of law for the court to order the Official Receiver not to charge the fee in this case.

57.Secondly, the assets of the Company were sufficient to meet the Company’s liabilities, the Official Receiver’s time costs and the ad valorem fee, still leaving a surplus for TEAL, so that the Judge’s reasoning in favour of the permanent stay would not be fundamentally affected by the ad valorem fee.  TEAL has not cross-appealed against the order for stay on the ground that, if the ad valorem fee was payable, no stay should have been granted; nor has TEAL challenged the Judge’s reasoning that so long as it was paid the surplus, it would not be prejudiced by the stay.  Neither has TEAL mounted any challenge in any form against the Official Receiver’s decision not to apply for a reduction of the ad valorem fee in this case.

58.Providing for payment of a statutory liability out of the Company’s funds cannot be said to be a real prejudice to TEAL.  It may be noted that TEAL was the petitioner who set in motion the machinery for the compulsory winding up of the Company, the natural and ordinary consequence of which was that the ad valorem fee would be payable on the assets realised and brought to credit.  On the contrary, requiring the Official Receiver to hand over the funds to TEAL without withholding the amount of the ad valorem fee would give TEAL a “windfall” at the expense of the public purse – money to which it had no entitlement and which it could have no legitimate expectation to receive.

59.The prejudice caused to the parties in having to incur additional costs to deal with the ad valorem fee issue belatedly raised can be met by an appropriate costs order against the Official Receiver, who had from the outset acknowledged liability for wasted costs.  It is also relevant to note that the Official Receiver discovered her omission relatively soon after the hearing, that the 1^st Summons was issued not long thereafter, that the argument on the ad valorem fee fell within a narrow compass and would not require lengthy court time, and that it did not fundamentally alter or undermine the arguments raised at the hearing or the decision to grant the stay.

60.For these reasons we consider that the Official Receiver should be permitted to pursue the 1^st Summons and raise the matter of the ad valorem fee belatedly.  The Conditional Stay Order should be so construed that the “Liquidation Expenses” to be paid out of the funds held by the Official Receiver included the ad valorem fee.

Disposition and costs

61.There was no suggestion that the 1^st Summons was precluded by the Permanent Stay Order.  Accordingly, it was unnecessary to deal with the first appeal, on which we made no order. 

62.For the reasons above, we allowed the second appeal.  Pursuant to the 1^st Summons, we made a declaration that the Liquidation Expenses as stated in the Conditional Stay Order do include the ad valorem fee, and made an order that the payment to TEAL of the surplus calculated on that basis shall be regarded as compliance with the requirement on the Official Receiver under §2(3) of the Conditional Stay Order.  It was unnecessary to make any order under the 2^nd Summons which was sought in the alternative.

63.The Judge ordered the Official Receiver to pay TEAL’s costs of the 1^st and 2^nd Summonses on the indemnity basis.  The Official Receiver does not seek to disturb the basis of taxation but contends that she should only be required to pay 50% of those costs, for the reason that TEAL had advanced an argument that the ad valorem fee was not payable, which was not accepted by the Judge or by this court.  We do not agree. The additional hearing before the Judge was necessitated wholly by the Official Receiver’s omission.  TEAL cannot be said to be acting improperly or unreasonably in raising a legal argument against the summonses.  In all the circumstances we shall not disturb the costs order below.

64.Given that TEAL has actively contested the second appeal, it seems to us that costs of the appeal should follow the event.  Accordingly, there will be an order that TEAL do pay the Official Receiver the costs of the second appeal, to be taxed if not agreed.

(Susan Kwan) Vice President

(Maria Yuen) Justice of Appeal

(Godfrey Lam) Justice of Appeal

Mr Samuel K Y Chan, instructed by Messrs. Fred Kan & Co., for the Petitioner (Respondent)

Mr Jeremy Bartlett SC, instructed by the Official Receiver (Appellant)