Re C.A. Pacific Finance Ltd & C.A. Pacific Securities Ltd
Read the full judgment text of on BabelCite. was delivered on 20 November 2001.
1. In January 1998, petitions were presented for the winding-up of CA Pacific Securities Ltd (CAPS) and CA Pacific Finance Ltd (CAPF). Provisional Liquidators were appointed as a matter of urgency.
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HCCW 36/98, 37/98 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) ACTIONS NO. 36 AND 37 OF 1998 ---------------------------
Coram: Hon. Yuen, J. in Chambers Dates of Hearing: 5 October, 19 October, 20 November 2001 Date of Decision on Distribution: 20 November 2001 Date of Reasons for Decision: 27 November 2001 ------------------------------------ REASONS FOR DECISION ------------------------------------ Background 1.In January 1998, petitions were presented for the winding-up of CA Pacific Securities Ltd (CAPS) and CA Pacific Finance Ltd (CAPF). Provisional Liquidators were appointed as a matter of urgency. 2.In June 1998, the companies were wound-up. In due course, the Provisional Liquidators were appointed Liquidators of the companies. 3.One of the first tasks of the Provisional Liquidators, which they continued as Liquidators, was to determine whether clients of CAPS and CAPF had the title to shares acquired by CAPS through CCASS, a computerised book-entry settlement system where unnumbered share certificates are immobilised and deposited with a central share depositary. 4.In December 1998, I held that notwithstanding the acquisition of the shares through CCASS, the shares belonged to the clients, and not to CAPS. 5.The consequence of that decision is that the shares that have remained are held by the companies in trust for the clients. The present application deals with matters arising in relation to the administration and delivery of the shares. 6.Since I held in December 1998 that the shares belonged to the clients, there have been other proceedings and decisions regarding first, the order of priority in relation to shortfall shares and secondly, the classification of clients arising from the order of priority. Berkeley Applegate order 7.Pursuant to the finding that the shares were held on trust for the clients, in April 1999, I made a Berkeley Applegate order for the proper remuneration of the Liquidators to be paid out of the trust assets ie the shares. This type of order was named after Berkeley Applegate Ltd (No. 2) [1989] 1 Ch 32, where it was first made. 8.In Berkeley Applegate, an investment company, which held funds and mortgage estates on trust for investors under a scheme which provided that no costs whatsoever would be incurred by the investors, went into liquidation. The liquidators' remuneration and expenses greatly exceeded the company's free assets. The liquidators asked that their remuneration and expenses be paid out of the trust assets. 9.Deputy High Court judge Edward Nugee QC granted the liquidators' application. He held that although the liquidators were not in the position of a trustee (the trustee being the company), the Court had been asked to enforce the investors' equitable interests in the funds and mortgage estates. In doing so, it had a discretion to require an allowance to be made for costs incurred and skill and labour expended in the administration of the property. 10.The deputy judge held that since the work done by the liquidators had been of benefit to the trust property and the investors, and would have had to be done by either the investors themselves or by a court-appointed receiver, the court would exercise its inherent jurisdiction to order a proper allowance to be made to the liquidators out of the trust funds to the extent not covered by the company's own free assets. 11.At 50C-D, the deputy judge justified his order on traditional trust grounds by finding that the liquidators' skill and labour had added to the estate in the sense of carrying out work which was necessary before the estate could be realised for the benefit of the investors. 12.In the present case, I made a Berkeley Applegate order as it was clear that but for the intervention of provisional liquidators (and later, liquidators), an orderly presentation of the various issues which have arisen - as to title, order of distribution and (later) classification of clients - and implementation of the decisions made by the Court would not have been possible. The situation in this case had never been encountered previously, and the numbers of clients, and quantities and amounts of shares involved were also substantial. Order for allocation and delivery of shares 13.In December 2000, following proceedings for the determination of the order of priority for shortfall shares, I made an order (amended on 5 October 2001) that each allocation and delivery of shares to a client shall be subject to:-
The "processing fee" 14.The Liquidators have referred to the sums payable under sub-paragraphs (b) and (c) above as a "processing fee". The Liquidators claim that their actual and estimated remuneration and expenses (excluding legal costs) relating to the administration of the shares amount to $95m (including the period of provisional liquidation). This comprises work relating to the following categories:-
15.Actual and estimated legal costs relating to the same categories amount to $23m. The sums of $95m and $23m amount to 13.2% of the value of the share portfolio as at 19 January 1998, the date of liquidation (the Value Date). It is this percentage of the value of each client's portfolio as at the Value Date that the Liquidators propose should be paid as a processing fee as a condition of delivery of shares. 16.These claims need to be examined and assessed. Legal costs can be subject to taxation for which the Court has established procedure and experienced taxing masters. The situation is however different with an examination and assessment of the Liquidators' claim for their own remuneration and expenses. This issue will be addressed below. This application 17.The present application deals with:-
(a) Mode of distribution of the shares 18.The first question posed by the Liquidators for the Court's consideration relates to the way in which the shares are to be distributed. 19.On this aspect, written submissions were sent to the Court shortly before the hearing on 19 October 2001 by solicitors for the Securities and Futures Commission (SFC). The SFC, by reason of subrogation rights arising from its payment of compensation to clients from the Unified Exchange Compensation Fund, has the single largest interest in the distribution. The SFC submitted that all shares be sold and the proceeds distributed. 20.As a result of that, the hearing on 19 October 2001 was adjourned part-heard for further submissions to be made on this and other matters. 21.Three options have been submitted for the Court's consideration. Under Option 1, the Liquidators would sell all clients' shares and distribute the net cash realised to each individual client (i.e. after deducting first, any amount owed by the client and secured by a lien and secondly, the processing fee). This is the SFC's preferred option. It has the advantage of easy (and therefore, less costly) administration, and would mean that a client would not have to pay the processing fee first before receiving the shares. 22.In my view, however, this would be equivalent to a forced sale. A sale of all clients' shares, irrespective of individual clients' wishes, would be an infringement of their proprietary rights in the shares. Each client has his own reason for acquiring a certain stock, varying from pure speculation, to a personal interest in a particular company's long-term growth potential. It cannot be assumed that a stock represents no more than a current monetary value to all clients, although it may be to some. I would therefore have no hesitation in rejecting this option. 23.Under Option 2, the Liquidators would sell a portion of each share allocation to pay the processing fee, before distributing the balance of the shares (less the amount subject to a lien) to the client. This was an option which I advanced at the hearing on 19 October 2001. In their submissions of 14 November 2001 however, the Liquidators informed the Court that there would be added complexity and administration due to the numbers of clients and different lines of stock and allocations, and as such this option was not viable. 24.Under Option 3, as suggested by the SFC and supported by the Official Receiver's Office, each client would have the option of receiving either shares or cash proceeds. However, the Liquidators have indicated that there would only be costs benefits if an individual client's election applied to all his shares. In other words, it would have to be an "all or nothing" option, where the clients would not be able to elect which line of shares to retain and which to sell. It seems unlikely that such an option, lacking in freedom for the clients, would be welcome by them. 25.Having considered the above, it appeared to me that the interests of the clients would be best served by simply distributing the shares to them upon payment of the processing fee, so that each client would have the greatest freedom to decide what to do with his shares. Depending on each client's personal circumstances, he may wish to sell some shares and retain others, and for those shares which he may wish to sell, he would have the freedom to choose for himself a date and price for sale. 26.I realise that there may be some clients who may find it difficult to raise the processing fee at the outset due to a drop in share prices since early January 1998. However, given that option 2 would be more costly to operate, there seems no real alternative. The fact is that the value of their shares has decreased due to general economic forces operating during the time taken to ascertain their entitlements and to implement distribution of the shares. (b) Setting of provisional processing fee 27.The provisional processing fee is based upon the amounts claimed by the Liquidators, amounts which may have to be reduced after taxation (in the case of legal fees) and examination and assessment (in the case of the Liquidators' own remuneration and expenses). Should there be a reduction, the clients should be refunded any sums overpaid. 28.I have considered whether it would be appropriate to require the clients to pay only a part of the provisional processing fee for delivery of the shares, pending the taxation and examination and assessment which may result in a reduction of the charges claimed. 29.However, should the claims be allowed in full (or even substantially) after taxation and examination and assessment, difficulties would arise for the Liquidators to pursue the balance from the thousands of clients to whom shares have been delivered. In the course of time, there may be changes of addresses and other contingencies rendering it difficult for the Liquidators to locate clients. 30.It would therefore appear to be more just and practical for the provisional processing fee to be placed in a separate bank account from which any refund could be claimed by the clients, than to require the Liquidators to run the risk of trying to recover any unpaid balance from clients (numbering in the thousands). The Liquidators will have to make regular reports of receipts and payments from this separate bank account to the Official Receiver and the Committees of Inspection. (c) Examination and assessment of Liquidators' remuneration and expenses 31.In relation to the Liquidators' claims, I have considered the following:-
(i) Examination and assessment ordered 32.First, it is clear that an examination and assessment can be ordered. The Liquidators have not disputed this and have accepted that their remuneration and expenses should be reviewed before payment. As far as the basis in law for such an examination is concerned, since the claim to remuneration and expenses is made by virtue of a Berkeley Applegate order in favour of the Liquidators made in the exercise of the Court's discretion, it must follow that the Court has a right to ensure that its exercise of discretion is not abused by the making of improper, unreasonable or disproportionate claims. 33.Further, it is clear that an examination and assessment should be ordered for the benefit of the clients. The amount of the remuneration and expenses claimed is large, although it must also be recognised that the tasks undertaken in this case were by no means simple. 34.Relationships between the Liquidators and some of the clients have not been good, and at least the more vocal critics among the clients would be highly suspicious of any claims to remuneration and expenses made by the Liquidators. It is therefore important that a fair and independent examination and assessment be undertaken. (ii) By whom the examination and assessment is to be undertaken 35.The second aspect is more problematic. As far as legal costs are concerned, there is existing procedure and expertise for their examination and assessment in the form of taxation by the Court's taxing masters. Taxation can be (and has been) sought by the Liquidators who are in the position of clients vis-a-vis their legal advisers. 36.But the examination and assessment of the Liquidators' own remuneration and expenses, in cases of substantial size and complexity, poses a real problem. Submissions in this regard have been made by the Liquidators, the SFC (as the single largest "client") and the Official Receiver. The Court has also had the opportunity to consider the Ferris Report on liquidators' remuneration. Committee of Inspection 37.The Liquidators have suggested review by the Committees of Inspection. However the Committees have no jurisdiction to assess the Liquidators' remuneration and expenses, because under the statute they are concerned only with the companies' free assets, and not with assets which are held by the companies as trustees. Official Receiver 38.The Official Receiver's Office does have overall supervision over liquidators by virtue of s.204 Companies Ordinance, but the inadequacy of resources available to the Official Receiver is well-known (see Re Peregrine Investments Holdings Ltd [1999] 3 HKLRD 59, 65J-66B, 67H-J). In that case, the Court of Appeal emphasized the important role that the Official Receiver has to play in the supervision of liquidators and urged that more funding should be sought. Unfortunately it would appear that there has been little change. 39.Whilst work is being done by the Official Receiver regarding guidelines on liquidators' remuneration, those guidelines would assist in the area of presentation of claims, and whilst that would of course be helpful, there remains the problem how claims can be examined and assessed by persons able to do so quickly and professionally in a complex, substantial case such as the present. Court - Judges 40.Liquidators' claims for remuneration and expenses in this type of case are supported by voluminous documentation. Judges' time cannot be set aside to read, digest and critically examine and assess the documentation at the expense of other litigants whose cases are waiting to be heard and decided. 41.More importantly there is the question of judges' expertise in undertaking such an exercise. In Re Potter's Oils Ltd [1986] 1 WLR 201, quoted in the Ferris Report (referred to below), Hoffmann J (as he then was) said, at 207:
Law Costs Draftsmen 42.In Peregrine, Le Pichon J (as she then was) ordered the Official Receiver to appoint a law costs draftsman to prepare a report on the remuneration sought by the liquidators in that case. The liquidators appealed. 43.The Court of Appeal unanimously decided that the judge had jurisdiction to make the order she did, and the majority held that there had been no wrongful exercise of discretion in appointing a law costs draftsman. 44.Mayo JA however considered that a law costs draftsman was unlikely to possess sufficient knowledge or experience to enable him to make a judgment as to whether any particular task undertaken by liquidators was necessary or appropriate. 45.In the event, none of the law costs draftsmen approached by the Official Receiver was willing to accept appointment, presumably due to apprehension whether they were professionally qualified for the work required of them. The matter was remitted to the judge, but in the end, no examination or assessment took place after the liquidators reduced their claim. Taxing master 46.In England, the taxing master was asked to assess the receiver-liquidators' remuneration in MGN v Maxwell [1998] BCC 324 but the same difficulties were encountered. I think it would be unfair to ask any taxing master not qualified in accountancy and insolvency practice to examine and assess the Liquidators' claim in the present case, as he would be suffering from the same lack of expertise as the judges. 47.The decision in Maxwell led to the establishment of a Working Party chaired by Ferris J. Their Report published in July 1999 (www.open.gov.uk/lcd/civil/ferris.htm) recommended that the practice of referring the claims to the taxing master should continue, but that in cases of special size or complexity (such as the present case), "new procedures", less cumbersome than the taxation of a solicitors's bill, would have to be devised. 48.The Ferris Working Party was also concerned with the increase in costs that would result from the submission of a substantial bill to the taxation process. A supplemental report is being prepared but has not been published as yet. Sitting with Assessor 49.In the Ferris Report, it was suggested that in substantial cases, the Court could sit with an assessor who has expertise in the relevant field. In Hong Kong, assessors can be appointed pursuant to s.53 High Court Ordinance. This is an option which I raised with the parties, and there does not appear to be any dispute that this would be a sensible option. 50.However, what did cause concern was whether such a person would be available, and the incidence of costs of his appointment, given that such an assessor would probably be an accountant, whether practising or retired from private practice. The incidence of costs is dealt with below. As for the availability of such an individual, approaches to various individuals are being made. 51.As a matter of completeness, I should add that despite the endeavours of the legal advisers who appeared before me, it is not known what is the practice in other jurisdictions for the examination and assessment of liquidators' remuneration in cases like the present. In 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FAC 144, where liquidators had to deal with assets held by a trust company, the Court recognised that appropriate directions would have to be given for the challenge to the liquidators' remuneration by beneficiaries. Unfortunately, it is not known what, if any directions, were subsequently given. 52.In light of the matters set out above, I conclude that the examination and assessment of the Liquidators' claim in the present case should be undertaken by either a taxing master with accountancy and insolvency practice qualifications, or the Court sitting with an assessor with those qualifications under s.53 High Court Ordinance. (iii) Incidence of costs of the examination and assessment 53.The Liquidators have in their submissions dated 16 November 2001 estimated that the direct cost of an external accounting review of their remuneration and expenses to date and for a review of future remuneration and expenses could be in the order of approximately $6m. That appears to be a generous estimate, but to avoid spending any further time in a more accurate estimation, that would have to be adopted. Such costs should be claimed from the trust assets in the first instance. Incorporating this into the provisional processing fee, the percentage to be applied would be 14%. 54.The parties have made submissions on the test to be applied in determining who should bear the costs of the examination and assessment. 55.The Liquidators have submitted that they are in the position of constructive trustees of the shares, so that the incidence of costs should be identical to that in an action taken by beneficiaries against trustees for an account of the administration of the trust estate. In that situation, a trustee would only be liable for the costs of the action if the proceeding is necessary because of the neglect or default of the trustee. Even if the trustee's conduct has been mistaken, provided that the conduct has been honest and correct, the trustee would be entitled to his costs out of the trust estate. 56.I accept the submissions of the SFC that this is not applicable. First, the Liquidators are not trustees. They are the subject of a Berkeley Applegate order, which is predicated upon their not being trustees, as it is the company which is the trustee. 57.Further, in Mirror Group Newspapers plc v Maxwell and others [2000] 2 All ER (D) 706, Ferris J held that the remuneration of court-appointed receivers is not costs, with the result in that case that the examination and assessment of their remuneration (even though by a taxing master) was not a taxation of legal costs for which fees were payable to the Court under the relevant schedule. Although that decision dealt with court-appointed receivers, the rationale of a Berkeley Applegate order is that if the liquidators did not administer the trust property, the Court would have had to appoint receivers. 58.The SFC has submitted that the position is not unlike a solicitor-client taxation of legal costs. In such taxations, the legislature has provided in s.67(5) Legal Practitioners Ordinance that in non-contentious cases, generally the client pays the costs of the taxation, unless the bill is reduced by one-fifth, in which case the solicitor pays for the taxation. 59.An alternative is that a proportion of the costs directly incurred in examining and assessing the disallowed costs be borne by the Liquidators. 60.The SFC has submitted that the Court should adopt either a "specified proportion" approach as in solicitor-client taxation, or the alternative approach which, it submits, is likely to produce a more exact and fairer result. 61.The Official Receiver has submitted that the entire costs of the examination and assessment of the Liquidators' remuneration and expenses should be borne by the trust estate. 62.I take the view that the "specified proportion" approach would be too arbitrary. However, to order that the entirety of the costs of the examination and assessment of the liquidators' remuneration and expenses be borne by the trust estate would be a dangerous precedent which could lead to irresponsibility in the lodging of claims and unfairness. 63.I consider that the interests of justice and fairness as between the Liquidators and the clients would be best served by the Court's adopting a discretionary approach, and making such orders as to the costs of the examination and assessment (whether it be undertaken by a suitably qualified taxing master or an assessor sitting with the Court) depending on the propriety, reasonableness and proportionality of the claims. Order 64.I would therefore direct that the Liquidators distribute the shares to each client upon payment of a provisional processing fee of 14% of the value of each client's portfolio as at the Value Date. The provisional processing fee so received is to be placed by the Liquidators in a separate interest-bearing account, for which an account is to be supplied to the Official Receiver and the Committees of Inspection, at periods to be decided by the Official Receiver. Upon the completion of taxation of the legal costs and an examination and assessment of the Liquidators's remuneration and expenses, any excess in the provisional processing fee paid with interest accrued is to be paid back to the clients. 65.The Liquidators are to notify the clients as to the steps to be taken by them (the clients) for the delivery of their shares, including the amounts to be paid for the provisional processing fee (and to release any liens, if applicable). Should no payment be made within 60 days in the first instance, the Liquidators are to notify the clients again (by advertisement and individual notification) in case of any miscommunication of the first notification. 66.Upon the expiry of 120 days from the Liquidators' first notification, clients who have not paid the provisional processing fees (and any debts due under the lien, if applicable) would be deemed to have instructed the companies (in liquidation) to sell the shares and to hold the proceeds of sale (subject to the provisional processing fee and any debts) in place of the shares, such proceeds to be paid to the clients as soon as practicable. 67.The sale of shares by the Liquidators is to be effected as soon as practicable in such mode as the Liquidators see fit and at such prices to be determined by them upon taking advice from such stockbrokers or financial advisers as they consider proper. 68.As for the costs of this application, I would make an order nisi that half (reflecting the issues of the mode of distribution and the setting of the provisional processing fee) should be paid from the trust assets, and the balance (reflecting the issue of incidence of the costs of examination and assessment of the Liquidators' remuneration and expenses) to be in the examination and assessment.
Representation: Mr D Karliner of Herbert Smith for the Liquidators Mr R Jindal (on 19 October 2001) and Miss T M Lee (on 20 November 2001) of Freshfields Bruckhaus Deringer for the SFC Miss Teresa Wong of Official Receiver's Office |
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