Li Lai Fun and Others v. Centro-sound Ltd

Case No.HCLA 8/1986

Court

HCLA

Date—

Judge—

Case Document

100%Judiciary

HCLA000008/1986

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

LABOUR TRIBUNAL APPEAL NO. 8 OF 1986

(Claim Nos. 4192-3 of 1983)

________________

BETWEEN

LI LAI FUN & 50 others

Respondents
(Claimants)

AND

CENTRO-SOUND LIMITED

Appellant
(Defendant)

________________

Coram: Deputy Judge Barnett in Court

Date of Hearing: 10 November 1986

Data of Delivery of Judgment: 19 November 1986

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JUDGMENT

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1. In November 1983, the 51 Respondents lodged two claims in the Labour Tribunal in which they sought various amounts of annual leave pay, severance pay and wages in lieu of notice. These claims were heard on 20th January 1984 in the absence of the Defendant. The Respondents were awarded various amounts. At the time but unknown to the Tribunal, Mr. HON Kam-poon and Mr. Dermot Agnew had been appointed receivers of the Defendant by Barclays Bank International Limited under a debenture dated 31st March 1983.

2. On 8th October 1985, a Mr. Leung appeared before the Tribunal with an application to set aside the awards which the Presiding Officer had made. The application commenced as follows :-

"I, LEUNG Chi-CHING, FREDERICK, representative and/or agent of HON KAM POON AND DEMOT AGNEW who are the receivers of Centro-Sound Ltd., a Defendant in this claim, which was heard and determined by the tribunal in its absence and an. award made on the 20th day of January, 1984, hereby pursuant to section 21A of the Labour Tribunal Ordinance, make application to set aside the award, and for an extension of time for the making of such application."

3. The application went on to set out the reasons for the Defendants non-appearance at the hearing and the necessity of an extension of time. As the Presiding Officer dismissed the application on other grounds which are now the subject of this appeal it is not necessary to consider those reasons further. The Presiding Officer gave detailed written reasons for his decision but, in essence, they were that (a) the receivers had no power either by statute or under the debenture to defend proceedings and (b) in any event they had no power or authority to delegate the making of the application to Mr. Leung.

4. The Receivers contend that, by virture of Section 265 of the Companies Ordinance as applied by Section 9 of the same Ordinance, they are endowed with sufficient locus standi. The combined effect of these provisions is that, where a receiver has been appointed but the company is, not being wound up, the debts which in every winding up must be paid in priority to all other debts, must be paid out of the assets coming to the hands of the receiver. This, it is argued, requires a receiver to protect assets against claims; particularly, as in the present case, against a claim which the receiver knows or thinks not to be proper.

5. Mr. Lai, who appeared on behalf of only one respondent, but whose submissions supported (not unsurprisingly) by the other respondents, did not address himself specificially to this point. His argument was of a more general nature. In the course of his argument, he cited two cases which are useful for the purpose of clarifying the position and function of a receiver.

6. In Newhart Developments Ltd. v. Co-operative Commercial Bank Ltd.,⁽¹⁾ Shaw L.J. said at p. 819:-

"	One has got to see what the function of the receiver is. It is not, of course, to wind up the company. It is perhaps interesting to note in passing that when, a liquidator is appointed, certainly in a winding up by the court, the powers of the directors immediately cease by statutory provision. There is no such provision in relation to the appointment of a receiver, whose duty it is to protect the interests of the mortgagee or debenture holders, as the case may be. In so far as it is requisite and necessary for him in the course of his dealing with the assets of the company, bringing them in and realising them, and so on, to bring actions as well, he is empowered to do so by the debenture trust deed in the name of the company. That makes it possible for him to institute such proceedings without exposing himself to the risk of a liability for costs if those proceedings should fail. But the provisions in the debenture trust deed giving him that power is an enabling provision which invests him with the capacity to bring an action in the name, of the company.
	.........
	There is in the debenture deed itself a provision to the effect that the receiver may carry on the business of the company or concur in carrying on its business, which itself demonstrates that there is not a total extinction of the function of the directors. It is only within the scope of its assets which are covered by the debenture, and only in so far as it is necessary to apply those assets in the best possible way in the interests of the debenture holders, that the receiver has a real function. If in the exercise of his discretion he chooses to ignore some asset such as a right of action, or decides that it would be unprofitable from the point of view of the debenture holders to pursue it, there is nothing in any authority which has been cited to us which suggests that it is not then open to the directors of the company to pursue that right of action if they think it would be in the interests of the company."

7. It is worth noting that the powers given to the receive by the debenture in that case are essentially the same as the powers given to the Receivers in the present case.

8. In Easworth Ltd. v. Howard William Burdett⁽²⁾, Huggins, J.A., (as he then was) said at p. 508:-

".....it has been common to refer to a receiver as the 'agent' of the company of whose property he has been appointed receiver. Thus in In re B. Johnson & Co. (Builders) Ltd.⁽³⁾ Sir Francis Evershed, M.R. said :-

The situation of someone appointed by a mortgagee or a debenture holder to be a receiver and manager as it is said, 'out of court'. - is familar. It has long been recognized and established that receivers and managers so appointed are, by the effect of the statute, jaw, or of the terms of the debenture, or both, treated, while in possession of the company's assets and exercising the various powers conferred upon them, as agents of. the company, in order that they may be able to deal effectively with third parties.

However, the description is misleading and the learned judge went on :-

But, in such a case as the present at any rate, it is quite plain that a person appointed as receiver andmanager is concerned, not for the benefit of the company but for the benefit of the mortgagee bank, to realize the security; that is the whole purpose of his appointment; and the powers which are conferred upon him, and which I have to some extent recited, are (as Sir Lynn observed, and I think fairly observed) really ancillary to the main purpose of the appoinment, which is the realization by the mortgagee of the security (in this case, as commonly) by the sale of the assets'.

Later, he continued :-

"	The distinction between a manager of a company in the ordinary way of business and a receiver an and manager of the property of a company, appointed by a debenture holder is clearly stated by Jenkins, L.J. in the case cited at p.661 :-

.... the phrase 'Manager of the company, prima facie, according to the ordinary meaning of the words, connotes a person holding, whether de jure or de facto, a post in or with the company of a nature charging him with the duty of managing the affairs of the company for the company's benefit; whereas a receiver and manager for debenture holders is a person appointed by the debenture holders to whom the company has given powers of management pursuant to the contract of loan constituted by the debenture, and, as a condition of obtaining the loan; to enable him to preserve and realize the. assets comprised in the security, for the benefit of the debenture holders. The company gets the loan on terms that the lenders shall be entitled, for the purpose of making their security effective, to appoint a receiver with powers of sale and of management pending sale; and with full discretion as to the exercise and mode of exercising those powers. The primary duty of the receiver is to the debenture holders and not to the company. He is receiver and manager of the property of the company for the debenture holders, not manager of the company'."

9. The function of a receiver, therefore is to look after the interest of the debenture holder or other person who has appinted him. The receiver is not concerned with the wider interest of the company. In so far as there are funds available to him, he would pay those funds to the debenture holder at his peril if there are outstanding preferential claims. In my view, however, this is a long way from investing a receiver with an implied statutory power or duty to defend proceedings brought against the company. I am satisfied that the learned Presiding Officer was correct in reaching the conclusion which he did. This ground of appeal must fail.

10. Mr. Chong, for the Receivers, then argued that the necessary power is to be found in the debenture itself. The relevant provisions or the debenture are:-

"a receiver or receivers so appointed shall have power:-

	(a)	To take possession of collect and get in the property and assets charged by this Debenture and for that purpose to take all proceedings in the name of the company or otherwise as may seem expedient;
	(b)	To carry on or concur in carrying on the business of the Company;
	(c)	To sell or concur in selling all or any of the property and assets charged by this Debenture after giving to the Company at least seven days, notice of his or their intention to sell and to carry any such sale into effect by assigning in the name and on behalf of the Company or otherwise;
	(d)	To make any arrangement or compromise which he or they shall think expedient in the interests of the Bank.

A receiver or receivers so appointed shall be deemed to be the agent or agents of the Company and the Company shall be solely responsible for his or their acts or defauts and for his or their remuneration."

11. Focusing on paragraph 3(a), Mr. Chong said that the last six words should be read disjunctively from "for that purpose" so that they mean "or otherwise take proceedings as may seem expedient". He also referred to the definition "all" in Stroud's Judicial Dictionary to show that it may mean "any". Given this construction, he argued that this must confer a power on a receiver to defend an action in the name of the company.

12. I confess to having difficulty in following this argument. The object of paragraph 3(a) is, beyond doubt, the getting in of property and assets. To get in assets it may well be necessary to take or commence proceedings, e.g. for the recovery of book debts. Defending an action does not: ordinarily get in assets although it may well prevent their dissipation. Defending an action is more likely to be for the wider benefit of the company rather than the narrower interest of the debenture holder. If the debenture holder had wished the receiver to defend actions brought against the company, he would and could easily have said so simply by the addition of the word "defend". In my judgment it would defeat the plain language of this paragraph to say that it impliedly confers on the receiver a power to defend proceedings.

13. It was then argued that the Presiding Officer did not take into account the receiver's wider appointment as manager by virtue of paragraph 3(b). In his written reasons, the Presiding Officer cited a passage from Gower's Principles of Modern Company Law on the function of a receiver and went on to consider paragraph 3(a) Indeed, he said that paragraph 3(b) is obviously not relevant Mr. Chong submitted that paragraph 3(b) confers on the receivers an unrestricted power to carry on the business, making them both receivers and managers. As managers, they have the right to protect assets which must include the power to take or defend proceedidngs.

14. Mr. Chong also suggested that the directos of a company are displaced by the appointment of a receiver who can and should do all that the directors might do including trading, and taking or defending proceedings. The receivers could also delegate duties such as by the appointment of a sub-manager. For these propositions, Mr. Chong cited various paragraphs from Halsbury's Laws. The lie is, however, very clearly given to these propositions by the passages from Newhart⁽¹⁾ and Emsworth. ⁽²⁾

15. Mr. Lai argued that paragraph 3(b) does not convert the receiver into a full legal manager. He submitted that the receiver is simply invested with a restricted power to carry on the business and that it would be false logic to say that she receiver is a manager in the full sense. It must be implied, he says, that paragraph 3(b) means "to carry on business for the benefit of the debenture holder". The court should be slow to confer wide powers unless they are express or clearly perceived.

16. I have no doubt that paragraph 3(b) constitutes the receivers in this case as receivers and managers in the accepted sense of that phrase. The question is whether a receiver and manager has general and unlimited managerial powers.

17. In my view, the answer lies in the passages which I to earlier and which were cited on behalf of the Respondents. In Newhart Developments⁽¹⁾ Shaw L.J., when dealing with a provision similar to paragraph 3(b), said:-

"It is only within the scope of its assets which are covered by the debenture only in so far as it is necessary to apply those assets in the best possible way in the interests of the debenture holders that the receiver has a real function."

In Emsworth Ltd. ⁽²⁾, the following passages appeared in the quotation from Jenkins, L.J.:-

"	powers of management ... to enable (the receiver) to pressrve and realize the assets comprised in the security for the benefit of the debenture holders."
	and
"	He is receiver and manager of the property of the company for the debenture holders, not manager of the company."

18. In my view, this makes it plain that a receiver and manager, appointed out of court on terms such as those in this debenture, is not invested with full and unrestricted managerial powers over the company. Such powers as are conferred do not, in my judgment, include the power to defend-proceedings. Involvement in litigation is usually expensive and often uncertain. It is not necessarily apt to advance the interest of the detenture holder. I am satisfied, therefore, that the Receivers in this appeal did not have power to defend proceedings. The proper course for the receivers to have taken would; have been to persuade the directors of the company to defend the proceedings and, if they were not prepared to do so, to approach the debenture holder for appropriate authority.

19. Therefore, although the learned Presiding Officer based his decision upon the narrower powers of a receiver simpliciter and failed to consider the wider implications of paragraph 3(b), his decision was nonetheless correct. This ground of appeal must fail.

20. It is not necessary for me in the circumstances to decide the question of whether the Receivers had power or authority to delegate the application to set aside the judgment to Mr. Leung. I would, however, have found that the application was properly made. Notwithstanding the us eof the words "reprasentative and/or agent of .... the receivers", it seems to methat the true construction of the opening paragraph of the application, which I have set out earlier, is that the Receivers are the applicants. I have no doubt that the form of words which was adopted was an attempt to ensure that Mr. Leung would be a person having a right of audience under Section 23 of the Labour Tribunal Ordinance. The effective position is that the receivers are the applicants, having given to Mr. Leung the task of performing the ministerial act of setting out the reasons to support the application and the task of appearing before the Tribunal at the hearing of their application. It is a nice point which will not now have to be considered as to whether Mr. Leung did have a right of audience under Section 23.

21. For the reasons given above, the appeal is dismissed. I would just add that, in my view, if the application to set aside had been heard on its merits, it was in all probability doomed to failure. The reasons given for the delay of some 15 months in making the application are, in my view, wholly unsatisfactory and unconvincing.

(N.J. Barnett)
Deputy Judge of the High Court

(1) [1978] 1 Q.B. 814
(2) [1978] H.R.L.R. 506
(3) (1955) 1 Ch. 634

Representation:

Mr. K.M. Chong instructed by Peter W.K. Lo & Co. for Appellant.

Mr. Thomas Lai instructed by Rowdget W. Young & Co. for 5th Claimant LAM Yuet-sim.

C3, 4, 14, 15, 19, 29, 38, 39, 42, 43, 44 & 47 absent.