Re Mf Global Hong Kong Ltd

HCCW 356/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 356 OF 2011

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AND

HCCW 357/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 357 OF 2011

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Before: Hon Harris J in Chambers

Date of Hearing: 11 September 2012

Date of Decision: 4 October 2012

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D E C I S I O N

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1.On 2 November 2011 I appointed Patrick Cowley, Fergal Power and Lui Yee Man, all of KPMG, joint and several provisional liquidators (“Provisional Liquidators”) over MF Global Hong Kong Ltd (“MFHK”) MF Global Holdings HK Ltd (“MFHoldings”). On 11 January 2012 Master Ko made orders winding up both companies. The background to the proceedings is rehearsed in earlier judgments and is generally well known; both companies were part of the MF Global Group of commodity and security trading companies, which became insolvent in well publicised circumstances in the USA in the final quarter of 2011.

2.On 4 May 2012 summonses were issued in both liquidations by a creditor for orders that:

(1) The winding up of the Companies shall be conducted as a creditors’ voluntary winding up pursuant to section 209A of the Companies Ordinance.

(2) The present Provisional Liquidators (who continued in office pursuant to section 194(1)(aa) of the Ordinance) of both Companies be appointed as joint and several liquidators.

(3) Committees of Inspection be appointed in respect of both Companies.

(4) Determining whether the Provisional Liquidators are required to pay realisations into the Companies Liquidation Account and, in a related question, whether ad valorem fees are deductable on any sums paid into such account.

3.The Official Receiver was represented at the hearing of the summonses.  The first three applications are uncontroversial.  The reason conversions are sought is with a view to reducing court involvement in the liquidation with attendant reduction in time and costs and also to reduce the scale fees that would otherwise have to be paid to the Official Receiver under the Companies (Fees and Percentages) Order, Cap 32C.  Saving costs with a view to maximising the amount available to creditors is a legitimate reason to seek a conversion: Re Peregrine Fixed Income Ltd [1999] 2 HKLRD 653 per Le Pichon J at 654I-J and 657A-C. The power to order a conversion is discretionary.  The factors to which the court has regard are discussed in Le Pichon J’s judgment.  They focus on whether or not there is a reason why it is desirable that the liquidation remains under court supervision and have regard to considerations such as evidence of wrong‑doing by those in charge of a company.  I am satisfied that there is no reason why, in the present case, the liquidations should not be converted into a creditors’ voluntary winding up.  In particular I have regard to the following factors:

(1) The unanimous consent of the creditors and contributories.

(2) Based on the provisional liquidators’ investigations to date there is no evidence of fraud or breach of duty in relation to the affairs of the Companies.

(3) There is significant progress in the liquidations, with realisations in MFHK of $171,500,000 and MFHoldings of $32,000,000.  Clients assets to the value of $32 billion have be realised.

(4) Section 191 reports were filed with the court on 6 March and 29 February 2012 respectively.

(5) The cooperation of directors.

(6) None of the directors was a director of a company which has gone into liquidation in the last 5 years.

(7) The insolvency of the Companies is not a matter of public concern.  The number of clients who are owed money is limited.

4.I will, therefore, make an order for the conversion of the two liquidations into a creditors’ voluntary winding up.  The creditors and contributories agree that the Provisional Liquidators should be appointed under section 194(1)(c) as joint and several liquidators.  This is a matter within the court’s discretion, which is exercised with regard to the wishes of creditors and contributories and in particular creditors, who have the primary interest in the conduct of the liquidation of an insolvent company: Re Luen Yick Water & Drainage Works Ltd (unrep) HCCW 209/2002 9 January 2003 per Kwan J at para 18 and Re Akai Holdings Ltd [2001] 2 HKLRD 411 per Yuen J at 417J.  Given the unanimous views of the creditors and contributories I will make an order appointing the Provisional Liquidators as joint and several liquidators of the respective Companies.

5.So far as the appointment of committees of inspection are concerned, there is no dispute that committees should be appointed.  The only issue concerns their composition and the issue is a small one of no controversy.  In respect of MFHoldings a committee is sought composing of seven members proposed by the contributories and creditors.  There is no dispute about the identity of members.  Seven members have previously been ordered and seven members has generally been considered the maximum number of members: Re Guangnan (KK) Supermarket Ltd [2002] 1 HKLRD 348 per Yuen J at 351 para 9.  However, this is a matter of practice based on assumptions about what is the optimum size for a manageable committee.  In the case of MFHK it is suggested that the appropriate number is 9, and again the identity of the members is agreed by the interested parties, as this will provide for a balanced representation of different interests and cater for the fact that there are multi-jurisdictional aspects to the liquidations, which will be assisted if MF Global UK Ltd and MF Global Holdings Ltd have representatives on the committee.  I am satisfied that in the circumstances of this particular case a committee consisting of 9 members is justified.  I will, therefore, make orders that committees of inspection are established consisting of the members that have been proposed and agreed by the creditors and contributories.

6.The controversial application concerns whether or not section 202(1) of the Companies Ordinance applies to the Provisional Liquidators.  Section 202(1) provides:

“Every liquidator other than the Official Receiver of a company which is being wound up by the court shall, in such manner and at such times as the Official Receiver directs, pay the money received by him to the Companies Liquidation Account at the bank where such account is kept, and when the Official Receiver is the liquidator of such company he shall pay all moneys received by him in such capacity into the Companies Liquidation Account:

Provided that the Official Receiver may, on the application of the liquidator, authorize the liquidator to make his payments into and out of any other bank specified by the liquidator in such application, and thereupon those payments shall be made in the prescribed manner.”

7.A practical consequence of the application of this sub-section is the payment of ad valorem fees pursuant to paragraph 7(2) of the Companies (Fees and Percentages) Order, cap 32C (“Order”), which is made pursuant to section 296 of the Ordinance.  Paragraph 7(2) provides:

“The percentages prescribed in number 1 of Table B of Schedule 3 shall be paid by a liquidator upon submission of his accounts to the Official Receiver under section 203, or where the Official Receiver is acting as liquidator, before he is released under section 205.”

8.Number 1 of Table B of Schedule 3 in turn provides:

“On the aggregate amount of assets realized and brought to credit by a liquidator (including the Official Receiver when he is acting as liquidator), after deducting any sums paid to secured creditors, other than holders of floating charges in respect of their securities and any sums spent out of money received in carrying on the business of the company, a fee according to the following scale…”

9.Liquidator is defined in section 2(1) of the Ordinance: “includes a provisional liquidator holding such office by virtue of section 194”.  If the Provisional Liquidators come within this definition section 201(1) applies to them and the Order applies to the aggregate amount of assets realised by Provisional Liquidators.  The Provisional Liquidators argument is a simple one.  A provisional liquidator appointed under section 193 does not fall within the definition in section 2(1), section 201(1) does not apply to him and the Order does not apply to any realisations made by him.  I do not understand there to be any dispute about this.  They argue further that a provisional liquidator who remains in office after a winding-up order is made by virtue of section 194(1)(aa) also does not come within the definition with the same consequences.  The basis for the Provisional Liquidators so arguing is the judgment of Barma J in Lehman Brothers Securities Asia Ltd (No 2) [2010] 1 HKLRD 58 in which he held that a provisional liquidator holding office by virtue of section 194(1)(aa) is not a “liquidator” within the meaning ascribed by section 2(1).  Although this decision was reached in a different context Mr Maurellet, who appeared for the Provisional Liquidators, argued that the definition could not sensibly, and accordance with the normal principles of statutory construction, be interpreted as having one meaning in one context and another meaning in another context.  Section 201(1) clearly refers to ‘liquidator’ and, so argued Mr Maurellet, this can only be read as a reference to ‘liquidator’ as defined in section 2(1).  Accordingly, the section does not apply to the Provisional Liquidators.  Generally, I accept that a consistent meaning is to be accorded to a defined term, although as explained in the passage quoted from Barma J’s judgment in the next paragraph this is not always so.

10.It is useful set-out Barma J’s reasoning in Lehman Brothers (No 2), which is to be found in the following paragraphs of his judgment:

“29. It seems to me that both of these interpretations are possible interpretations of the definition of “liquidator”.  There is therefore, in my view, an element of ambiguity in relation to the definition, for the purpose of resolving which it is legitimate to have regard to the intention of the legislature, as disclosed by the Explanatory Memorandum.  That document makes it clear that the introduction of the new definition (and indeed all the other relevant amendments effected by the Bill) were intended to be purely consequential upon the introduction of section 194(1A).  There is nothing in the Explanatory Memorandum or other legislative materials to suggest that it was intended to make any amendment to the previous law relating to the source of the court’s ability to assess the remuneration of provisional liquidators appointed under section 193 and continuing in office under section 194(1)(aa), which Le Pichon J had only the year before held to be governed by the court’s inherent jurisdiction, and not by section 196.

30. Indeed, it seems to me that the terms of paragraph 21 of the Explanatory Memorandum puts the matter beyond doubt, in terms of the intention behind the amendment, as it refers to the definition including “a provisional liquidator holding such office by virtue of section 194 as amended” (my emphasis).  The only amendment to section 194 made on this occasion was the introduction of section 194(1A). Section 194(1)(aa) was already present in the unamended version of the Ordinance, and therefore, the definition clearly was not directed at a provisional liquidator continuing in office pursuant to it.

31. I am therefore of the view that where a provisional liquidator has been appointed under section 193, his remuneration falls to be assessed by the court pursuant to its inherent jurisdiction both before and after the making of the winding up order, until a liquidator has been appointed.

32. In any event, having regard to the legislative history, it seems to me to be quite clear that the definition section should be read so as to limit the reference therein to “provisional liquidator” to a provisional liquidator holding office by virtue of section 194(1A). Although this involves reading into the definition a limitation that is not expressed in its terms, the situation here appears to me to fall clearly within the ambit of the court’s power to construe legislation so as to correct what is, in my view, an obvious drafting error.  That the court has power to do so is made clear by the decision of the House of Lords in Inco Europe Limited v First Choice Distribution [2000] 1 WLR 586, where Lord Nicholls said (at p 592C-G):-

‘It has long been established that the role of the courts in construing legislation is not confined to resolving ambiguities in statutory language. The court must be able to correct obvious drafting errors. In suitable cases, in discharging its interpretative function the court will add words, or omit words or substitute words. … This power is confined to plain cases of drafting mistakes. … Before interpreting a statute in this way the court must be abundantly sure of three matters: (1) the intended purpose of the statute or provision in question; (2) that by inadvertence the draftsman and [the legislature] failed to give effect to that purpose in the provision in question; and (3) the substance of the provision [the legislature] would have made, although not necessarily the precise words [it] would have used’.”

11.As is apparent from paragraph 29, Barma J was of the view that the definition was intended to apply to provisional liquidators appointed under section 194(1A), namely, provisional liquidators appointed by the Official Receiver at a time at which by virtue of section 194(1)(a) he is provisional liquidator; a view with which I agree. This is important because it demonstrates that the introduction of the definition cannot have been intended to alter the way in which other sections in the Ordinance dealing with liquidators was intended to operate.  It is, therefore, fallacious to assume that because ‘liquidator’ in section 2(1) does not include a provisional liquidator under section 194(1)(aa), as I accept it does not, that such a provisional liquidator is necessarily not a liquidator for the purposes of section 202(1).  The pertinent question is whether a provisional liquidator in office under section 194(1)(aa), which came into force in 1997, was a ‘liquidator’ as the term is used in section 202(1) prior to the introduction of the definition in section 2(1) in 2000?  If he was, the introduction of the definition did not alter the position.

12.The Official Receiver, who was represented by Mr Jenkin Suen, argues that section 202(1) has been understood since 1997 to apply to section 194(1)(aa) provisional liquidators and that it would be absurd if it did not.  He submitted that if section 202(1) applies to the Official Receiver during the period when he is acting as provisional liquidator under section 194(1)(a) and any person appointed by him under section 194(1A) it would make no sense for it not to apply to a provisional liquidator under section 194(1)(aa).  I can see the logic of this argument, although I note that it is not clear that section 202(1) does apply to the Official Receiver during the period he is acting as provisional liquidator as section 202(1) states that it applies ‘when the Official Receiver’ is liquidator, although I accept that it would appear to be anomalous if the Official Receiver did not have to comply with section 202(1) at a time when a provisional liquidator appointed by him did so.  It seems to me that in order to understand whether section 202(1) should be interpreted as applying to provisional liquidators in office under section 194(1)(aa) it is first necessary to understand its legislative history and also how the office and function of provisional liquidators were understood until fairly recently.

13.Section 193 empowers the court to appoint a liquidator at any time after the presentation of a petition and before a winding-up order is made.  Provisional liquidators are appointed under section 193 to protect the assets of a company pending the determination of the petition, although in more recent years the concept of protection has been interpreted liberally and has allowed provisional liquidators to be appointed at the instigation of creditors to employ techniques, designed to maximise the value of a company’s assets for the benefit of its creditors, which are more effectively implemented through provisional liquidation then after a winding-up order has been made^[1].  Once a winding-up order is made there is no longer a need to appoint a person to protect the assets as the Official Receiver becomes the provisional liquidator and this has been the case since the Ordinance came into force in 1932.  In 1997 section 194(1)(aa) was introduced, which provided for the first time that a provisional liquidator appointed under section 193 continue as provisional liquidator after a winding-up order has been made pending either he or another person becoming liquidator.  It follows that prior to 1997 the question of a provisional liquidator appointed under section 193 realising assets and making payment into the Companies Liquidation Account did not arise.  As I have already noted given the language used it appears that section 202(1) did not apply to the Official Receiver during the period in which he was provisional liquidator.  I do not consider this to be a surprising position if one has regard to the role which, at the time section 194(1) and section 202(1) were introduced, a provisional liquidator was generally intended to play^[2].  A provisional liquidator was not expected to realise assets but protect them pending the hearing of a winding‑up petition.  In the case of the Official Receiver holding office as provisional liquidator following a winding-up order he would in practice probably not have been expected to make much progress, if any, in liquidating assets prior to calling a meeting of creditors and contributories of a company under section 194(1) (and its predecessors) to decide whether an application should be made to the court for the appointment of another person as liquidator.  At the time the provisions were first in force it was not common for an independent person to be appointed liquidator for the practical reason that there was commonly no assets available out of which to pay his fees.  I note in this regard that section 180(4) of the 1932 Ordinance expressly provides that where a liquidator is not appointed by the court the official receiver shall be the liquidator, a provision now deleted from the section and probably reflecting the original prevailing practice, which has now changed. The relevance of this is that in my view it is not clear that section 202(1) was intended as, Mr Suen argued, to apply to provisional liquidators. 

14.Mr Suen argued that the decision in Lehman Brothers (No 2) was not relevant as it was limited to the narrow issue of whether the remuneration of provisional liquidators was a matter for the court under its inherent jurisdiction and whether the position was changed by the introduction of the definition of ‘liquidator’ in section 2(1).  I agree to the extent that Barma J’s own reasoning explains that the introduction of the definition was intended to have a narrow ambit and that it would be artificial, on the basis of the judgment, to read the introduction of the definition as being intended to have a far wider reaching effect.  However, this leaves the question of why section 202(1) uses ‘liquidator’ rather than ‘liquidator or provisional liquidator’ when a clear distinction is made between the two in section 194 and its precursors.  As I have explained above I do not accept that it is clear that section 202(1) must have been intended to apply to realisations by the Official Receiver at the time he was acting as provisional liquidator appointed pursuant to section 194(1)(a). It seems to me that the better view is that it was probably not so intended for the reasons I have given. 

15.Mr Suen submitted that the Companies Ordinance and its subsidiary legislation are extensive and must be read in context.  He drew my attention to Australian cases which establish that it is necessary to consider each provision of the Australian corporations legislation in context to determine whether or not the term “liquidator” includes “provisional liquidators”: Newmont Pty Ltd v Laverton Nickel NL [1978] 2 NSWLR 325; Capita Financial Group Ltd v Rothwells Ltd (1989) 18 NSWLR 306.  I accept this and the analysis undertaken above is consistent with this approach.  The problem, viewed from the perspective of the Official Receiver, and his understandable wish to have all realisations paid into the Companies Liquidation Account and attract ad valorem fees, is that when section 194(1)(aa) was introduced the definition of “liquidators” was not introduced that was subsequently enacted in 2000 and, if Barma J is correct, which in my view he is, it follows that section 2(1) did not alter the interpretation of section 202(1), which for the reasons that I have explained does not operate as the Official Receiver has assumed it does.

16.In conclusion, in my view a provisional liquidator in office under section 194(1)(aa) is not a “liquidator” for the purposes of section 202(1).  In so far as this is considered to be produce an anomalous result it needs to be dealt with by legislation.

Mr Jose Maurellet, instructed by Tanner De Witt, for the Joint & Several Provisional Liquidators (in both cases)

Mr Jenkin Suen, instructed by the Official Receiver

Ms Doris Wu of the Official Receiver’s Office