Re Kansa General International Insurance Co. Ltd. (in Compulsory Liquidation)
Read the full judgment text of HCMP 4691/1998 on BabelCite. This High Court CFI judgment was delivered on 20 November 1998.
1. This is a petition of Kansa General International Insurance Company Limited (in compulsory liquidation) ("Kansa HK") under section 166 of the Companies Ordinance for the court's sanction to a Scheme of Arrangement ("the Scheme") between Kansa HK and (a) its Scheme Creditors who are Direct Insurance Preferential Creditors; and (b) its Scheme Creditors who are Reinsurance Preferential Creditors. As Kansa HK has been wound up, it is the liquidators, Nicholas Timothy Cornforth Hill and Alan Thorn
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HCMP004691/1998 HCMP 2159/98 and 4691/98 ----------------------- H E A D N O T E ----------------------- Company in compulsory liquidation - Scheme of Arrangement under section 166 of the Companies Ordinance - whether open to Scheme creditors to use any form of proxy where proxy forms had been settled by court - whether difference is one of substance Court meetings - whether duly convened where court's directions not strictly complied with - whether court has power to waive non-compliance Whether Scheme properly explained - material information - costs of the Scheme and impact on Scheme creditors Costs of the Scheme - whether payment of substantial part of costs prior to the hearing of the Petition and the court's sanction acceptable Costs of the Scheme - role of Committee of Inspection considered HCMP 2159/98 and 4691/98 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO.2159 AND NO.4691 OF 1998 ------------
------------- Coram : The Hon Mrs Justice Le Pichon in Court Date of Hearing : 6 November 1998 Date of Handing Down of Judgment : 20 November 1998 ------------------------ J U D G M E N T ------------------------ 1. This is a petition of Kansa General International Insurance Company Limited (in compulsory liquidation) ("Kansa HK") under section 166 of the Companies Ordinance for the court's sanction to a Scheme of Arrangement ("the Scheme") between Kansa HK and (a) its Scheme Creditors who are Direct Insurance Preferential Creditors; and (b) its Scheme Creditors who are Reinsurance Preferential Creditors. As Kansa HK has been wound up, it is the liquidators, Nicholas Timothy Cornforth Hill and Alan Thornton Rennie, who have caused the petition to be presented for and on behalf of Kansa HK for approval of the Scheme. 2. Kansa HK is the Hong Kong branch of a company ("the Company") with the same name being incorporated and with its main office in Helsinki, Finland. The Company is an insurance company authorized by the Hong Kong Commissioner of Insurance to carry on certain classes of general insurance business in Hong Kong. The Company which was incorporated in 1920 under the laws of Finland, was first registered as an oversea company in Hong Kong in 1979. Kansa HK commenced underwriting in Hong Kong in 1979 and effected its insurance and reinsurance business with its policy holders and cedents through Alliance Underwriters Limited ("Alliance") for clients in Hong Kong and other jurisdictions in South-East Asia, i.e. Taiwan, Thailand, Philippines, Guam, Singapore, China and Malaysia. In Taiwan, business was effected through Alliance Reinsurance Management (Far-East) Limited ("Alliance Reinsurance"). 3. Kansa HK's immediate parent, Kansa International Corporation Limited ("KIC") experienced financial difficulties in the 1980s such that a number of restrictions was placed with respect to its Hong Kong insurance business since 1987. On 7 February 1994, Alliance was instructed by the Company to cease writing new policies and on 30 December 1994, Kansa Helsinki was declared bankrupt. The Commissioner of Insurance petitioned to wind-up Kansa HK on 10 July 1995 and a winding-up order was made on 13 September 1995. Priority of claims 4. Section 265 of the Companies Ordinance (Cap.32) sets out the order of priority for preferential payments in a liquidation. Where the company is an insolvent insurance company, non-insurance preferential liabilities have priority to claims by any person under a contract of insurance. See section 265(1)(a)-(db) and section 265(2). Direct insurance preferential liabilities rank next in priority : section 265(1)(e) and (ea). Reinsurance preferential liabilities rank next : section 265(1)(f). Summary of the Scheme 5. A synopsis of the Scheme appears in an executive summary dispatched to Scheme Creditors :
6. The framework of the Scheme is such that it does not affect the priority of Non-Insurance Preferential Creditors whose claims will be paid in full. Pre-Scheme Costs and Scheme Costs are given the same level of priority since the Scheme provides for the payment of such costs in priority to Scheme Claims. The Scheme is to apply to all liabilities of Kansa HK in respect of "Scheme Claims", i.e. any claim against Kansa HK which relates to a Direct Insurance Preferential Liability or a Reinsurance Preferential Liability in respect of a liability to which Kansa HK was subject as at 13 September 1995 and would include the claims to which Kansa HK may become subject after that date by reason of an obligation incurred before that date. A loss sustained after the date of the winding-up but prior to the winding-up order being made is admissible to proof. See In re Northern Counties of England Fire Insurance (1881) 17 Ch D 337. 7. The Scheme does not apply to Kansa HK's ordinary, i.e. non-preferential (unsecured) creditors who will not be entitled to receive any dividend in the Hong Kong liquidation unless and until Kansa HK's assets had been applied in payment in full of the claims of Scheme Creditors. Based on current financial information available to the Liquidators, it is unlikely that there will be sufficient assets to discharge in full the claims of Kansa HK's Scheme Creditors. So, it is unlikely that there will be any assets available to distribute to its other creditors. 8. In the absence of any scheme, the Liquidators would normally have to wait until all the claims within the same rank had become quantified before paying any distributions to those creditors. Given the nature of the business written by Kansa HK, it is likely that it would take many years before its underwriting liabilities would all be quantified. Thus, in a conventional liquidation, there would be a very significant delay before any distributions could be paid to those of Kansa HK's creditors who, under the Scheme, will be Scheme Creditors. According to the executive summary, the actuarial assessments of Direct Insurance Preferential Liabilities and Reinsurance Preferential Liabilities are HK$5 million and HK$75 million respectively and the amount available for distribution is approximately HK$40 million. 9. The purpose of the Scheme is stated in clause 1.3 of the Scheme itself to be as follows :
Order on the Summons for Directions 10. At the hearing of the Summons for Directions on 15 July 1998, the court ordered, inter alia, that meetings be convened of the two classes of Scheme Creditors, namely, Direct Insurance Preferential Creditors and Reinsurance Preferential Creditors, to consider, and if thought fit, to approve (with or without modification) the Scheme pursuant to section 166 of the Companies Ordinance. The forms of proxy were also settled by the court and ordered to be sent together with the Explanatory Statement and the Scheme (collectively "the Scheme Document"), the executive summary, and a covering letter from the Joint Liquidators. 11. Directions were also given, inter alia, for a notice convening the meetings to be advertised in the newspapers specified in the Order. Whether the Scheme should be sanctioned 12. At the hearing of the petition to sanction the Scheme, a number of matters were specifically considered by the court which were relevant to the exercise of its discretion. These are set out below. 13. Proxies 14. According to the Chairman's report, the court meetings were duly convened and the resolutions duly passed. At the meeting for Direct Insurance Preferential Creditors, three such creditors voted by proxy in favour of the Scheme. The aggregate amount of their claims was $850,406.34. There were no votes against the Scheme nor were there abstentions at that meeting. At the meeting of the Reinsurance Preferential Creditors, 28 such creditors voted by proxy. The aggregate amount of their claims is $24,245,642.42. Again, there were no votes against the Scheme nor any abstentions. 15. One of the proxy holders, namely, Paul Hatzer, a partner of Holman Fenwick & Willan who is the representative of South China Insurance Company Limited, a member of the Committee of Inspection, submitted proxy forms on behalf of 13 Reinsurance Preferential Creditors, representing approximately 50% of the amount of the votes cast by that class in favour of the Scheme. The forms he submitted ("the Hatzer forms") were not in the form settled by the court which was a two-way proxy, giving the Scheme Creditor the option of appointing a special or a general proxy. The Hatzer form of proxy was a general proxy only. Mr Hill who was the Chairman of the court meetings considered this to be a minor irregularity in the form of the document and of no significance. He therefore exercised his discretion to admit those votes for the purpose of determining whether the requisite majorities of Scheme Creditors had approved the Scheme. 16. There was no evidence as to how the Hatzer forms came into existence nor how they came to be used by the 13 Reinsurance Preferential Creditors. The legend on the Hatzer forms suggests that they may have originated from Mr Hatzer. If so, quite why he saw fit to devise his own form of proxy when the forms had been settled by the court is not apparent. 17. The issue of principle which arises is whether it was open to Scheme Creditors to use a form different from that settled by the court. There is dicta which supports the view that in a case where the company is in liquidation, a creditor may not use any form of proxy as opposed to the form settled the court. See Re Dorman, Long and Co. Ltd. [1934] Ch 635 at 639. 18. Leading counsel submitted that the July Order enabled the Chairman to accept the Hatzer proxies. The relevant part reads :
I do not see how that part of the July Order dispenses with the use of the form of proxy settled by the court. It makes no sense for the court to expend valuable time on settling the relevant forms if the Scheme Creditors are to be at liberty to disregard them. In the present case, the difference between the form settled by the court and the Hatzer form is one of substance rather than of form, in any event, absent evidence that the Scheme Creditors concerned were making a deliberate and conscious choice to confer a general rather than a special proxy. That being the case, the Chairman ought not to have admitted those proxies. 19. That said, it appears to make no difference to the result on the facts of the present case since there were no abstentions and no votes cast against the Scheme. Even if the Hatzer proxies were to be disregarded, I have to conclude that the requisite majority voted in favour of the Scheme. 20. Whether the court meetings were duly convened 21. Directions were given in the July Order that notice of the meetings ordered by the court be advertised. The directions were not strictly adhered to in several respects : the advertisements appeared on 3 August when, in order for at least 28 clear days to elapse before 31 August, the date of the meetings, they should have appeared on 2 August. Second, the notice published in the China Daily was in English rather than in Chinese because at the time of the application for directions, it was overlooked that the China Daily is in fact an English publication. Third, the notices required to be advertised in an Indonesian publication (in Indonesian) and in a Thai publication (in Thai), were advertised in substitute publications rather than the publications specified in the order because the lead time required for the placing of notices in those publications was too long. 22. According to the mailing list of creditors, there is only one creditor located in Mainland China, namely, The People's Insurance Company of China to whom a copy of the Scheme Document had been sent by post. On 23 October 1998, the Liquidators caused a notice of approval of Scheme of Arrangement to be published in the Chinese language edition of the China Insurance News. No objections have been received from any person regarding the Scheme since that date. 23. A failure to comply with the court's directions for convening a meeting will not ipso facto invalidate the proceedings at the meeting. The court has a discretion to waive a non-compliance with its directions. I am satisfied that in the present case, "the meetings had been in substance (though not precisely) summoned in the manner prescribed". See per Romer J In re Anglo-Spanish Tartar Refineries Limited [1924] WN 222. No useful purpose would be served by convening further meetings. So far as may be necessary, any technical non-compliance with the court's directions referred to above is waived. 24. Whether the Scheme was properly explained 25. It is axiomatic that the court must be satisfied that the creditors have been given a sufficient explanation of the Scheme and its effects. From a Scheme Creditor's point of view, the advantages of the Scheme would best be gauged by comparing his position before and after the Scheme. For a Direct Insurance Preferential Creditor, he stands to receive 100% of his claim irrespective of the Scheme. The position of a Reinsurance Preferential Creditor is different in that he only stands to receive a dividend, there being insufficient assets to meet his claim in full irrespective of the Scheme. In this context, it is relevant to consider the adequacy of the information contained in the Scheme Document based on which an informed decision may be made by a Reinsurance Preferential Creditor. 26. The Scheme enables a Reinsurance Preferential Creditor (as is the case with a Direct Insurance Preferential Creditor) to receive payment earlier than under a conventional liquidation. But unlike the case of a Direct Insurance Preferential Creditor, the costs of the Scheme fall to be borne exclusively by the Reinsurance Preferential Creditor. Nowhere is this explicitly spelt out but that is the effect of the Scheme. The executive summary sent to the Scheme Creditors did not so much as mention the question of costs, much less the amount involved. 27. The reason why costs do constitute material information is set out in Re China Light & Power Co. Ltd. and CLP Holding Ltd. [1998] 1 HKC 170 at 182F-183E. Mr Scott SC for the Liquidators sought to draw a distinction between a creditors' scheme of arrangement and a shareholders' scheme of arrangement. He submitted that the costs involved have to be borne by the estate whether or not the Scheme is sanctioned, absent bad faith on the part of the Liquidators. Irrespective of the validity of the distinction sought to be drawn (about which I have grave reservations), I cannot accept that the cost of the exercise is not material information for those persons who have to foot the bill who are all the Reinsurance Preferential Creditors. For present purposes, the Scheme is no different from a shareholders' scheme since the costs are effectively to be borne by the company itself (i.e. its creditors albeit a class thereof) and not by any white knight. 28. I now turn to consider the information provided. 29. Clause 8.2 of the Scheme is in the following terms :
Despite the heading of Clause 8.2, in the Scheme itself, 'Scheme Costs' is defined as meaning all costs etc. referred to in Clause 8.2.2 only. Costs etc. which fall within Clause 8.2.1 come within the definition of 'Pre-Scheme Costs'. The critical date is the 'Effective Date' for determining whether costs etc. fall into one or other of the categories. 'Effective Date' is defined by reference to the date when an office copy of the order of the court sanctioning the Scheme is delivered for registration to the Registrar of Companies pursuant to section 166(3) of Cap.32. 30. Several aspects of the definition of 'Pre-Scheme Costs' require comment :
It is relevant at this point to refer to Clause 5.4.5 which provides :
It is to be noted that the provision is silent as to the principles by reference to which approval is to be given and might conceivably be construed as giving a free reign to the Committee of Inspection in agreeing the Liquidators' fees as will become apparent below. 31. Tucked away in parenthesis in clause 8.2.1 is the phrase "(to the extent not already paid)". The significance of this phrase would not have emerged had the court not inquired into, inter alia, the costs associated with the Scheme at the hearing of the petition. It transpired that :
Nothing in the letter from the Liquidators dated 5 November 1998 containing this information would lead one to conclude that the time charges are subjected to any critical scrutiny by the Committee. This is perhaps not altogether surprising given the actual representation on the Committee which is dealt with below. 32. The net effect of the above is that the court is faced with the situation that irrespective of its sanction to the Scheme, a substantial part of the costs has in fact been paid and disbursed out of the assets of the Company. This is plainly unacceptable and can only have resulted from a lack of understanding on the part of the Committee as well as the Liquidators of their respective duties and obligations. What if the court were not to sanction the Scheme? What if the court were to disallow the costs of the Liquidators in all or in part? Is the court's discretion to be pre-empted? 33. The composition of the Committee of Inspection in the present case is as follows :
The first three are Reinsurance Creditors and the last a contributory. However, two of the Reinsurance Creditors, namely South China and Ming Tai, as well as the contributory have appointed individual solicitors as their agent or representative to serve on the Committee. Those Reinsurance Creditors have appointed partners in the firm of Holman Fenwick & Willan and the contributory has appointed a partner of Clifford Chance. Only Aon is represented by one of its own executives. 34. Where a member of the Committee being a company appoints not one of its own staff members but an outside agent to represent it on the Committee, there is the obvious danger that the role of each member of the Committee, charged with looking after the interests of the general body of creditors as a whole, might easily be overlooked. After all the solicitor representative is paid for his services by the relevant member while his duty is not to look after the interest of that member only but of the general body of creditors. What may be beneficial or advantageous to his client who may be a major creditor may not necessarily be so to a small creditor. Potential conflicts between the interests of creditors inter se even those of the same class is not fanciful. 35. The approach of the Committee to the question of fees and remuneration and costs must be to act in the best interests of the general body of creditors that it represents. In the absence of express consent or authority from each creditor, the Committee is not a free agent who is at liberty to agree expenditure as it sees fit; rather, it is answerable to the creditors whom it represents. See In re Peregrine Investment Holdings Limited (No.2) [1998] 3 HKC 423 at 426E. To discharge that duty, it is incumbent upon the Committee to properly scrutinize fees and expenditure incurred in the liquidation. In this connection, prima facie, it is incumbent on the Committee to ensure that the principles set out in In re Peregrine Investment Holdings Limited (No.1) [1998] 3 HKC 1 are applied. 36. The Explanatory Statement disclosed that as at 31 March 1998, total receipts were approximately HK$45.8 million and payments made some $7.57 million, leaving a net balance of $38.24 million. At the hearing, the court was presented with the up to date figures as at 4 November 1998. Total receipts were $47.3 million. Payment made totalled just under $13 million, leaving a net balance of $34.38 million. So in the seven months that have elapsed since the end of March 1998, payments totalling $5.4 million have been made. This figure apparently includes some $2 million paid in respect of the costs of the Scheme. 37. Nowhere in the Scheme Documents is it stated what the Pre-Scheme Costs and Scheme Costs as defined in clause 8.2 are likely to amount to, nor what the net assets (prior to any provision for Scheme Costs) available for distribution to Reinsurance Preferential Creditors are estimated to be. It renders the task of balancing the cost of the present exercise against the advantages likely to accrue from the Scheme much more difficult. The financial information that is contained in the Scheme Document is not particularly helpful because of the lack of uniformity in the dates of the relevant information which makes any meaningful comparison impossible. The financial implications are never driven home and are exacerbated by precipitous payments in respect of Pre-Scheme Costs which were nowhere made apparent. 38. To add to the overall confusion, whilst the value of the claims of Reinsurance Preferential Creditors is stated in para.7.6 of the Explanatory Statement as approximately $69 million, at para.8.4, the consulting actuary appears to have used a figure of $88.7 million. A third (and different) figure appears in the executive summary, i.e. $75 million. 39. At clause 8.4 of the Scheme, it is stated that Reinsurance Preferential Creditors may expect a payment in total of 33%. The executive summary gives a different set of figures. According to para.4 of that summary, the approximate figures for distribution to Reinsurance Preferential Creditors is $35 million in respect of claims totalling $75 million. The expected dividend on these figures would come to 45% rather than 33%. 40. At the hearing, the following summary of the up-to-date position was provided to the court :
41. In order to compare like with like, and adopting the figure used in paras.8.4 and 8.6 of the Explanatory Statement, the value of the Reinsurance Preferential Creditors' claims should be $88.7 million rather than $75 million. On that assumption, the expected dividend percentage for Reinsurance Preferential Creditors is nothing like 38% but between 32% and 33%. Further, it is debatable to what extent it would be appropriate to treat all or any part of $4 million which have not yet been received by the Liquidators as assets available for distribution since this amount is subject to outstanding arguments on set-off etc. This may in turn depress the estimated return to Reinsurance Preferential Creditors. 42. These matters highlight why the treatment of relevant financial information has been less than satisfactory. The same criticism may be levied at the manner in which certainly the Pre-Scheme Costs have been dealt with. Two questions arise : first, were the deficiencies sufficiently serious such as to justify the withholding of the court's sanction? Secondly, what may now be done to ensure that expenditure in relation to the Scheme is limited to what is necessary and proper? 43. In my judgment, whilst there are considerable deficiencies in the financial information, they are not so fundamental as to negative the consent of the Scheme Creditors. The acceleration of receipts is plainly an important if not the decisive factor from the perspective of any Scheme Creditor. So whilst I do not consider that the court's sanction should be withheld, this should be fair warning to petitioners that full and accurate information as to the financial impact of any scheme is required and failure to provide such information may result in costs being disallowed. 44. As noted above, the conduct of the Committee of Inspection and of the Liquidators in effecting payment of a substantial amount of Pre-Scheme Costs prior to the hearing of the petition raises concern. It is difficult to see how an "all-in" fee can be justified unless it can be demonstrated that it is necessarily less than fees chargeable on a time cost basis. It is also unclear whether and to what extent the Liquidators' fees that have been paid have been critically scrutinized (if at all) by the Committee of Inspection. Suffice to say that I have considerable misgivings on this score for the reasons considered above. Consequently, at the very minimum, the legal costs and the Liquidators' fees of and incidental to the Scheme including all disbursements must be subjected to close scrutiny to ensure that payment is only made of fees and disbursements that are fully justified, being necessary and proper. The proposed Scheme must therefore be amended to reflect this. 45. As intimated at the hearing, it is a condition of the court's sanction of the Scheme that both sets of costs be taxed. I direct that no further payments in respect Scheme Costs be made until further order, pending the taxation of Pre-Scheme Costs. Undertakings are to be provided by the Liquidators and Clifford Chance to repay any amount received in excess of the taxed costs. 46. I do not accept that the costs involved in the taxation so ordered are necessarily to be borne by Kansa HK be they the taxation costs of the legal fees or the Liquidators' fees. That is a matter for the taxing master. There is no magic and nothing sacrosanct about the fees of liquidators to warrant their coming out of the estate regardless of whether the fees are properly justified. So far as the court fees are concerned, the taxing master has a discretion to remit all or any part of the same under rule 2(2) of the High Court Fees Rules (Cap.4). See In re Peregrine Investment Holdings Ltd. (No.1) at 22E-F. 47. An alternative to taxation would be the disallowance of part of the costs for the Liqudiators. In the present case, the former appears to be the more appropriate. The matter is to be restored for directions relating to taxation and how the same is to proceed.
Representation: Mr John Scott, SC, inst'd by M/s Clifford Chance, for the Applicant |
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