Re Kansa General International Insurance Co. Ltd. (in Compulsory Liquidation)

CACV000087/1999

CACV 87/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 87 OF 1999

(ON APPEAL FROM HCMP 2159 & 4691 OF 1998)

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Coram: Hon Nazareth V-P, Mortimer V-P and Suffiad J in Court

Date of Hearing: 20 July 1999

Date of Judgment: 30 July 1999

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J U D G M E N T

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Mortimer V-P:

1. This is an appeal by the joint liquidators of Kansa General International Insurance Company Limited (Kansa HK) which is in compulsory liquidation against Le Pichon J's order which provided that the liquidators' costs in a Scheme of Arrangement should be taxed by the court.

The background

2. Kansa HK is the Hong Kong branch of a group of Finnish companies. It is an insurance company authorised to undertake certain classes of general insurance. Kansa HK commenced underwriting in Hong Kong in 1979. Its immediate parent experienced financial difficulties during the 1980s so that restrictions were placed on Kansa HK's business in 1987. The main Finnish company was declared bankrupt after financial difficulties in December 1994. Consequently the Commissioner for Insurance petitioned to wind up Kansa HK on 10 July 1990 and a winding-up order was made on 13 September 1995.

3. On 19 January 1996 the court appointed one of the joint liquidators following his nomination at a meeting of creditors on 13 November 1995. At a further meeting on 27 March 1998 the other liquidator was nominated and sanctioned by the court on 10 June 1998.

4. Later, the liquidators petitioned the court to sanction a Scheme of Arrangement under s.166 of the Companies Ordinance (Cap. 32) between Kansa HK and two ranks of scheme creditors (a) direct insurance preferential creditors and (b) re-insurance preferential creditors.

5. On 15 July 1998 the judge made directions for meetings, advertisements and other preliminaries leading to the application for approval of the Scheme which came before the court on 6 November 1998.

The order approving the Scheme

6. The judge sanctioned the Scheme of Arrangement subject to certain modifications and conditions. The main part of her order is as follows:

"AND UPON the Court ordering the Scheme Costs of the Liquidators and the legal fees of Clifford Chance be taxed

AND UPON the Liquidators and Clifford Chance undertaking:

1. to submit to taxation the costs including all disbursements of the liquidators and of and incidental to the Scheme of Arrangement;

2. to repay to the estate any amount received which it is subsequently determined as a result of the said taxation process is in excess of the approved costs and disbursements received to date by the Liquidators and Clifford Chance

PROVIDED THAT there be liberty to apply for the Liquidators and Clifford Chance to vary the above order for taxation and to be released from such undertakings

THE COURT HEREBY SANCTIONS the Scheme of Arrangement set forth in the Schedule to the said Petition subject to the modifications approved by this Court which Scheme as so modified and sanctioned is set forth in the Schedule hereto."

The issues

7. There are three issues for our determination:

(1) Whether, in the circumstances of this application, the judge had jurisdiction to make the order that the liquidators' fees and disbursements (including their solicitors' fees) should be taxed.

(2) If so, whether there was any sound basis upon which the judge exercising her discretion ought to have made the order.

(3) In any event, whether before making her order the judge ought to have given the liquidators a further right to be heard upon it?

The first issue

8. Mr John Scott SC who appears for the liquidators submits that as the Committee of Inspection had agreed to the liquidators' and the lawyers' remuneration and the Official Receiver had not objected, that is an end of the matter. In these circumstances the judge had no power to order that the fees be taxed. The submission is simple and depends upon the terms of s.196(2)(b) of the Companies Ordinance which provides:

"(2) Where a person other than the Official Receiver is appointed liquidator, he shall receive such remuneration by way of percentage or otherwise as is determined-

(a) where there is a committee of inspection, by agreement between the liquidator and the committee of inspection; or

(b) where there is no committee of inspection or the liquidator and the committee of inspection fail to agree, by the courts and if two or more persons are appointed liquidators, their remuneration shall be distributed among them in such proportions as may be determined by the committee of inspection or the court, as the case may be."

9. Mr Scott also points to sub-section 2A which provides for the Official Receiver to apply to the court if he is of the opinion that the method or level of remuneration agreed by the Committee of Inspection for any reason ought to be reviewed. This section provides:

"(2A) If the Official Receiver is of the opinion that the remuneration of a liquidator as determined under subsection (2)(a) should be reviewed the Official Receiver may apply to the court, and the court may make an order confirming, increasing or reducing the remuneration of the liquidator."

10. Finally, he makes reference to rule 179 of the Companies (Winding-Up) Rules of which only sub-section 2 is in point. This provides:

"(2) No payments in respect of bills or charges of solicitors, managers, accountants, auctioneers, brokers, or other persons, other than payments for costs and expenses incurred and sanctioned under rule 43, and payments of bills which have been taxed and allowed under orders made for the taxation thereof, shall be allowed out of the assets of the company without proof that the same have been considered and allowed by the Registrar. The taxing officer shall satisfy himself before passing such bills or charges that the employment of the solicitor or other person in respect of the matters mentioned in the bills or charges has been duly sanctioned:

..."

11. Mr Scott contends that these provisions provide a complete scheme for agreeing, allowing and in certain cases taxing the remuneration and disbursements of liquidators. He therefore submits that as the liquidators' fees were agreed by the Committee of Inspection and the Official Receiver has not taken any steps under s.196(2A) of the Ordinance or any other provision, there is no inherent power or jurisdiction in the court to require further taxation of the fees. Furthermore, he relies upon a passage in the judge's own judgment in Re Peregrine Investment Holdings Limited (No.2) [1998]3 HKC 423 at 426H. When considering the statutory framework for liquidators' remuneration the judge said:

"The committee is at liberty to agree to the basis it considers appropriate having regard to the interests of the general body of creditors. It is only in default of any agreement being reached that, under the provisions of section 196(2), remuneration will fall to be determined by the court."

It is to be noted, however, that in this passage the judge is dealing with fixing the method of remuneration rather than any system for taxation of the fees charged.

12. Mr Glen for the Official Receiver invites the Court's attention not only to s.196(2A) - to which he surprisingly referred as "a little known section" - but also to other provisions relating to the Official Receiver's powers and duties.

13. The first of these is s.203 of the Ordinance which provides for a liquidator to send to the Official Receiver an account of his receipts and payments not less than twice a year together with such vouchers and information as he may require and the power of the Official Receiver to require the production of books and accounts. There are also provisions for the accounts to be audited and provided to creditors and contributories should the Official Receiver so decide.

14. Also, Mr Glen invites the Court's attention to s.204 which requires the Official Receiver to generally supervise liquidators together with appropriate powers to bring the liquidator before the court and examine him should it be necessary. The section provides as follows:

"(1) The Official Receiver shall take cognizance of the conduct of liquidators of companies which are being wound up by the court, and, if a liquidator does not faithfully perform his duties and duly observe all the requirements imposed on him by statute, rules, or otherwise with respect to the performance of his duties, or if any complaint is made to the Official Receiver by any creditor or contributory in regard thereto, the Official Receiver shall inquire into the matter, and take such action thereon as he may think expedient.

(2) The Official Receiver may at any time require any liquidator of a company which is being wound up by the court to answer any inquiry in relation to any winding up in which he is engaged, and may, if he thinks fit, apply to the court to examine him or any other person on oath concerning the winding up.

(3) The Official Receiver may also direct an investigation to be made of the books and vouchers of the liquidator."

15. Additionally, Mr Glen points out the Official Receiver's powers and duties on a taxation of costs of those employed by a liquidator in rule 172 of the Companies (Winding-Up) Rules the final sentence of this rule provides:

"The Official Receiver shall call the attention of the liquidator to any items which, in his opinion, ought to be disallowed or reduced, and may attend or be represented on the taxation."

Rule 172 is one of a number of rules relating to taxation of costs of those employed by the liquidator including the requirement in rule 176 that if in a winding-up by the court such costs, charges and disbursements exceed $3,000 in the aggregate, it is required that they be taxed by the Registrar. Finally, Mr Glen points out that rule 179(2) provides that none of these payments even after taxation shall be allowed out of the assets of the company without further consideration and allowance by the Registrar.

The legislative Scheme

16. In simple terms, the legislative scheme in a winding-up by the court is that once appointed, the level of remuneration of a liquidator is fixed by the Committee of Inspection, failing that by the court. But, throughout the winding-up the liquidator is subject to the supervision of the Official Receiver as an officer of the court.

17. As can be seen in s.196(2A) he may bring the level of remuneration determined by the Committee of Inspection before the court for review. By s.203 the liquidator has to provide to the Official Receiver all his accounts and books for audit if necessary, and by s.204 the Official Receiver must "take cognisance" of all the liquidator's duties and powers, and his exercise of them with the right to bring the liquidator before the court upon any of these matters should he so decide.

18. The winding-up rules provide for the mandatory taxing of the costs of professionals employed by the liquidator and the Official Receiver has the right to attend such taxation. Finally no payments can be made out of the assets of the company unless they have been considered and allowed by the Registrar - in other words, by the court.

19. The court's control through its officers of a winding-up by the court is comprehensive. For present purposes there is no question but that it covers a consideration of whether a liquidator's fees have been necessarily and properly incurred in accordance with the principles in Mirror Group Newspapers plc v Maxwell & others [1989] BCC 234 and Re Peregrine Investment Holdings Ltd (No.1) [1989]3 HKC1.

20. Unfortunately, the Official Receiver often does not undertake these important duties, nor does he exercise the full supervision over liquidators which the Ordinance requires. I have in mind particularly his duties under s.196(2A) and s.204 of the Ordinance, and rule 172 of the Winding-up Rules. The reason appears to be a lack of resources which has led to a practice of not fully undertaking these necessary functions. (For the position on provisional liquidators, see Peregrine Investments Holdings Ltd and ors CACV 39, 40 and 41 of 1999, unreported.)

21. Clearly this is a matter which causes concern. The court's supervision over company winding-up cannot be effective unless its officers fully perform their duties. It appears from Mr Glen's submission that the Official Receiver from time to time will question fees when the accounts are submitted to him under s.203 but this is a very different procedure from that envisaged of bringing the matter before the court for its determination.

22. The court supervision of company winding-up in most cases wholly depends upon the Official Receiver fulfilling his duties and exercising his powers under the Ordinance. In any event, however, if the court itself wishes to questiion any aspect of a winding-up, it cannot be left powerless. If the court becomes concerned about the level of liquidator's fees or any other matter in a liquidation, the normal order will be addressed to the Official Receiver to fulfil his duties. But, this cannot be the only means whereby a court can supervise its own winding-up. For example, where it questions the level of fees claimed or paid in circumstances such as in the present case, I have little difficulty in holding that the court has the jurisdiction to require the liquidator to submit to taxation. For these purposes, the liquidator is an officer of the court. It also follows that the court may ask for an undertaking to the same effect.

The Scheme of Arrangement

23. However, having set out the background it is not necessary for the purposes of this appeal to decide whether or not the judge had the necessary jurisdiction to make the orders she made outside the sanctioning of a Scheme of Arrangement. When considering this Scheme the judge became concerned about the amount of pre-scheme fees claimed. The reasons are to be found in her judgment. In order to satisfy these concerns and protect the general body of creditors she made it a condition of sanctioning the scheme that the liquidator should undertake to have his fees taxed. Accordingly she made the necessary modification to the Scheme which she approved. There is no doubt that she is entitled to impose conditions before approving a Scheme of Arrangement. It is trite law and counsel did not suggest otherwise. For these reasons I would hold that the judge has jurisdiction to make the order and to vary the Scheme to be sanctioned.

24. Counsel also submits that the order cannot stand because its effect is to require every future fee charged to be taxed. With respect, this is not necessarily so. By the terms of the Scheme this remains under the court's control.

The second and third issues

25. It is convenient to consider the second and third issues together. The real point made by Mr Scott is that if the judge had fully ventilated her concern and the orders she proposed at the hearing, further evidence could have been adduced, further submissions could have been made and there is a chance that she would have not imposed the condition and made the order.

26. The judgment below shows that the judge had an impressive grasp of both the Scheme and all the financial information which had been provided for her at that time. The information she had on the Scheme, the costs, the composition of the Committee of Inspection and the relevant financial statements provided led her to become concerned whether the liquidator's fees of and incidental to the Scheme including the disbursement were necessary and proper and whether they had been considered against the appropriate tests. In these circumstances in order to satisfy her concerns and protect the general body of creditors, she imposed the condition upon the Scheme and asked the liquidators to give the appropriate undertaking.

27. I avoid the nice point whether in these circumstances it is open to the liquidators to appeal having given the undertaking. The reason is that I am satisfied that there are no grounds for the court to interfere with the judge's discretion and remit the Scheme back to her for further consideration. This, I believe, would be the appropriate order if we were inclined to disturb the condition.

28. There is no indication even before the Court of Appeal that the liquidator's claimed fees have been considered against the appropriate tests and it cannot be said to be a hardship upon any professional person to be asked to justified the fees for his work. Furthermore, the order challenged concerns a procedural matter well within the court's supervisory responsibility. As a procedural direction, this Court will not interfere unless the direction is plainly vitiated by error of law or other manifest mistake. See Ashmore v Corporation of Lloyds [1992]1 WLR 446 and Thermawear Ltd v Linton (The Times, October 20, 1995). There is none here.

Conclusion

29. For the reasons I have endeavoured to set out, I would dismiss this appeal.

Suffiad J:

For the reasons given by my Lord Mortimer V-P, I also agree and there is nothing further I wish to add.

Nazareth V-P:

I also agree.

30. I add the following. Mr Scott SC helpfully pursued the several grounds of appeal under three heads.

31. The first of these was jurisdiction. Here, he focused upon certain provisions of the Companies Ordinance, to which Mortimer V-P has referred, in particular s.196(2). It is true that the latter on its face suggests that where there is a committee of inspection, a liquidator other than the Official Receiver shall receive such remuneration as is agreed to by the Committee of Inspection, where there is such a committee. But the matter cannot properly be addressed in the confined context of only that provision. Regard must also be held also to the remainder of the Companies legislation, to other applicable law and here, the factual matrix. Viewed in that larger context, which Mortimer V-P has set out, I am satisfied that the judge did have the jurisdiction to require the undertaking she apparently sought of the liquidators. The scheme that was proposed and submitted for the court's approval itself contained provision for the disbursements and costs incurred by the liquidators to be paid in full out of the cash assets with the agreement of the Committee of Inspection. In that respect, the judge merely secured the undertaking that the costs including all disbursements of the liquidators of and incidental to the Scheme of Arrangement would be submitted to taxation. For my part, I cannot see why the judge was not entitled to make her approval of the Scheme of Arrangement conditional upon a requirement that the disbursements and costs be taxed. I am unable to find in the several provisions referred to by Mr Scott and indeed by Mr Glen for the Official Receiver, a supervisory regime of so conclusive and inflexible a nature as to be totally incompatible with the qualification introduced by the judge. I am therefore unable to accept that the court lacked jurisdiction to make the order and require the undertaking in question. I also reject Mr Scott's submission that as the judge had earlier decided to approve the scheme, she was functus officio by the time she came to require the undertaking. Since the judge had not yet sealed her order, she was still seized of the matter and entitled to introduce the qualification in question.

32. Mr Scott's second head of grounds, relied upon as a backstop to the first head, was that the necessary grounds to found the factual foundation for the exercise of jurisdiction were lacking. I do not find it necessary here to say more than that I agree with Mortimer V-P that that judge had a sufficient, indeed, an impressive grasp of the factual background, including the fact that the Committee of Inspection would comprise professional men and the role the Committee would play.

33. Mr Scott's third head of grounds was concerned with the complaint that the judge failed to allow the liquidators an opportunity to be heard on the order she proposed to make. Notwithstanding Mr Scott's submissions, I am satisfied that the appellants did not suffer any significant prejudice by reason of any such failure. But more to the point, I am not persuaded that after hearing the submissions on both sides in particular those of the liquidators, the judge was yet required, before coming to a firm conclusion as to the form of order she would make, to inform the liquidators of its nature and to hear them upon it.

34. In concluding I would also point out that the judge in making her order did so in the exercise of her discretion. This Court would therefore only be entitled to intervene if she proceeded upon some misdirection of law or fact, or if she was plainly wrong. I am satisfied that she is not wrong and did not so misdirect herself.

35. The appeal is accordingly dismissed.

Representation:

Mr John Scott SC (M/s Clifford Chance) for the Appellant

Mr Jeremy Glen for Official Receiver