Re Kiu May Construction Company Limited

Case No.HCCW 65/1984

Court

High Court CFI

Date—

Judge—

Case Document

100%Judiciary

HCCW000065/1984

IN THE SUPREME COURT OF HONG KONG

COMPANIES WINDING-UP

NO. 65 OF 1984

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IN THE MATTER of Companies Ordinance (Cap.32)

and

IN THE MATTER of Kiu May Construction Company Limited

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Coram: The Hon. Mr. Justice Jones in Chambers.

Date of hearing: 9th July 1985.

Date of Delivery of Judgment: 12th July 1985.

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JUDGMENT

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1. A winding-up Order was made against Kiu May Construction Company Limited on the 11th June 1984. The Official Receiver was appointed to be the liquidator of the Company with a Committee of Inspection. At a meeting of the Committee of Inspection on the 17th May 1985 the Committee sanctioned the institution of proceedings against Great Eagle Company Limited (Great Eagle) in respect of a claim for $1,989,000.00.

2. On the 5th June 1985 I made an Order under Section 265(5B) of the Companies Ordinance that all creditors who had by a certain date paid contributions to the Official Receiver for the costs of the proposed proceedings to be instituted against Great Eagle be entitled pro rata to the amount of their contributions to the net amount recovered after repayment of their contributions and payment of preferential claims.

3. Section 265(5B) of the ordinance reads: -

"Where in any winding up assets have been recovered under an indemnity for costs of litigation given by certain creditors, or have been protected or preserved by the payment of moneys or the giving of indemnity by creditors, or where expenses in relation to which a creditor has indemnified a liquidator have been recovered, the court may, on the application of the Official Receiver or the liquidator or any such creditor, make such order as it deems just with respect to the distribution of those assets and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk run by them in so doing."

4. About two-thirds of the creditors made contributions towards the costs which amounted to $286,072.20. Counsel upon the instructions of the Official Receiver gave an opinion and settled a statement of claim, but no proceedings were instituted.

5. On the 7th June 1995 Great Eagle offered to settle the claim by a payment of $1,950,000.00. The Committee of Inspection sanctioned the settlement at this figure on the 13th June 1985.

6. By the present summons the Official Receiver seeks directions that the sum recovered from Great Eagle after appropriate deductions be retained in the liquidation and not be distributed to those creditors who have made contributions towards the costs.

7. Mr. Robertson who appeared for the Official Receiver submitted that the contributions had been raised for the specific purpose of instituting proceedings, but as no proceedings became necessary the purpose was not fulfiled. Mr. Robertson also sought directions on the following matter:-

"Where creditors propose to make contributions to enable the Official Receiver to take steps to preserve assets or for litigation the Official Receiver should be permitted to make an application under Section 265(5B) of the Companies Ordinance prior to any recovery being effected."

8. The general rule for the distribution of assets amongst creditors is pari passu. Mr. Robertson cited three Australian authorities during the course of his argument: Re: Lance, Ex pte Official Assignee [1900] 21 NSW R29; Re: A. Shadler Ltd. (1904) 5SR (NSW) 33: 21 WN 217 (Sup Ct.) and Re: Allied Glass Manufacturers Ltd. (1936) SR (NSW) 409: 53 WN 137, 9ABC 21 which reveal that a strict interpretation has been placed on the construction of similar legislation in Australia.

9. Walker J. in In the Matter of A. Shadler Ltd. at p.p.35 and 36 had this to say:-

The general rule for the distribution of the assets in a bankrupt estate is that the assets are to be distributed amongst the creditors pari passu. The 77th section say that, in the case of assets which may have been recovered by means of an indemnity, the Court may make such order as it thinks just with reference to the distribution of such assets, and may give the indemnifying creditors advantage over the others in consideration of the risk run by them in giving the indemnity.

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The 77th section limits the Court to give preference to cases where the assets have been recovered by means of an indemnity for costs of litigation, and it is said that in this case the indemnity has not been given for costs of litigation. I held, in Lance's Case, that the section requires strict interpretation, and I remain of that opinion. It is an invasion of the old-established and prima facie rule in the distribution of a bankrupt's estate, that all creditors are to share pari passu; and, therefore, being an invasion of that principle, it seems to me that the Court should not apply it to a case not coming within the language of the section; so that unless the indemnity, which has been given in this case, can properly be said to have been given for the costs of litigation, I have not got the power to extend the provisions of the section."

10. Mr. Chain who opposed the application on behalf of the creditors who contributed asserted that the contributions were at risk from the time that their monies were received by the Official Receiver.

11. I entirely agree with the approach taken by the Australian Courts and I am therefore of the opinion that Section 265(5B) should be interpreted strictly. Accordingly unless the specific purpose for which the indemnity had been given was fulfilled viz the institution of proceedings the section will not apply. No risk had been taken by the contributors to the indemnity in this case apart from counsel's fees for the preliminary work which was minimal. As a result there will be an order in the terms of the summons.

12. With regard to the supplementary issue posited by Mr. Robertson I agree that a broad view of the section should be adopted. As a matter of common sense I answer that question in the affirmative for an indemnity is a prerequisite to the institution of proceedings. Creditors who make contributions are entitled to have their costs secured by a court order in the event of recovery.

	(B.L. Jones)
	Judge of the High Court

Representation:

Mr. A.L. Robertson for Official Receiver.

Mr. B. Chain (Ip, Ku & Stoppa) for Federal Enterprises Co. Ltd.

Mr. Chu Bing Cheuk in person.