Re Tse Lee Yuen Jewelry Ltd

HCCW000160/1982

Headnote

Proof of debt in company winding up rejected by the Official Receiver - appeal against the Official Receiver's decision allowed by consent under Rule 95 of the Companies (Winding-up) Rules - application by the Official Receiver to expunge the proof of debt under Rule 96 of the Companies (Winding-up) Rules and for the creditor to re-prove its debt - held that the Official Receiver is entitled to apply to expunge the proof if there has been a mistake of law or a mistake of fact - the court should exercise its discretion to set aside an order when it would be manifestly inequitable to enforce the order which may be at the expense of the general body of creditors.

COMPANIES WINDING-UP

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Coram: The Honourable Mr. Justice Jones in Chambers.

Dates of hearing: 14 & 15 June 1984

Date of delivery of judgment: 12 July 1984

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JUDGMENT

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1. A petition to wind up Tse Lee Yuen Jewelry Limited (the Company) was presented on the 9th September 1982 on the grounds of insolvency. An order to wind up the Company was made on the 28th January 1983 and the Official Receiver was appointed to be the liquidator.

2. A proof of debt was lodged on behalf of Chung Khiaw Bank Limited (the Bank) on the 21st April 1983 for the sum of $15,810,541.57 and interest. The claim was made under a guarantee dated the 2nd September 1981 whereby the Company guaranteed all monies due to the Bank up to a limit of $16,000,000 in respect of general banking facilities granted by the Bank to C.C. Tse (Agencies) Ltd. The proof was rejected by the Official Receiver on the 12th July 1983.

3. On the 28th July 1983 the Bank applied by summons under Rule 95 of the Companies (Winding-up) Rules for an order to reverse the decision of the Official Receiver. When the summons came before me on the 5th October 1983 a consent order was made in the following terms:-

Although a creditor is not entitled to prove for interest accruing after the commencement of the winding up, which by Section 184(2) of the Companies Ordinance is deemed to commence at the date of the presentation of the petition, sums by way of interest are alleged to be included in the amount admitted to proof under the consent order from that date until the date of the winding up order. Interest on the principal due at the date of the presentation of the petition was also calculated at a rate exceeding the maximum of 8% permitted by Section 71(1) of the Bankruptcy Ordinance which applies to winding up proceedings by virtue of Section 264 of the Companies Ordinance.

4. The Official Receiver subsequently reconsidered the matter with regard to interest and wrote to the Bank's solicitors on the 25th November 1983 with a request that fresh proofs be lodged. However, the Bank did not comply with this request.

5. Three summonses are before me and I will set out their particulars.  The first issued on the 5th May 1984 by the Official Receiver seeks directions from the Court with regard to the proof on the matter of interest, what sum ought to be paid to the Bank, and whether the consent order can be the subject of review. The second summons was issued on behalf of the Bank on the 9th May 1984 for an order directing the Official Receiver to distribute the dividend on the sum of $15,792,429.07 at the same percentage that has been distributed to other creditors of the Company together with interest. The third summons issued by the Official Receiver on the 11th June 1984 makes application for the following orders:-

Before hearing the summonses I was asked by Mrs. Clough who represented the Official Receiver and Mr. Poon who appeared on behalf of the Bank to decide the following agreed preliminary issue: 'Has the Court power to vary or set aside the consent order of the 5th October 1983 on an application made by the Official Receiver under Rule 96 of the Companies (Winding-up) Rules. If so should it do so (assuming but without deciding that the proof was thereby improperly admitted) in the light of the terms of the order and the fact that the order was obtained by consent under Rule 95 of the Companies (Winding up) Rules.' I will now set out the relevant parts of these two rules.

Mrs. Clough concedes that a mistake of law was made by the Official Receiver with regard to the claim for interest which she says it would be inequitable to enforce as it would prejudice the general body of creditors.

6. As authority that the court has jurisdiction to set aside a consent order she cited Huddersfield Banking Company Limited v. Henry Lister & Son Limited (1895) 2 Ch. 273 where Kay L.J. at page 284 said:-

"     Now, what is this consent order? After all, it is only the order of the Court carrying out an agreement between the parties. Supposing the order out of the way and the agreement only to exist, there can be no sort of doubt that the agreement could be set aside, not merely for fraud, but in case it was based upon a mistake of material fact which was common to all the parties to it. Then, if it could be set aside on that ground, why should the Court be unable to set it aside simply because an order has been founded upon it?  It seems to me that, both on principle and on authority, when once the Court finds that an agreement has been come to between parties who were under a common mistake of a material fact, the Court may set it aside, and the Court has ample jurisdiction to set aside the order founded upon that agreement. Of course, if the order had been acted upon, and third parties' interests had intervened and so on, difficulties might arise; but nothing of that kind occurs here. Here we have got simply the parties to this agreement and order before us. No one else seems to have obtained any kind of interest under it; and therefore, if it be made out that the order proceeded upon the common mistake of a material fact, there is ample jurisdiction in the Court to set it aside.

7. There was a dispute as to the nature of the order made on the 5th October 1983. Mrs. Clough contended that it was an interlocutory order whilst Mr. Poon submitted that it was a final order. However, upon the authorities cited there does not appear to be a fundamental distinction between a consent order made in interlocutory proceedings and a consent order made on a final judgment see Purcell v. F.C. Trigell Ltd. (1971) 1 Q.B. 358 where Winn L.J. at page 365 said:-

"..............Lord Denning M.R has said, and I agree, there is no fundamental distinction in law between a consent order made in interlocutory proceedings and a consent order made on a final judgment. However, there is this to be said, that apparently the court would prefer to keen closer control over its interlocutory proceedings than it would over its final orders if satisfied that they had been agreed to by fully advised and competent parties.".

See also Mullins v. Howell (1879) 11 Ch.D. 763 where Sir George Jessel M.R. said at pare 766:-

".............. there is a larger discretion as to orders made on interlocutory applications than as to those which are final judgments.".

Mrs. Clough also referred me to In re Hawkins ex parte Troup (1895) 1 O.B. 404 which held:-

"    On an application for a receiving order, where the petitioning creditor's debt is founded upon a judgment obtained by the compromise of an action, the Court of Bankruptcy has power to reject the debt as not being a good petitioning creditor's debt if, after inquiring into all the transactions between the parties leading up to the compromise and judgment, the Court can see that the compromise, although not fraudulent was unfair and unreasonable:-

Lord Esher M.R. at page 408 said:-

"............. I think the cases shew that the Court will go behind a judgment by consent. I am also of opinion that a judgment obtained by a compromise does not of itself stop the Court from going behind it. We have tried to say that the Court will go into the whole transaction, because the question is not one of a dispute between the two parties; it is a matter which will affect, and materially affect, the rights of all the creditors who are not before the Court when it has to determine whether a receiving order should be or should not be made, which will or may result in the debtor being made a bankrupt.".

8. In reply Mr. Poon put forward four propositions. Firstly a consent order is evidence of a contract subject to all the incidents of a contract with the additional sanction of a judge's order see Wentworth v. Bullen 9 B & C 840, Lievesley v. Gilmore (1866) Court of Common Pleas 570, Yanley Investment Ltd. v. Federal Hong Kong Products Co. Ltd. (1979) H.K.L.R. 122. Secondly a Court will not set aside or vary a consent order particularly a final order as opposed to an interlocutory order unless it is with the consent of the parties see Australian Automatic Weighing Machine Company v. "alter (1891) W.N. 170, or a fresh action is instituted to set aside the order on similar grounds for setting aside a contract e.g. fraud, mistake or misrepresentation see Ainsworth v. Wilding (1896) 1 Ch. 673, Tsang Lan-fong v. Chan Yee-shuen (1964) H.K.L.R. 626, Ho Shiu-kwong v. On Chuen Kam Koon Shoes Shop (1971) H.K.L.R. 34. Thirdly for the court to set aside the order on the grounds of unilateral mistake the mistake must be a mistake of fact not a mistake of law see Ho Au Shi v. Ho Tsz Tsun (1916) H.K.L.R. 105. Mr. Poop argued that there was in any event no mistake of law for the Official Receiver was aware of the position with regard to interest at the hearing as the order stated that no interest was admissible to proof after the date of the winding up order.   Accordingly, he should have raised the matter at that time if he had any doubt.   Even if the Official Receiver had been negligent or inadvertent in overlooking this issue it would not in Mr. Poop's submission afford an excuse see Henderson v. Henderson (1843) 3 Hare 99. Fourthly the only difference between a final order by consent and an interlocutory order by consent is one of procedure. In respect of a final order it is necessary to start a fresh action to set aside the order whilst in the case of an interlocutory order it is possible to do so in the same proceedings.  Mr. Poon asserts that the order is a final order for it is in the nature of a declaratory order which has finally determined the rights between the parties see Re Compton (1884) 27 Ch. 392, Re Crosley (1887) 34 Ch. 664, In a recent case cited by Mr. Poon Nnadi v. Cotson, The Times 15th May 1984 the Court of Appeal applying Salter Rex & Co. v. Ghosh (1971) 2 O. B. 597 and Moran v. Lloyds (1983) Q.B. 542 held that one did not look to the nature of the order to determine whether it is final or interlocutory, but to the nature of the application. If the application could have led to the continuation of the action it was interlocutory. Nevertheless if the order is interlocutory, Mr. Poon contends that it can only be set aside on contractual principles, for not only is it an order, but it is also an agreement between the Official Receiver and the Bank. In view of the agreement he asserts that the Official Receiver is estopped from denying its validity. Although Mr. Poon agrees that a trustee in bankruptcy has power by statute to go behind an agreement to determine whether there is a real debt, see Re Lennox (1885) 16 Q. B. 315, Re Van Laun (1907) 2 K.B. 23 he says that there is no corresponding power for a liquidator to do so under the Companies Ordinance.

9. The nature of the application on the 5th October 1983 was an appeal by the Bank against the Official Receiver's decision to reject the proof of debt. Before the hearing a compromise was reached which required the sanction of the court by virtue of Section 199(1)(f) of the Companies Ordinance. The terms were placed before the court and embodied in the consent order. No decision was made on the merits nor was the question of interest raised at the hearing. If the summons had been argued either side after judgment could have appealed to the Court of Appeal. As submitted by Mrs. Clough the order was executory for it could not be enforced without a further order. In my judgment the nature of the application was interlocutory. I therefore rule that the order was interlocutory.

10. Wherever possible it is highly desirable that parties to a dispute should try to achieve a settlement in order to save the expense of litigation. In this case a large sum is involved with the result that every day lost means a substantial loss to the Bank in interest alone. Both sides were legally represented, and would have weighed the advantages and disadvantages before they came to a compromise. Such matters would necessarily have included the complexity of the legal issues involved and the time and expense of litigation. The Official Receiver in his capacity as liquidator is an officer of the court. Upon a winding up he acts as the agent of the Company and exercises his power in accordance with the Companies Ordinance subject to the control of the court. In respect of certain powers including the power to effect a compromise of a debt he requires the sanction of the court or the committee of inspection. His duties include the collection and realisation of assets and the discharge of debts and liabilities after proof. I do not agree with Mr. Poon's submission that the Official Receiver has no right to investigate whether a genuine debt is due. Power is granted by Rule 94 of the Companies (Winding-up) Rules to examine every proof of debt and the grounds of every debt. The position of the liquidator is the same as that of a trustee in bankruptcy, see In re Home and Colonial Insurance Company Limited (1930) 1 Ch. 102.

11. The contention that there was no mistake of law because the Official Receiver had directed his mind to the fact that no interest accrued after the date of the winding up order has no merit. If the Official Receiver did not appreciate that the winding up order dated back to the presentation of the petition and interest was included after that date by mistake, it was necessarily a mistake of law. He could not have raised the matter when the order was made for he was under a misapprehension as to when the winding up was deemed to have commenced. It was held In re Roberts, Roberts v. Roberts (1905) 1 Ch. 704 a decision of the Court of Appeal that if any party has entered into a compromise in consequence of what afterwards proves to have been an erroneous view taken by a solicitor of the facts or of the law that party may have the compromise set aside. No reasons were given by the court in Ho Au Shi v. Ho Tze Tsun (1916) H.K.L.R. 105 for its decision which I do not consider to be correct.

12. In my opinion a party is not restricted to making an application to set aside a consent order where there is only a mistake of fact.  He is entitled to do so whether the mistake is a mistake of fact or a mistake of law.

13. Mr. Poon described the Official Receiver as a party to the proceedings, and that there was a contractual relationship With the Bank. I do not accept this argument. The Official Receiver is concerned with the liquidation of the Company and carries out his duties in the public interest. There is therefore a distinction between consent orders made on the application of the Official Receiver and consent orders made in other types of litigation. Towards the creditors he occupies a fiduciary position. The Official Receiver's role on the 5th October 1983 was to agree, subject to the sanction of the court, to a compromise which evidently he believed to be in the best interests of the liquidation. He could not make the agreement himself without the sanction of the court. He now says that he was wrong to do so for he acted in excess of his powers. Had the court been aware of the Official Receiver's mistake the order would not have been made.

14. The legal effect of the compromise is derived from the court order over which the court has jurisdiction. An analogy can be drawn with consent orders in the matrimonial jurisdiction see Thwaite v. Thwaite (1982) Fam. 1. The submission that the order can only be set aside on contractual principles is therefore misconceived. If the proof was wrong the Bank are in effect saying that the Official Receiver has blundered, the court has approved the blunder and we are entitled to payment of the agreed amount although it is contrary to law and may be to the prejudice of other creditors. I do not accede to this argument.

15. In my judgment when a liquidator has made a mistake whether it is a mistake of law or a mistake of fact and he considers that a proof was improperly admitted by virtue of a consent order, he is entitled to apply to the court under Rule 96 to expunge the proof. On the assumption that the proof was improperly admitted the court should exercise its discretion to set it aside for it would be manifestly inequitable to enforce such an order which may be at the expense of the general body of creditors.

Representation:

Mrs. M. Clough for Official Receiver.

Mr. W. Poon (Charles S.C. Yeung & Co.) for Respondent.