Companies Winding-up Proceedings1998

RE PEREGRINE INVESTMENTS HOLDINGS LTD.

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60603-EN-2008-03-18

RE PEREGRINE INVESTMENTS HOLDINGS LTD. AND ANOTHER

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HCCW 20 & 32 of 1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) PROCEEDINGS NOS. 20 & 32 OF 1998

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	IN THE MATTER OF THE COMPANIES ORDINANCE, CAP.32
	and
	IN THE MATTER OF PEREGRINE INVESTMENTS HOLDINGS LIMITED (IN COMPULSORY LIQUIDATION)
	and
	IN THE MATTER OF PEREGRINE DERIVATIVES LIMITED
	(IN COMPULSORY LIQUIDATION)

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Before : Hon Chu J in Chambers

Date of Hearing : 6 January & 10 February 2003

Date of Decision : 10 February 2003

Date of written Reasons for Decision : 18 March 2008

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REASONS FOR DECISION

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The application

1. By summons filed on 11 December 2002, the Joint & Several Liquidators of Peregrine Investments Holdings Limited (“PIHL”) and those of Peregrine Derivatives Limited (“PDL”) jointly applied under section 200(3) of the Companies Ordinance for directions on the following questions:


(1)	Where the debt of a principal debtor in insolvent liquidation has been guaranteed by a surety who is also in insolvent liquidation, at what point can the guaranteed creditor who has submitted a proof of debt for the said debt in both liquidations be treated as having obtained recovery in full such that he has no entitlement to receive further dividends from either the principal debtor or the surety?

(2)	Once the guaranteed creditor has obtained recovery in full, would the surety then be entitled, by virtue of its part payment only of the debts of the principal debtor which are the subject of the guarantee, to be subrogated to the guaranteed creditor’s rights against the principal debtor (including the right to receive any remaining dividends from the liquidation of the principal debtor).

The relevant facts

2. The background facts giving rise to the application were set out in the Twenty-Fifth Affidavit of David Richard Hague. It can be summarised as follows:


(1)	Both PIHL and PDL were and are in insolvent liquidation.

(2)	PIHL was the holding company for the Peregrine group of companies. It had been providing guarantees for the equity derivative business of PDL.

(3)	When PDL went into liquidation, it defaulted under derivative transactions in respect of which PIHL had provided guarantees (“the Guaranteed Transactions”).

(4)	In respect of the Guaranteed Transactions, eight of the creditors (“the Guaranteed Creditors”) had submitted proofs of debt to the liquidators of PDL as well to the liquidators of PIHL.

(5)	Depending on the nature of the Guaranteed Transactions, the Guaranteed Creditors may be entitled on a contractual basis to claim for interest accruing at various rates on the contractual sum until payment in full. The admitted claim of each of the Guaranteed Creditors in both liquidations (“the Admitted Claim”) did not include interest that might have accrued since the date of presentation of the winding up petitions of PDL and PIHL.

(6)	At the time of the application in question, the Guaranteed Creditors had received by way of interim dividends from the respective estates of PDL and PIHL 68 cents and 23.2 cents in the dollar on the Admitted Claim.

(7)	There is a possibility that with the aggregate of the further interim or final dividend from the estate of PDL, the Admitted Claim of a number of the Guaranteed Creditors would be paid in full.

The issues

3. By Question (1), the liquidators of PIHL and those of PDL sought clarification on whether the Guaranteed Creditors’ right of recovery in respect of the Guaranteed Transactions from the estates of PDL and PIHL is limited to the amount of the Admitted Claim or whether the right extends to their full contractual entitlement under the Guaranteed Transactions, which included the non-provable deferred interest (“the Contractual Claim”).

4. As at the adjourned hearing of the application, two of the Guaranteed Creditors had confirmed to the liquidators that other than their admitted claims, they did not have any further contractual claims.

5. For those Guaranteed Creditors who might have further contractual claims, if their right to recover is limited to the amount of the Admitted Claim, the liquidators of PDL and those of PIHL would only pay them such amount from the further interim or final dividend as would render the aggregate amount of dividends received by the Guaranteed Creditors equivalent to the Admitted Claim. If, however, their right to recover were not so limited, they would be entitled to continue receiving dividend payments until the Contractual Claim is satisfied.

6. Question (2) concerns the liquidators of PIHL. They took the view that the estate of PIHL should have a right of subrogation against the Guaranteed Creditors by reason of the interim dividends paid out of the estate of PIHL. They therefore sought to clarify whether, once the Guaranteed Creditors had obtained full recovery, PIHL could be subrogated to the Guaranteed Creditors’ rights against PDL and become entitled to recover further dividends from PDL, notwithstanding that PIHL had only paid part of the Guaranteed Creditors’ claim.

The Decision

7. On 10 February 2003, I directed under Question (1) that the liquidators were not prevented from continuing to make a full distribution to the Guaranteed Creditors until the Contractual Claim had been paid in full. On Question (2), I made no direction as I was not persuaded that the right of subrogation could arise.

8. I further ordered that the costs of the liquidators of the two companies and the costs of the Official Receiver (assessed on a gross sum basis at $66,000) to be paid out of the assets of PDL and PIHL in equal portions.

9. I now reduce the reasons into writing.

Question (1): The Guaranteed Creditors’ right of recovery

10. The authorities have established that a secured creditor who has both provable and non-provable claims in a bankruptcy is entitled to appropriate security realisations against the non-provable element of his claim if he chooses to do so: Ex p Hunter (1801) 6 Ves Jun 94, 31 ER 955; Bower v. Marris (1841) Cr & Ph 351, 41 ER 525, Re Firth, ex p Schofield (1879) 12 Ch D 337.

11. The principle was implicitly applied in Joint Stock Discount Company (1869) LR 5 Ch App 86, a creditor who had a right of proof for the same debt against the estates of two companies in liquidation, was held to be entitled to receive dividends from both estates until the full amount of the debt and interest had been satisfied. The creditor in that case was the holder of unpaid bills of exchange. Both the drawer and indorser of the bills were in liquidation. The bills became due after the commencement of the winding-up and consequently no interest had accrued before that. The creditor had proved in and received dividends from both liquidations. It claimed to be entitled to continue to prove against the indorser to the full amount admitted until the post-liquidation interest was satisfied. The Master of the Rolls ordered that it be excluded from participating in further dividends paid to creditors of the indorser. In allowing the appeal, Sir G M Giffard LJ said (at 88) the creditor, if he can obtain payment from other sources, is entitled “to combine and retain all that he can obtain from all those sources until he is paid not only his principal but all his interest, and so the debt is entirely satisfied.”

12. In Re Humber Ironworks and Ship building Co (No. 2) (1869) LR 5 Ch App 88, the English Court of Appeal similarly held that the rule that a creditor is not entitled to dividends towards payment of post-liquidation interest, would not prevent a creditor who held security from receiving dividends to the full amount of the principal and at the same time realising his security until the full amount of the principal and interest had been satisfied. Referring to the Joint Stock Discount Company case, Sir G M Giffard LJ said (at 92) that for a creditor who has a claim on two or more estates, “he proves against each of those estates for whatever is due up to the date of the bankruptcy or winding-up, so that he may get from each of those estates everything he can until the debt is extinguished in the proper sense of the term.”

13. The two decisions were considered and applied in the more recent decision of the Supreme Court of New South Wales in Midland Montagu Australia & Anor v. Harkness (1994) 124 ALR 407. After quoting from the above passage in Re Humber Ironworks and Ship building Co (No. 2), McLelland CJ added that (at 421): “… when [the 1^st Debtor] and [the 2^nd Debtor] are severally liable to [the Creditor] for a common amount, [the Creditor], although claiming the full amount against both, can retain no more than 100% of his debt. It is clear to my mind both as a matter ofprinciple and authority that the “debt” for this purpose must be taken to be the contractual debt and to include accruing interest, notwithstanding the bankruptcy or winding up of [the 1^st Debtor] or [the 2^nd Debtor] or either of them.”

14. Although there is no Hong Kong authority on the point, I am of the view that the above English and Australian cases and the principles stated in them should apply here. The rationale being that neither bankruptcy or winding up has the effect of discharging a debtor’s liability for future interest. Accordingly, on question (1), for the Guaranteed Creditors who had a Contractual Claim, they are entitled to continue to receive dividends from PDL and PIHL until they have recovered the full amount of their Contractual Claim.

Question (2): Right of subrogation?

15. On Question (2), the starting point is to note the rule against double proof such that “there is only to be one dividend in respect of what is in substance the same debt”: Oriental Commercial bank, ex p European Bank (1871) LR 7 Ch App 99; see also Polly Peck International plc (in administration) (No. 3) [1996] 1 BCLC 428 at 436H-438G. The object of the rule is to absolve the liquidators from paying out two dividends on what is essentially the same debt: Barclays Bank Ltd v. TOSG Trust Fund Ltd [1984] AC 626, 636B-C.

16. Hence in the present situation, while the Guaranteed Creditors are entitled to prove in both liquidations for the full amount of their debts, PIHL could not prove in PDL’s liquidation in competition with the Guaranteed Creditors: see also Westpac Banking Corporation v. Gollin & Co Ltd (In liquidation) [1988] VR 397, 409 (lines 34-40).

17. As for a surety’s right of subrogation, the English authorities suggest that a surety’s right to be subrogated to the creditor’s rights in respect of the guaranteed debt arises at the moment he has paid in full all that he must pay to the creditor under the guarantee: Re Howe, ex p Brett (1871) 6 Ch App 838.

18. There are, on the other hand, Australian decisions to the effect that the right of subrogation may arise notwithstanding that the surety had not himself paid the full debt: A.E. Goodwin Ltd v. A.G. Healing Ltd (1979) 7 ACLR 481; McColl’s Wholesale Pty Ltd v. State Bank (NSW) Ltd (1984) NSWLR 365; see also Russet Pty Ltd (In liquidation) v. Bach (unreported) Supreme Court of New South Wales, 23 June 1988. These Australian authorities, however, were not dealing with insolvency situation; they are cases in which a surety is seeking to put himself in the position of the creditor in respect of securities in the hands of the creditor.

19. The liquidators submitted that the Australian decisions can be extended to insolvency situation, thus PIHL should be subrogated to the position of the Guaranteed Creditors once the Guaranteed Creditors have received 100 percent of their debts.

20. Mr Beresford who appeared on the instruction of the Official Receiver submitted that the question of subrogation does not arise in the present situation. I agree.

21. Principally, the dividends paid by PIHL to the Guaranteed Creditors, being post-proof payments, do not have the effect of reducing the debts owed by PDL to them because, as a matter of law, they are not appropriated to the debts. The point was explained by McLelland CJ in Midland Montagu v. Harkness at 416:

“… it is clear that post-proof receipts do not justify reduction in the quantum of the proof (see e.g. Re Amalgamated Investment and Property Co Ltd [1985] Ch 349 at 379-86; Re Joint Stock Discount Co (Warrant Finance Co’s Case) (1869) LR 5 Ch App 86; Re Blakeley; Ex parte Aachener Disconto Gesellschaft (1892) 9 Morr 173), although they may limit the amount of a distribution in respect of that proof in order to prevent double satisfaction. In order for the rule of double satisfaction to operate to preclude [the Creditor] from enforcing payment from [the 1^st Debtor], by reason of the prior receipt by [the Creditor] of a sum from [the 2^nd Debtor], it must be shown that the latter sum or some calculable part of it was received in satisfaction of the common amount. This depends upon the applicable principles of appropriation of payments. However, principles of appropriation applicable to consensual payments, founded upon the express or implied intention of the payer or payee, do not govern payments made in the course of an administration provided for by law.”

22. The interim dividends paid by PIHL are only on account of PIHL’s final dividend and do not reduce the quantum of the Guaranteed Creditors’ debts. The liquidators of PDL cannot take into account PIHL’s interim dividends and reduce the dividend to be paid to the Guaranteed Creditors. As and when PDL makes the final dividend on the Guaranteed Creditors’ proof, the account is closed. Further by reason of the rule against double proof, no further claim against the estate of PDL can be admitted. Accordingly, no subrogation can arise. Any surplus that may be held by the Guaranteed Creditors will be held on trust for PIHL.

23. Given that no subrogation will arise on the facts, no direction needs to be made under Question (2).

(C Chu)
Judge of Court of First Instance
High Court

Mr Cambpell Korff of Messrs Clifford Chance for the Joint & Several Liquidators of PIHL and PDL.

Mr Roger Beresford for the Official Receiver

21400-EN-1999-08-12

RE PEREGRINE INVESTMENTS HOLDINGS LTD. AND OTHERS

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HCCW000020F/1998

HCCW Nos. 20,22 & 32 of 1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP NO. 20,22 & 32 OF 1998

____________

IN THE MATTER OF PEREGRINE INVESTMENTS HOLDINGS LIMITED, PEREGRINE FIXED INCOME LIMITED, PEREGRINE DERIVATIVES LIMITED

And

IN THE MATTER OF THE COMPANIES ORDINANCE, CAP.32

__________

Coram: Master Chu

Date of handing down of decision: 12 August 1999

_________________________________

Reasons for Decision on Taxation

_________________________________

The Background

1. The 3 companies, Peregrine Investments Holdings Limited, Peregrine Fixed Income Limited and Peregrine Derivatives Limited were wound up by the Court on 18 March 1999.

2. The Liquidators have since December 1998 submitted to the court bills of costs prepared by the solicitors engaged by them, namely, Messrs. Clifford Chance ("CC") and Messrs. Deacons, Graham & James ("DGJ"), for taxation under Rule 179 of the Companies (Winding Up) Rules, Cap. 32 ("the Rules"). Both CC and DGJ charged on a time basis. In the course of taxing their bills, I had, among other things, made adjustments to the hourly rates of some of the fee earners. In some instances, the reductions made are quite substantial, a matter which I shall return to deal with later.

3. Both CC and DGJ did not accept the reductions made to the hourly rates and had made written representations, including letters dated 4th and 6th May 1999. I was not persuaded by the representations made and by letters dated 6th and 12th May informed the solicitors of the same. It appears from the correspondence that the Liquidators were and are aware of the solicitors' objection and have supported, or to say the least not disagreed with, it.

4. By letter dated 20 May 1999 from CC (but with input from DGJ), the solicitors made further representations in a renewed attempt to review my ruling on the hourly rates. The solicitors indicated in the letter their intention of taking the matter on appeal in the event that the review is declined. They further observed that the approach to allowable hourly rates may have profound consequences for the legal profession as a whole in respect of services rendered to liquidators in winding up actions.

5. Having regard to the stated intention of the solicitors and their observation on the consequences of my determination, I now reduce into writing my approach in determining the appropriate hourly rates of the solicitors and the reasons for the same.

The Reductions to Hourly Rates

6. In assessing the hourly rates of the fee earners, my starting point is the experience and seniority of the fee earner involved. I drew assistance from the level of hourly rates normally allowed by taxing masters on taxation for fee earners of comparable experience and seniority. The current level of allowable hourly rates had been communicated by the Registrar to the Law Society and is reflected in the Law Society Circular No. 97-234(PA). Another Circular No. 99-76 (PA) has since superseded this Circular, but the allowable hourly rates remain unchanged. Apart from considering the experience of the fee earner, I also took into account the nature of the work undertaken and the time spent on the work by the fee earner involved. These are to be ascertained from the summary of tasks or breakdowns provided by the solicitors and attached to their bills.

7. For the bills of costs that had been taxed so far, the most substantial reductions in hourly rates relate to those claimed by the trainee solicitors and one unqualified fee earner of CC bearing the initial "TGS". The hourly rates claimed by the trainee solicitors in the bills submitted by CC and DGJ for taxation ranged between $1500 and $1850. This is considerably higher than the rate of $1300 allowed by taxing masters on taxation, irrespective of the basis of taxation. From the summary of tasks or the breakdowns supplied, I can see no justification, whether with reference to the nature of the work done or otherwise, for the higher rates claimed. Accordingly, the allowable hourly rates of the trainee solicitors had been reduced to $1300.

8. In the case of TGS, he is a para-legal responsible for document management. His hourly rate was claimed at $1750. According to the Liquidators' notes on CC's bill no. 38564, CC had justified TGS' involvement and work on the basis that "efficient collation and management of incoming and outgoing correspondence in an assignment of this nature and complexity is vital". The Liquidators had accepted the explanation and I do not intend to take exception with that. However, what is apparent is that the work of TGS is to maintain the relevant documentation correspondence and files in orderly manner so as to ensure that CC has a proper record and an intelligent filing system. This will in turn facilitate the other fee earners in the discharge of their work and duties.

9. There is, in my view, no justification for the hourly rate of $1750 claimed for TGS. The hourly rate normally allowed for non-qualified staff of solicitors firm on taxation ranges between $800 and $1000. $1750 is well above the allowable rate of a trainee solicitor and is not far below the rate of $2000 allowed for newly admitted solicitors.

10. It is also to be noted from the bills submitted so far that the amount of time taken up by TGS for document management each month is fairly substantial. There are instances where the time spent is as much as 30 hours and above : see bill nos. 37926, 38825 and 39467 for instance. As mentioned above, the Liquidators had also raised query on this matter, but had not pursued it further upon the explanation given.

11. Considering the nature of the work done by TGS, the amount of time involved and the fact that, to a large extent, the work is to ease the tasks of other fee earners; I had reduced the hourly rate of TGS to $1000.

The Objections of the Solicitors

12. The fundamental objection of the solicitors to my decision to reduce the hourly rates is that these rates had been agreed between them and the Liquidators, who are their clients. As such, the Registrar in taxation under Rule 179 of the Rules should not disturb the agreed rates. The grounds of this objection, as appear from CC's letter dated 20 May 1999, can be summarized as follows :-

(1) The hourly rates agreed had been carefully formulated so as to enable the law firms to make an appropriate return. Further, "competitive pressures" ensure that the hourly rates reflect market conditions as a whole.
(2) The bills are taxed on a solicitor and own client basis. In as much as it is not open to the client to challenge the hourly rate he has agreed to, the Court has no jurisdiction to reduce the rates agreed, notwithstanding that the client is acting in a representative capacity for the benefit of a third party.
(3) The hourly rates set out in the Law Society Circular 97-234(PA) only refers to taxation on party and party basis.

Reasons for Decision on the Hourly Rates

13. It is indeed the case that the bills of CC and DGJ were taxed on a solicitor and own client basis. In this regard, I am guided by the order of Le Pichon J. made herein on 25 November 1998. In ordering that the Official Receiver appointed a law costs draftsman to prepare a report on the costs and disbursements of the Provisional Liquidators' solicitors, her Ladyship directed that the report be prepared on the basis of a solicitor and own client basis.

14. I accept that under O.62 r.29 R.H.C., on the taxation of a solicitor's bill by his client, all costs shall be allowed except those costs, which are of an unreasonable amount or have been unreasonably incurred. The rule also provides that all work and costs approved by the client shall be conclusively presumed to be reasonably incurred or reasonable in amount.

15. Notwithstanding the provisions in O.62 r.29, I do not accept that it follows that the Registrar in taxation under Rule 179 of the Rules has no power to re-open the fees or rates agreed to between a liquidator and his solicitors.

16. It is pertinent to note at the outset that the relationship between a liquidator and his solicitors is different from an ordinary solicitor and client relationship. This is because the liquidator is not paying the solicitors out of his personal resources, but from the funds and assets of the company in liquidation. At the same time, he assumes the role and responsibilities of a trustee and is charged with the duty of protecting both the estate and the interests of the creditors. While he is allowed his remuneration out of the estate of the company, he is obliged to justify his remuneration by reason of his duty to account. The same principle applies to disbursements incurred by him. The fees of his solicitors are paid out of the estate by way of the liquidator's disbursement. As such, the solicitors through the liquidator will have to justify the fees charged before the same can be allowed to come out of the estate. It is in the light of this spirit that disbursements of a liquidator, including his solicitors' fees, are required to be taxed and approved by the Registrar under Rule 179 of the Rules. It follows that the principles set out in O.62 r.29 have to be read and applied subject to the overriding power of the Registrar under Rule 179. Rule 179 will be rendered redundant and the purpose of taxation defeated if it were otherwise construed to be subject to O.62 r.29.

17. Where a liquidator has agreed with his solicitors regarding the fees and rates to be charged, he is contractually bound to honour that agreement. The agreement however does not bind the Court and cannot fetter the Court's power to scrutinize the bills of the solicitors. If the Court considers that the agreement on costs reached between the liquidator and the solicitors is proper and reasonable, the Court will of course sanction it and approve payment of the agreed costs from the estate. But if the liquidator or the solicitors fails to satisfy the Court that the agreed costs and rates are reasonable and justified, the agreed costs will not be allowed to be met by the funds of the company. In short, there are two distinct questions to be asked : (1) what is the proper amount payable by the liquidator as client; and (2) how much of the amount so payable is to be allowed as payment out of the estate : see Peregrine Investments Holdings Limited (No. 1) [1998]1HKC 1 at 13.

18. In the present case, I was told that the Liquidators had agreed with CC and DGJ on the hourly charge out rates of the fee earners. That being the case, the Liquidators, as client, will have to honour the agreement and cannot therefore challenge the rates. The Registrar in taxing the solicitors' bills under Rule 179, however, stands in a different position. There is no question that the Registrar having jurisdiction to review the agreed hourly rates and to make appropriate adjustments, including reductions. Accordingly, when making reductions to the hourly rates, I am not suggesting that the solicitors are not entitled to recover from the Liquidators, who are their clients, the rates or costs as agreed. All that I am deciding is that the estate should only pay, by way of disbursements of the Liquidators, solicitors' fees calculated on the reduced rates, which, in my view, are proper and reasonable.

19. The argument that the hourly rates were formulated to enable the solicitors to make appropriate return is wholly irrelevant. That is not a matter that the Court should afford any weight in taxing the disbursements of the Liquidators.

20. I also entertain reservations about the suggestion that the agreed rates reflect market conditions as a whole. It is true that the Liquidators had indicated in their letter dated 3 May 1999 that they had reviewed DGJ's hourly charge out rates by comparing them to those of other firms in Hong Kong. There is, however, no indication that the Liquidators were aware of or had considered the rates set out in the Law Society Circular No. 97-234(PA). And if their attention had been drawn to the hourly rates normally allowed by taxing masters on taxation, there is no explanation as to why the Liquidators nevertheless consider it appropriate and justified to accept rates which are considerably higher, especially in the case of unqualified staff. It is to be remembered that the rates set out in the Law Society Circular were set in July 1997. That was a time when the market conditions of the legal profession in particular and the economy of Hong Kong as a whole were much better than March 1998 when these companies were wound up, the present Liquidators appointed and the solicitors retained. It is also to be noted that for bills of CC covering work done after March 1999, the hourly rates of the some of the fee earners had been revised upwards. TGS's hourly rate, for instance, was raised from $1750 to $1850. How that can be said to have reflected market conditions is difficult to comprehend.

21. I now turn finally to the argument that the hourly rates set out in the Law Society Circular only relates to party to party taxation. The Circular was issued as a result of a letter written by Mr. Registrar Betts to the Law Society dated 14 July 1997. Since 1985, the Registrar, High Court, would from time to time indicate to the Law Society by correspondence the level of hourly rates which taxing masters would allow to solicitors upon taxation, by reference to the solicitors' experience and seniority. In this letter of 14 July 1997, Mr. Registrar Betts set out the revised level of allowable hourly rates. Nowhere had he indicated that the rates should only apply to party and party taxation. Indeed, there is little justification for adopting different rates simply because the basis of taxation is different.

22. At any rate, it is irrelevant whether the rates set out in the Circular relate to party to party taxation. The fact remains that the Circular reflects the rates which taxing masters generally consider to be appropriate and reasonable for solicitors of comparable experience and for the unqualified fee earners. There has to be good and compelling reason before the Registrar in a Rule 179 taxation will allow a liquidator to recover from the estate his solicitors' fees calculated at higher rates.

Conclusion

23. For the reasons set out above, I see no ground from departing from my previous decision on the hourly rates to be allowed to the fee earners of CC and DGJ. The request for review is accordingly declined.

	(Carlye Chu)
	Registrar, High Court

Representation:

29835-EN-1999-05-27

RE PEREGRINE INVESTMENTS HOLDINGS LTD.

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HCCW20, 22 and 32/98

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H E A D N O T E

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Provisional liquidators (other than Official Receiver) appointed under section 193 of Cap.32 - term of office - effect of section 194(1)(aa) of Cap.32

Remuneration during period post-winding-up order - whether within section 196(2) of Cap.32 or under court's inherent jurisdiction

Official Receiver's Office Circulars entitled "Withdrawal of funds from the Companies' Liquidation Account for payment of liquidators' remuneration" - whether ultra vires payment made in respect of provisional liquidator's fees for period post-winding-up order pursuant to Circular - effect

Rule 176 of Companies (Winding Up) Rules - taxations made under a mistake of law - whether to be set aside

HCCW20, 22 and 32/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NOS.20, 22 and 32 OF 1999

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IN THE MATTER OF PEREGRINE INVESTMENTS HOLDINGS LIMITED

AND IN THE MATTER OF PEREGRINE DERIVATIVES LIMITED

AND IN THE MATTER OF PEREGRINE FIXED INCOME LIMITED

and

IN THE MATTER OF the Companies Ordinance, Cap.32

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Coram : The Hon Mrs Justice Le Pichon in Chambers

Date of Hearing : 29 April 1999

Date of Decision : 27 May 1999

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D E C I S I O N

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1. This is a renewed application by the Provisional Liquidators of Peregrine Investments Holdings Limited ("PIHL"), Peregrine Derivatives Limited ("PDL") and Peregrine Fixed Income Limited ("PFIL") respectively for a further interim payment in respect of their fees. The issues which arise are of relevance generally where provisional liquidators have been appointed prior to a winding-up order being made.

2. The present application is a sequel to the original application by the Provisional Liquidators for payment of their fees for the period from the date of their respective appointments up to 18 March 1998 when winding up orders were made in respect of all three Peregrine companies. On 19 March 1998, as an interim measure, payments of 25% on account of the fees of (1) the Provisional Liquidators up to and including 15 February 1998; (2) M/s Deacons, Graham and James up to and including that date and (3) M/s Clifford Chance up to and including 14 February 1998 were allowed. At the adjourned hearing held on 27 May 1998 the purpose of which was to ascertain the principles that apply in fixing the remuneration of provisional liquidators, an interim payment of 25% on account of the fees submitted by the Provisional Liquidators, M/s Deacons and Clifford Chance up to 17 March 1998 was allowed, plus all of what in Re Peregrine Investments Holdings Limited [1998] 3 HKC 1 at 7I ("Peregrine (No.1)") was described as "category (1)" disbursements, being disbursements of the Provisional Liquidators other than counsel's fees and fees of foreign lawyers.

3. The 25% interim payment of the fees of the Provisional Liquidators was further increased to 33% on 25 June 1998, when judgment was given in Peregrine (No.1). In October 1998, when the Provisional Liquidators, its solicitors Deacons and Clifford Chance applied for further interim payments on account, the interim payments to the solicitors firms were increased to 50% in respect of fees for the period up to the date of the winding up orders. The Provisional Liquidators' application was refused since they had not re-submitted their fee notes in accordance with the principles set out in Peregrine (No.1). The re-submission was not made until 28 December 1998 when the Provisional Liquidators submitted eight files evidence in support of their application for approval of their own fees and disbursements and revived their application for a further interim payment.

4. It is regretted that the court's diary was such that the application could not have been dealt with earlier. In any event, the application caused me to revisit Re Peregrine Investments Holdings Limited and Ors (No.2) [1998] 3 HKC 423 ("Peregrine (No.2)"). That was an application by the Provisional Liquidators for the appointment of joint and several liquidators of PIHL, PDL and PFIL and an order regarding the remuneration of the joint and several liquidators. That application was heard on 2 July 1998 and judgment handed down on 7 July 1998. After considering different possible bases of remuneration open to the committees of inspection to agree with the Liquidators pursuant to section 196(2) including the time-cost basis, I observed (at 426F) :

" Finally, in reaching an agreement (if any) with the liquidators on remuneration, the committee of inspection should be aware that the winding-up order in respect of each of the companies was made on 18 March 1998. Such remuneration as may be agreed would therefore be retrospective in the sense that it will cover the period from 18 March down to the date of appointment of the liquidators....." (emphasis added)

5. The premise underlying the passage appearing in italics arose from a submission which I did not question at the hearing on 2 July 1998 (and consequently was never explored or argued), namely, that a different regime took effect upon the making of the winding up orders and that the remuneration of the Provisional Liquidators after that date was essentially a matter for the committee of inspection and not for the court. Upon re-visiting the judgment in Peregrine (No.2), I was sufficiently troubled by what appeared to me to be an incorrect statement of law for a chambers hearing to be scheduled. Meanwhile, by letter of 9 April to Clifford Chance, the Provisional Liquidators were asked to clarify the status of their fees between the date of the winding up orders (i.e. 18 March 1998) and the date when the Liquidators of PIHL, PFIL and PDL respectively became "capable of acting as such" as defined in section 195 of Cap.32 ("the post-Order period").

6. At the chambers hearing, I explained the reasons why the passage in Peregrine (No.2) cited above and its underlying premise appeared to be wrong as a matter of law and I invited assistance on this issue from the Provisional Liquidators and the Official Receiver. Another matter which arose for consideration as a result was the validity of the Office Circulars issued by the Official Receiver's Office, entitled "Withdrawal of funds from the Companies' Liquidation Account for payment of liquidators' remuneration". This question was first raised with the Official Receiver by the court by letter dated 13 April 1999 and responded to by the Official Receiver by letter dated 17 April. Further written submissions on both issues were invited.

7. The day after the hearing, (some three weeks after the request), information regarding the status of the fees of the Provisional Liquidators for the post-Order period was finally made available. The information supplied extended to their disbursements during that period.

Remuneration of Provisional Liquidators during the post-Order period

Term of office

9. Where, after the presentation of the petition but before the making of any winding up order, a provisional liquidator is appointed by the court pursuant to section 193 of Cap.32, he continues in office "as the provisional liquidator" upon the making of a winding up order until he or another person becomes the liquidator and is capable of acting as such. See section 194(1)(aa) of Cap.32. Thus, the period of office of a provisional liquidator appointed prior to the making of a winding up order does not terminate with the making of the winding up order but continues beyond that date until he or someone else is appointed liquidator and is capable of acting as such. So much appears to be common ground.

Remuneration : court or committee of inspection

11. It is again common ground that during the period commencing with the appointment and, at a minimum, ending with the making of a winding up order ("the pre-Order period"), the remuneration of a provisional liquidator appointed by the court pursuant to section 193 is a matter for the court. In issue is whether the remuneration of the Provisional Liquidators during the post-Order period is a matter for the court or the committee of inspection.

12. One would expect the remuneration of a provisional liquidator to go hand in hand with his term of office, that being only logical. But the Official Receiver and the Provisional Liquidators support the correctness of the observations (in italics) made in Peregrine (No.2) cited above. They share a common position which is that the court's control over the remuneration of a provisional liquidator ceases with the making of a winding up order and that thereafter, the question of remuneration is entirely a matter for the committee of inspection.

13. Whilst accepting that the statutory provisions in this regard "are far from clear", the Provisional Liquidators submitted that as the making of a winding up order fundamentally alters the status of the company and the powers and duties of the office-holder appointed to manage its affairs, the relevant provisions of Cap.32 dealing with the powers and duties of liquidators, including their right to seek approval of their remuneration from the committee of inspection under section 196(2), should properly come into operation upon the making of the winding up order. They therefore believe that -

"the most logical cut-off point for the instigation of the two separate regimes for approval of office-holders' remuneration should be the date of the winding up order".

It was also submitted that -

"therefore that it cannot have been the intention of the legislators that two different remuneration approval regimes be in place post the making of a winding up order".

14. The Official Receiver's submissions which are set out in his letter dated 11 May 1999, may be summarized as follows. A liquidator appointed under section 193(1) "provisionally" after the presentation of the petition and pending the hearing of the winding up petition ("the Section 193 PL") is a different officer from the provisional liquidator appointed on the making of the winding up order under section 194 of the Ordinance ("the Section 194 PL") since the roles of a provisional liquidator before and after the making of a winding up order are different. The formal appointment of a "permanent" liquidator does not mark the transition from provisional liquidation to liquidation. The transition must be at the date of the winding up order. Accordingly, the Official Receiver submitted :

"(a) In the case of a Section 193 PL, the court is charged with the duty to determine remuneration pursuant to the order appointing them and where the liquidation does not proceed, according to Companies Winding-up Rule 28(3).
(b) The provisional liquidation of any company ceases with the making of the winding-up order and from this stage, the company is in liquidation by order of the court. The Section 194 PL has all the powers, duties and obligations of a liquidator. He is a liquidator for the purposes of the Ordinance; the only aspect of his position that is provisional being his tenure, pending the decisions of the First Meetings and appointment by the Court.

(c) The duty of the court as detailed in (a) does not apply to a Section 194 PL.
(d) The legislation as it currently stands regarding remuneration has not been amended to take account of the changes made to Section 194 of the Ordinance by The Companies (Amendment) Ordinance 1997.
(e) Whilst on the face of it Section 196 of the Ordinance does not appear to apply to a liquidator before formal appointment, in keeping with the submission that a Section 194 PL is in fact a liquidator as envisaged by the Ordinance, it may be possible to construe Section 196 as applying to the Section 194 PL, and to rule that the remuneration of the Section 194 PL should be determined by the Committee of Inspection."

Nevertheless the Official Receiver acknowledged that there is in fact :

"... a lacuna in the legislation on the issue of who determines the remuneration of the Section 194 PL when it is someone other than the Official Receiver. It is not specifically addressed in the Ordinance. ...."

15. At the forefront of the submissions that the logical cut-off point for the two separate regimes is the making of the winding up order is the assumption that the provisional liquidator does end up becoming the liquidator. That is the Achilles' heel of the submissions : one needs look no further than what had happened in the liquidations of PIHL, PDL and PFIL. In PIHL and PFIL, not all three joint and several Provisional Liquidators became joint and several liquidators : in each case, one of the three did not become liquidator and another was appointed in his place.

16. Reference was made to Palmer's Company Precedents (17th Edition)(1960) Part 11 Winding Up at page 108 where it is stated :

"On the making of the winding-up order, the powers of the provisional liquidator come to an end."

But English statutory provisions and the authorities are of no assistance given a crucial difference in the legislation, being the amendments introduced to section 194(1) of Cap.32 by the Companies (Amendment) Ordinance 1997 (Ordinance No.3 of 1997) which provided for a pre-winding-up order provisional liquidator to continue in office until he or someone else becomes liquidator. This provision has no counterpart under English legislation and is unique to Hong Kong.

17. The Hong Kong statutory framework is clear : where a provisional liquidator is appointed after the presentation of the petition, upon the making of a winding up order, he "continues to act as the provisional liquidator" until he or another person becomes the liquidator. See section 194(1)(aa). Whether or not he becomes liquidator would depend on the outcome of the meetings of creditors and contributories. An application to the court for a liquidator to be appointed would only be necessary where a person other than the provisional liquidator is to be the liquidator. Therefore where the provisional liquidator is to be the liquidator of the company, no application need be made to the court. See section 194(1)(b) and (d). Even so, applications have sometimes been made for the appointment of the provisional liquidator as liquidator which is not strictly necessary.

18. Section 196(2) which addresses the question of remuneration of a person other than the Official Receiver who is appointed liquidator has to be construed in the context of that framework. The provision does not in terms extend to the remuneration of provisional liquidators : it certainly cannot encompass the remuneration of a person who is not or does not become a liquidator. Section 196(2) cannot therefore be given 'retrospective' effect since that might extend to remuneration of persons who may not or do not become liquidators. Even if the submission that upon the making of a winding up order, a provisional liquidator's powers become enlarged because of statutory powers that are conferred upon "liquidators" upon the making of a winding-up order, that of itself does not impinge on the question of remuneration or confer on the committee of inspection any authority in relation thereto.

19. In my judgment, the remuneration of a provisional liquidator (other than the Official Receiver) during the entirety of his term of office whether pre or post the making of a winding up order, is a matter for the court under its inherent jurisdiction. The committee of inspection has no authority or power in that regard.

The Official Receiver's Office Circulars

20. The release of funds from the Companies' Liquidation Account on 14 August 1998 appears to have been made pursuant to the Official Receiver's Office Circular No.1/97 dated 16 October 1997. The material part provides as follows :

" Companies (Winding-up) (Amendment) (No. 2) Rules 1997 became operative on 30 May 1997. Companies (Winding-up) Rule 176 as now revised does not require the remuneration of liquidators to be taxed by the court. However, Companies (Winding-up) Rule 179 stipulates that liquidators can only be paid after settlement of fees, expenses and charges relating to the liquidation.

2. Interim or full payment of liquidators' fees from the estate in the Companies Liquidation Account will be authorized by the Office on the understanding that the payments are on account and should be refunded to the estate to pay the liquidation fees, expenses etc. having priority over liquidators' remuneration under Companies (Winding-up) Rule 179 if there are insufficient funds to do so."

Paragraph 3 of that Circular set out the procedure for processing requests by liquidators for payment of their fees out of the Companies' Liquidation Account and, in particular, the information required. By letter dated 18 May 1999, the Official Receiver informed the court that at that time (i.e. in 1998), the then practice was not to apply the requirements of ORO Circular No.1/97 to cases where the fees had been approved by the committee of inspection. In other words, payments were automatically released without more on evidence of approval. Not even the information set out in paragraph 3 of the Circular had to be made available.

21. What is the legal effect of payments so released?

22. They are described in para.2 of the Circular as "interim" or "on account" payments. However, they are not true "interim" or "on account" payments since the clawback or obligation to repay is restricted to there being insufficient assets to meet claims having priority to the liquidators' fees under Rule 179 of the Companies (Winding-up) Rules. It is only in this limited and restricted sense that the payments are "on account". From the perspective of those who are lower down in the payment chain such as the general body of creditors, under the terms of the Office Circular, such payments are for practical purposes 'final', inasmuch as thereafter there is no scope for any reduction which could operate to augment the dividends payable.

23. Whether or not that is the legal effect of the Office Circular would depend on a more fundamental question which is whether the Official Receiver has power to so provide. His jurisdiction to do so is not immediately apparent. The matter was accordingly raised with the Official Receiver on 13 April 1999.

24. The Official Receiver acknowledges that the Office Circulars were not issued pursuant to provisions in the companies' legislation. Neither section 196(2A) nor section 204 confers any such power : section 196(2A) authorizes the Official Receiver to review remuneration which has been determined and, in the context, must refer to remuneration agreed between the committee and the liquidator in a particular liquidation, and section 204 requires the Official Receiver to inquire into complaints by creditors or contributories. Again this must arise out of and relate to a specific liquidation. Neither section empowers the Official Receiver to 'legislate' on when and how payments to provisional liquidators and liquidators become 'final'. Further, I cannot accept the suggestion (made in the letter of 18 May 1999) that the Official Receiver may have power under section 204 to "query" the amount of remuneration approved by the court. The Official Receiver is an officer of the court, subject to its supervision and not the reverse!

25. If the relevant powers were not conferred on the Official Receiver, it must follow that the Circulars are ultra vires the powers of the Official Receiver where they are not purely administrative in nature but purport to affect the substantive rights of the parties. Whilst administrative expediency has been put forward as justifying the arrangements or procedures set forth in the Circulars, demonstrably, they go beyond that.

26. I accept that if Rule 179 were applied in its full rigour, liquidators cannot expect to be paid until the completion of the liquidation. Since this is a process that normally takes several years to complete, true interim payments would not be objectionable so long as there are reasonable safeguards to ensure that the recipient has adequate means to meet any obligation to repay should it arise.

27. As noted above, the Circular assumes the 'finality' of a liquidator's fees where they have been agreed by the committee of inspection. The assumption is questionable since such agreement is not necessarily the end of the matter : payment of such agreed fees are subject to (1) any order that may be made under section 196(2A); (2) any action that may be taken by the Official Receiver under section 204(1) in the event of any complaint by a creditor or contributory; and (3) any order that may be made by the court under section 205(2), quite apart from its inherent jurisdiction. In any event, ultimate control must lie with the court in whom the power to release liquidators is vested.

28. It is thus obvious that the limited clawback provided for in the Circulars overlooks these matters and the interests of those whose claims rank after the payment of the liquidators' fees, such as the general body of creditors. In my judgment, the Office Circulars are ultra vires, they have no effect and cannot operate to 'validate' payments made thereunder or prevent them from being re-opened at the instance of the court.

Disbursements

Disbursements incurred by the Provisional Liquidators during their tenure of office during the post-Order period have been taxed pursuant to Rule 176. They fall into the following principal categories : the fees of Clifford Chance, the fees of foreign lawyers and counsel (including Hong Kong counsel), and the fees of Price Waterhouse's overseas offices.

29. By far the largest payments were those made to Clifford Chance whose fees for the post-Order period in the three liquidations totalled more than $18.7 million. Their invoices were submitted on the basis that they had been approved by "the Joint Liquidators". These were sent to the taxing master on 25 August 1998 and allowed in full by the Registrar three days later. As is invariably the case for a Rule 179 taxation, there was no opposition to the application. In those circumstances, at best the taxation process was a mere rubber-stamping exercise, devoid of meaning and serving no useful purpose. At worst, it was farcical and nothing but a charade, the so-called 'taxation' giving an air of legitimacy to an otherwise meaningless exercise. This conclusion is best illustrated by what was submitted to the taxing master. For Clifford Chance's fees in respect of PFIL for the period 18 March to 30 June 1998, essentially the post-Order period, there was a covering letter from the Joint Liquidators opining that the total amount charged in the amount of $9,679,594.81 was "reasonable" with no further elaboration. In support of this claim was Appendix 1 to the letter consisting of a single sheet of paper :

"Peregrine Fixed Income Limited

Summary of Clifford Chance's fee notes for the period from 18 March to 30 June 1998

Invoice date	Invoice/ credit note number	Period	Fee HK$	Expenses HK$	Disbursements HK$	Total HK$
30-Apr-98	36466	18 March to 25 April 98	3,243,096.50	25,065.87	31,633.69	3,299,796.06
15-May-98	36576	18 March to 25 April 98	18,086.00	-	-	18,086.00
15-May-98	1553	18 March to 25 April 98	(12,675.00)	-	-	(12,675.00)
30-Jun-98	37207	26 April to 31 May 98	3,567,715.75	21,264.66	230,513.57	3,819,493.98
10-Jul-98	37322	1 June to 30 June 98	2,443,717.00	36,728.26	74,448.51	2,554,893.77
			9,259,904.25	83,058.79	336,595.77	9,679,594.81"

Although the covering letter mentions the enclosure of copies of Clifford Chance's invoices (referred to in Appendix 1), these do not appear to have been enclosed. At any rate, they cannot be found in the court's file. Even if they had been enclosed, it is extremely doubtful if they would have enabled the Registrar to undertake any meaningful scrutiny since at the relevant time (i.e. August 1998) such invoices would not have been anything more than narrative bills.

30. For the taxation process to serve its intended purpose, the taxing master requires proper assistance in cases where there is no true opposing party. It is one thing for a party directly affected in the sense of having ultimately to pay the taxed costs to decide not to challenge the application. It would not be unfair that he should be made to bear the consequences. It is quite another where no effective challenge is mounted by an opposing party who is an office holder and those who have to bear the consequences are not the office holder but the creditors. Scrutiny by provisional liquidators or liquidators is small comfort since their own pockets are not affected by the amount of disbursements to be paid, quite apart from the general unwillingness of those on a time-charge basis to query the bills of other professionals who charge on the same basis.

31. As far as I am aware, it is almost unheard of for opposed bills to be allowed in full. They are invariably taxed down. The result is markedly different in cases where the application is not opposed. In such cases, the (understandable) tendency has been to rubber stamp the application and allow the amount claimed in full without scrutiny. This was certainly the case until late 1998, when I understand, unopposed bills began to be scrutinized where the absence of opposition is from office holders who do not have to bear the financial consequences of the taxation exercise. That is a development in the right direction given the inherent deficiencies in time-based remuneration and the almost unlimited scope for overbilling. This of course imposes an intolerable burden on the taxing master. In my judgment, in discharging those duties he could legitimately require the office holder to provide assistance, whether by the office holder himself or from a third party such as a law cost draftsman.

32. In Peregrine (No.1) [1998] 3 HKC at 5I-6C, I had expressed considerable disquiet on the possibility of overmanning and on the number of billable hours that fee earners were apparently able to achieve on a sustained basis. U.S. courts have had to confront similar issues. The 'billable' hour has given rise to considerable case-law in the United States from which specific problem areas can be discerned. See, for example, Re Pothoven, 84 BR 579 at 585-586 (Bankr SD Iowa 1988); Re Wicat Securities Legislation, 671 F.Supp.726 at 734-737, 742 (CD Utah 1987); In re Gold Seal Products Co. Inc., 128 BR 822 (Bankr ND Ala 1991) and Chrapliwy v. Uniroyal Inc., 584 F.Supp.40 at 46-50 (ND Ind 1983). Given this context, it is highly unlikely that, if subjected to proper scrutiny, claims for time-based fees would be allowed in full.

33. If, as I have held, the approval of the fees of the Provisional Liquidators during the post-Order period of their tenure of office was not within the purview of the committee of inspection under section 196(2), their fees and disbursements must be a matter for the court. Notwithstanding that the disbursements have been 'taxed', as will become apparent, the court's inherent jurisdiction to give directions in respect of these disbursements remains intact.

Payments made

34. The information supplied by the Provisional Liquidators as regards their fees for the period from 18 March 1998 to 2 July 1998 are as follows :

	Fees (HK$)		Disbursements (HK$)
PIHL	30,322,893		638,341
PFIL	22,048,402		129,292
PDL	4,893,864	_________	22,363	_______
Total		57,265,159		789,996

The fees were settled on 14 August 1998 and the disbursements on 16 September 1998.

35. It would appear from the letter dated 15 April 1999 from Clifford Chance that the fees and disbursements which were described in their letter of 21 April 1999 as "direct disbursements of the office-holders" during the post-Order period have been considered and approved by the relevant committees of inspection. It would further appear that an application was then made to the Official Receiver for release of the same out of the Companies' Liquidation Accounts pursuant to Office Circular No.1/97.

36. So far as disbursements (other than direct disbursements of the office-holder) are concerned, they differ from the fees and direct disbursements of the Provisional Liquidators in that they have been taxed pursuant to Rule 176. As noted above, by far the largest disbursements made were in respect of Clifford Chance's fees. For the post-Order period, their fees were as follows :

	(18/3/98 to 30/6/98) (HK$)
PIHL	5,694,743.93
PFIL	9,679,594.81
PDL	3,332,453.50	___________
		18,706,792.24

37. They were allowed in full and settled on 21 September 1998. So were the other two categories of disbursements, i.e. the fees of foreign lawyers and counsel and the fees of Price Waterhouse's overseas offices.

Order

38. As the committees of inspection and/or Joint Liquidators had no authority over the fees of the Provisional Liquidators and disbursements incurred during the post-Order period, the payments made are not binding on the court. The taxations obtained make no difference. For, as explained above, there was no taxation in any real sense but a mere rubber stamping exercise. Moreover, the submission of fees for approval by the taxing master was not pursuant to any order or direction of the court exercising its inherent jurisdiction over the fees and disbursements of the Provisional Liquidators incurred during the post-Order period : rather, as noted above, the taxations were obtained by the Liquidators and granted by the Registrar under a mistake of law. In my judgment, the entire exercise was a nullity and, in any event, is voidable at the instance of the court. I see no good reason for not setting aside the payments made (including the taxations) and I so order.

39. Accordingly, I direct that (a) the directions given in paragraph 1 of the Orders dated 23 November 1998 for the pre-Order period are to apply, mutatis mutandis, to the fees of the Provisional Liquidators of PIHL, PDL and PFIL for the post-Order period and (b) the directions given in paragraph 2 of the November Orders for the pre-Order period are to apply, mutatis mutandis, to all disbursements incurred by the Provisional Liquidators including the fees of Clifford Chance, the fees of foreign lawyers and counsel and the fees of Price Waterhouse's overseas offices for the post-Order period.

40. The directions given in November 1998 are the subject of an appeal which is to be heard in July. If (as I must assume), the Provisional Liquidators do not agree with my decision regarding their fees and disbursements during the post-Order period, this could conveniently be raised for determination by the Court of Appeal at the same time. Indeed, that would appear to be the most efficient way of resolving the issue.

Whether further interim payment to be ordered

41. The fees of the Provisional Liquidators for the period pre and post the date of the winding-up order in round terms total some $93 million. The de facto situation is that they have been paid, on account, 33% of the fees of the pre-Order period and 100% of the fees of the post-Order period. Put differently, they have received on account $69 million of total fees, or approximately 74%. Obviously any overpayment will have to be repaid prior to any release of the Liquidators from office. This would extend to disbursements that cannot be justified. In view of what has occurred, it would not be appropriate for me to exercise my discretion to make any further interim payments to the Provisional Liquidators. The application is accordingly refused.

	(Doreen Le Pichon)
	Judge of the Court of First Instance, High Court

Representation:

Mr Mark Hyde of M/s Clifford Chance, for the Liquidators

The Official Receiver

30026-EN-1998-07-02

RE PEREGRINE INVESTMENTS HOLDINGS LTD. and Others

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HCCW000020D/1998

HCCW20, 22 and 32/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NOS.20, 22 AND 32 OF 1998

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	IN THE MATTER OF PEREGRINE INVESTMENTS HOLDINGS LIMITED

	AND IN THE MATTER OF PEREGRINE DERIVATIVES LIMITED

	AND IN THE MATTER OF PEREGRINE FIXED INCOME LIMITED

	and

	IN THE MATTER OF THE COMPANIES ORDINANCE CAP.32

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Coram : The Hon Mrs Justice Le Pichon in Chambers

Date of Hearing : 2 July 1998

Date of Order : 2 July 1998

Reasons Handed Down in Court : 7 July 1998

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R E A S O N S

-------------------

1. Following the first meeting of creditors and contributories in Peregrine Investment Holdings Limited ("PIHL"), Peregrine Derivatives Limited ("PDL") and Peregrine Fixed Income Limited ("PFIL"), the Provisional Liquidators of each of these companies submitted their respective reports to the court, and at the same time, sought orders for the appointment of joint and several liquidators of PIHL, PDL and PFIL respectively and, inter alia, an order regarding the remuneration of such joint and several liquidators. The relevant remuneration orders which are in identical terms for each of PIHL, PDL and PFIL are :

"The remuneration of the liquidators to be such as may be agreed between the Liquidators and the Committee, and in default of agreement such remuneration shall be determined by the court as provided for in section 196(2) of the Companies Ordinance."

Each of the orders for remuneration was stayed pending the handing down of these reasons which are intended to assist the committee of inspection in determining how remuneration ought to be fixed for the liquidators. As the principles are of general application, it is appropriate to adjourn the proceedings into court for the reasons to be handed down.

The statutory framework

2. The remuneration order reflects the statutory position. In broad terms, the framework is that it is a matter for agreement between the liquidators and the committee of inspection. If however they fail to reach an agreement, the liquidators' remuneration will then be determined by the court. Section 196(2) of the Companies Ordinance provides as follows :

"(2) Where a person other than the Official Receiver is appointed liquidator, he shall receive such remuneration by way of percentage or otherwise as is determined-
(a) where there is a committee of inspection, by agreement between the liquidator and the committee of inspection; or
(b) where there is no committee of inspection or the liquidator and the committee of inspection fail to agree, by the court,

and if two or more persons are appointed liquidators, their remuneration shall be distributed among them in such proportions as may be determined by the committee of inspection or the court, as the case may be."

3. Whilst section 196(2) is silent as to the subject matter upon which the percentage is to be ascertained, it stands to reason that it must be the value of assets realized or distributed. This is certainly the current position in England : see rule 4.127(2)(a) of the Insolvency Rules 1986. Under those Rules, the percentage is of the value of assets realized or distributed or a combination of both. In determining that percentage, sub-paragraph 4 of that rule requires that regard be had to-

(a) the complexity (or otherwise) of the case,
(b) any respects in which, in connection with the winding up, there falls on the insolvency practitioner (as liquidator) any responsibility of an exceptional kind or degree,
(c) the effectiveness with which the insolvency practitioner appears to be carrying out, or to have carried out, his duties a s liquidator, and
(d) the value and nature of the assets with which the liquidator has to deal.

Although the Insolvency Rules are not a part of the law of Hong Kong, there is nothing in section 196(2) to prohibit a committee of inspection, if it thought fit, to adopt such of those criteria as appear appropriate.

4. Remuneration by way of percentage is mentioned specifically in section 196(2). Nevertheless that is but one of the possible bases of remuneration. An alternative basis for remuneration would be the so-called time cost basis. As explained in my judgment (handed down on 25 June 1998) in relation to the application of the Provisional Liquidators for remuneration for the period commencing with their appointment until the date the companies were wound up, this does not mean that office-holders are entitled to charge the number of billable hours that they assert have been spent on discharging their duties. Being fiduciaries, they have to justify that the time claimed to have been spent was properly spent in attending to matters arising in the liquidation.

5. In deciding whether or not the remuneration of the liquidators should be on a time cost basis, the committee of inspection needs to be alive to the problems highlighted by the court in that judgment concerning Price Waterhouse's fees. It must consider whether such a basis is going to be workable in the light of the problems identified and therefore how the apparent deficiencies in Price Waterhouse's internal office systems have been or can be remedied before agreeing to such a basis. I need hardly stress the importance of the committee being satisfied that proper systems are in place before any agreement on a time cost basis is reached. The committee is itself charged with looking after the interests of the general body of creditors and this factor should not be overlooked.

6. Finally, in reaching an agreement (if any) with the liquidators on remuneration, the committee of inspection should be aware that the winding-up order in respect of each of the companies was made on 18 March 1998. Such remuneration as may be agreed would therefore be retrospective in the sense that it will cover the period from 18 March down to the date of appointment of the liquidators. It is to be noted that during the period of provisional liquidation, the Provisional Liquidators were remunerated on a time cost basis pursuant to the order appointing them. By virtue of section 194(1)(aa), the Provisional Liquidators had to continue to act as such until they or other persons become the liquidators. However, this does not mean that the committee is under any obligation to agree to a time cost basis : it is a factor to be taken into account. The committee is at liberty to agree to the basis it considers appropriate having regard to the interests of the general body of creditors. It is only in default of any agreement being reached that, under the provisions of section 196(2), remuneration will fall to be determined by the court.

Representation:

Mr Mark Hyde of M/s Clifford Chance, for the Provisional Liquidators

Ms Phyllis McKenna for the Official Receiver

	(Doreen Le Pichon)
	Judge of the High Court Court of First Instance

32140-EN-1998-06-25

Re PEREGRINE INVESTMENTS HOLDINGS LTD.

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HCCW000020A/1998

HCCW20, 22 and 32/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

(COMPANIES WINDING-UP NO.20, 22 AND 32 OF 1998)

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IN THE MATTER OF PEREGRINE INVESTMENTS HOLDINGS LIMITED
and
IN THE MATTER OF THE COMPANIES ORDINANCE Cap.32

Coram : The Hon Mrs Justice Le Pichon (in Chambers)

Date of Hearing : 27 May 1998

Date of Handing down of judgment in Court : 25 June 1998

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J U D G M E N T

------------------------

Le Pichon, J.:

1. This application concerns the remuneration of provisional liquidators and, in particular, the principles that apply in fixing that remuneration. Whilst it is a matter close to the heart of insolvency practitioners, it is no less the case for creditors of insolvent companies. For, in any insolvency, what is paid to provisional liquidators by way of fees or disbursements out of an insolvent company's assets will not be available for distribution to the creditors. Given the recent spate of large insolvencies and the absence of any Hong Kong decisions on the subject, it would be appropriate to adjourn the hearing into open court so that this judgment is made public.

Background

2. The Provisional Liquidators were appointed provisional liquidators of Peregrine Investments Holdings Limited ("PIHL") and Peregrine Derivatives Limited ("PDL") on 13 January 1998 and of Peregrine Fixed Income Limited ("PFIL") on 16 January 1998. On 13 March 1998, the Provisional Liquidators submitted to the court for its approval, their fees from the respective dates of their appointment as Provisional Liquidators of PIHL, PDL and PFIL, up to and including 15 February 1998, as well as the fees of Deacons, Graham & James up to and including 15 February 1998 and Clifford Chance up to and including 14 February 1998, being the two firms of solicitors employed by the Provisional Liquidators to assist them in the liquidation. The fees sought were of a considerable magnitude : in round terms, the fees of the Provisional Liquidators (for approximately 34 days of work) were of the order of $27 million, Deacons' fees were approximately $13 million and Clifford Chance's fees were approximately $7 million, totalling $47 million. I found the level of fees alarming.

3. At a preliminary hearing in chambers on 19 March 1998, I raised with the Provisional Liquidators the question whether or not they accepted that the principles enunciated by Ferris J in Mirror Group Newspapers Plc v. Maxwell & Others [1998] BCC 324 apply to the fixing of their remuneration. Maxwell concerned applications by court-appointed receivers of the estate of the late Robert Maxwell for directions as to (i) the manner in which their remuneration was to be fixed; (ii) the authorization of certain disbursements; and (iii) the payment of a substantial sum on account of remuneration and disbursements in advance of the final quantification of those matters. As will become apparent, it is a decision of seminal importance in the context of the charges of office-holders. In the last of the 1997 Company Lawyer lectures delivered by Lightman J, subsequently published as an article, he described the Maxwell judgment as "illuminating" and "far-reaching", providing "an answer (if not the answer) to the problem of costs in insolvency cases" : see Lightman, Office-holders' charges : cost control and transparency (1998) 19 Company Lawyer 72 at 73.

4. In view of the position taken by the Provisional Liquidators that Maxwell is distinguishable, it was imperative that there be an adjourned hearing at which the matter could be properly ventilated and argued. Whilst an ex parte application by provisional liquidators for fees by its nature meets with no opposition, making the application inter partes was not a solution since it was unlikely that any creditor would wish to take on that task. Moreover, the matter was of considerable public concern, affecting, as it does, insolvencies generally and given the public perception that liquidations can have 'all the appearance of "party-time" for the professionals involved'. As Lightman J remarked in an earlier speech he delivered, published in (1996) JBL 113, 115-6, the problem as he saw it was :

"... the perceived lack of professional concern and lack of control over fees and costs in corporate insolvencies (and in particular in cases of receiverships). There is perceived to be a particular mindframe towards costs referable to the open unguarded pocket from which the costs are paid and the absence of effective monitoring - a mindframe careless of the consequences for unsecured creditors and others."

5. In those circumstances, it seemed desirable for an amicus to be appointed to assist the court under its inherent jurisdiction and I so intimated. This met with considerable resistance on the part of the Provisional Liquidators as well as Clifford Chance and Deacons who considered it both 'unprecedented' and 'conceptually inappropriate' because, in their view the role of that amicus would be to take an adversarial position against the professionals involved. That objection was misplaced since an amicus does not have an adversarial role. Rather, his role is to assist the court's deliberation by bringing up facts or law not known to the judge and he is independent of the parties to the proceedings.

6.Maxwell apart, the bills caused me some disquiet on several fronts : one was the possibility of 'overmanning'; the other was the sheer number of billable hours involved, translating in many cases into individuals achieving significant billable hours on a sustained basis of over 30 days. By definition, 'billable' hours represent that part of the working day that is properly chargeable to clients. Of necessity, they represent but a percentage, albeit possibly a significant percentage, of the day that is spent 'working'. In my experience, it is well-nigh impossible for the average mortal to maintain a high number of billable hours on a daily basis much beyond a few days if one is absolutely meticulous and honest about it. Yet, in many instances in the present case, the daily billable average is in double digits and, in some cases, well into them. I have to say that I view such apparent marathon feats with a considerable degree of scepticism, enhanced by the absence of any mechanism in the system for checking and control.

7. The bills also appeared to be insufficiently particularized. Since a winding-up order of each of the three companies had been made the day before the preliminary hearing, i.e. on 18 March, I directed that fully detailed and particularized bills be prepared down to 17 March. As an interim measure, upon the application of the Provisional Liquidators, I allowed a payment on account of 25% of the fees sought.

The adjourned hearing

8. The main purpose of the adjourned hearing was therefore to clarify the principles that apply on an application by provisional liquidators for -

a) payment of their fees out of the assets of the company in liquidation; and
b) recoupment or reimbursement to them of professional fees incurred by them out of the assets in their hands.

9. On 27 April 1998, the following material was lodged with the court :

(i) the fees and expenses of Price Waterhouse for the relevant period as separately billed to PIHL, PDL and PFIL together with a covering letter dated 25 April 1998 concerning the preparation and presentation of the bill and the supporting documentation;
(ii) the fees and disbursements of Clifford Chance with regard to the work undertaken on the instructions of the Provisional Liquidators of PIHL, PDL and PFIL together with two letters dated 16 April 1998 from Clifford Chance to the Provisional Liquidators regarding the bills;
(iii) three letters from Price Waterhouse to the court dated 24 April 1998 explaining the basis on which they have undertaken a detailed review of Clifford Chance's three separate bills together with confirmation that subject to certain deductions agreed with Clifford Chance, the bills were approved for payment in the form in which they were presented to the court.

10. On 1 May 1998, Deacons lodged their debit note as well as a breakdown of their time costs and a detailed description of the work done with the court.

11. Conspicuously missing from the material submitted were disbursements such as counsel's fees and the fees of foreign lawyers. As a result of inquiries made by the court, details of those disbursements were made available shortly before the hearing on 27 May 1998.

12. Fees (based on time costs) as well as fees after specific write-offs and/or negotiated reductions (considered in greater detail later) and disbursements (in HK$ and rounded where necessary) are summarized in the table below :

		PIHL	PDL	PFIL	Sub-Total	Total (after write-offs/ reductions)
Price Water-house	Fees	24,977,545	2,708,732	11,258,560	38,944,837
	Write-offs/ reductions	(2,805,444)	(135,437)	(562,928)	(3,503,809)
	Fees (after write-offs/ reductions)	22,172,101	2,573,295	10,695,632	35,441,028
	Disbursements (1)	188,707	146,792	210,230	545,729
	(2)	262,926	140,869	1,466,710	1,870,505
	Total (after write-offs/ reductions)	22,623,734	2,860,956	12,372,572		37,857,262

Deacons	Fees	20,941,300			20,941,300
	Write-offs/ reductions	(2,502,364)			(2,502,364)
	Fees (after write-offs/ reductions)	18,438,936			18,438,936
	Disbursements (1)	567,542			567,542
	(2)	2,583,328		5,568	2,588,896
	Total (after write-offs/ reductions)	21,589,806		5,568		21,595,374

Clifford Chance	Fees	3,530,908	2,897,166	8,487,020	14,915,094
	Write-offs/ Reductions	(176,545)	(144,858)	(424,351)	(745,754)
	Fees (after write-offs/ reductions)	3,354,363	2,752,308	8,062,669	14,169,340
	Disbursements (1)	73,189	24,134	106,809	204,132
	(2)	1,337,188	25,317	1,189,786	2,552,291
	Total (after write-offs/ reductions)	4,764,740	2,801,759	9,359,264		16,925,763

The two categories of disbursements reflect how these have been presented to the court. Category (2) comprises disbursements by way of counsel's fees and fees of foreign lawyers. The figures are compiled from the summary prepared by counsel for the Provisional Liquidators. All other disbursements such as photocopying charges, courier and fax charges and employment of security guards come within category (1).

13. For reasons difficult to fathom, whilst it is clear from the summary provided to the court who was responsible for instructing counsel or the foreign lawyers concerned in any particular matter, the role of reviewing the reasonableness of the fees was apparently undertaken by Deacons who negotiated reductions in relation to the invoices for the PRC lawyers and the German lawyers, being two out of a total of forty invoices. In their letter of 25 May 1998, the Provisional Liquidators were informed by Deacons that :

"... pursuing and negotiating fees with overseas counsel is of itself a timely (and potentially costly) exercise and we have sought to achieve a balance between the cost saving benefits of such an exercise and running up further costs."

14. The aggregate amount of fees and disbursements for which approval is sought is of the order of $76 million for the period of 9 weeks or 63 days which elapsed between the provisional liquidation and the winding-up orders. I am greatly troubled by the amount involved.

15. Mr Benjamin Yu, SC, appeared as amicus curiae at the adjourned hearing and I am grateful to Mr Yu for his submissions.

Remuneration of provisional liquidators

Under the Companies Ordinance

16. Section 193 of the Companies Ordinance which authorizes the appointment of provisional liquidators after the presentation of the winding-up petition is silent on the question of remuneration. Where the Official Receiver acts as provisional liquidator, he is allowed such amount as the court "may consider reasonable" in respect of the services of the official receiver as provisional liquidator : see rule 6 and Schedule 3, Table B, para.II of the Companies (Fees and Percentages) Order.

17. Although rule 28(3) of the Companies (Winding-up) Rules provides for the payment of costs, charges and expenses properly incurred by a provisional liquidator, including such sum as is or would be payable under the scale of fees in force for the time being where the Official Receiver is appointed provisional liquidator, it is limited to cases where no winding-up order is made upon the petition, or such order as made for the winding-up of the company is rescinded, or the proceedings are stayed. It does not apply where a winding-up order is made on the petition as in the present case.

18. Under English law, the position is very different. It is governed by rule 4.30 of The Insolvency Rules 1986 which provides :

"Rule 4.30 Remuneration
(1) The remuneration of the provisional liquidator (other than the official receiver) shall be fixed by the court from time to time on his application.
(2) In fixing his remuneration, the court shall take into account-
(a) the time properly given by him (as provisional liquidator) and his staff in attending to the company's affairs;
(b) the complexity (or otherwise) of the case;
(c) any respects in which, in connection with the company's affairs, there falls on the provisional liquidator any responsibility of an exceptional kind or degree;
(d) the effectiveness with which the provisional liquidator appears to be carrying out, or to have carried out, his duties, and
(e) the value and nature of the property with which he has to deal."

There is no corresponding Hong Kong provision.

19. It is common ground that the court has power when it appoints provisional liquidators to make an order specifying how they are to be remunerated. Even where no provision has been made in the order appointing the provisional liquidators for remuneration, the court nevertheless has inherent jurisdiction to allow a liquidator to retain his proper remuneration and expenses out of the assets he has administered. See In re Berkeley Applegate Limited [1989] 1 Ch 32 and Snell's Equity, 29th Ed. 254.

Express provision on appointment

20. In the present case, the order made express provision for remuneration. The terms upon which the Provisional Liquidators were appointed are identical. The relevant provision reads :

"IT IS FURTHER ORDERED that the remuneration of the Provisional Liquidators of the Company be calculated according to the standard hourly rates charged by Price Waterhouse for the services of the Provisional Liquidators and other grades of staff employed by them"

21. Counsel for the Provisional Liquidators did not seek to argue that the fee notes of the Provisional Liquidators are conclusive as to the amount to which they are entitled by reason of the terms of their appointment. As will become apparent, such an argument would be wholly untenable. Mr Fok submitted that given the express terms of the appointment, the time basis of assessment "should be the starting point in any determination of the method by which the outstanding fees of the Provisional Liquidators should be quantified" and that the observations of Ferris J in Maxwell should be read in the light of that important fact.

The Maxwell principles

22.Maxwell establishes (at 333E-334F) that :

(1) Administrators, liquidators, receivers, trustees in bankruptcy or other officers ("office-holders") are fiduciaries charged with the duty of protecting, getting in, realizing and ultimately passing on to others assets and properties which belong not to themselves but to creditors or beneficiaries of one kind or another. They are appointed because of their professional skills and experience and they are expected to exercise proper commercial judgment in the carrying out of their duties. Their fundamental obligation is a duty to account, both for the way in which they exercise their powers and for the property which they deal with.

(2) The allowance of remuneration to officer-holders represents an exception to the rule that a trustee must not profit from his trust which rule applies to all kinds of person who are in a fiduciary position. This exception inevitably involves a conflict between the interests of the fiduciary who is to receive such remuneration and the interests of those to whom the fiduciary duties are owed, who will bear whatever remuneration is allowed.

(3) It is for the office-holder who wishes to be remunerated at a particular level to justify his claim :

(a) Office-holders must give full particulars to justify the amount of any claim for remuneration. Where they seek to be remunerated upon the basis of time spent, they must do significantly more than list the total number of hours spent by them or other fee earning members of their staff and multiply this total by a sum claimed to be the charging rate of the individual whose time was spent. They must explain the nature of each main task undertaken, the considerations which led them to embark upon that task or to persevere in it. The time spent must be linked to this explanation so that it can be seen what time was devoted to each task.
(b) Office-holders must keep proper records of what they have done and why they have done it. Without contemporaneous records of this kind, they will be in difficulty in discharging their duty to account. Retrospective reconstructions are unlikely to be as reliable as contemporaneous records. Office-holders whose records are inadequate are liable to find that doubts are resolved against them because they are unable to fulfill their duty to account for what they have received and to justify their claim to retain part of it for themselves by way of remuneration.
(c) The test is whether a reasonably prudent man, faced with the same circumstances in relation to his own affairs, would lay out or hazard his own money in doing what the office-holders have done. It is not sufficient for office-holders to say that what they have done is within the scope of the duties or powers conferred upon them. They are expected to deploy commercial judgment, not to act regardless of expense. Transactions carried out at a high cost in relation to the benefit received will be subject to close scrutiny.

23. Mr Yu submitted that as a corollary, a provisional liquidator is not entitled to remuneration in respect of work which a reasonably prudent man faced with the same circumstances in relation to his own affairs would not have laid out his own money. Costs and expenses incurred unnecessarily should be disallowed. Re Kal Assay Southern Cross Pty Limited (in Liquidation) [1992] 9 ACSR 245, 262-3 and In re Silver Valley Mines (1882) 21 Ch D 381, 392. Further, a provisional liquidator should also be deprived of costs occasioned by a want of reasonable skill on his part. Equally, he should not be entitled to remuneration for services rendered in breach of his duties. Re Kal Assay Southern Cross Pty Limited (in Liquidation) (supra) at 263

24. As I understand it, Mr Fok, counsel for the Provisional Liquidators, accepts the general principles set out above save in the following respects :

25. First, Mr Fok takes issue with the suggestion that a failure to keep contemporaneous records would disentitle the Provisional Liquidators to remuneration. He submitted that one should approach the matter with 'practical realism', that the purpose of the exercise is not to apply bureaucratic red tape to make recovery impossible so that doubts ought not be resolved against the Provisional Liquidators, at least not until after they have been afforded an opportunity to explain.

26. On a proper reading, I do not accept that the judgment of Ferris J goes anywhere near to saying that office-holders who do not keep contemporaneous records are disentitled to remuneration. The burden is upon them to justify the remuneration claimed. They may do so by means other than contemporaneous records although, as Ferris J pointed out, contemporaneous records are likely to be a more reliable form of proof.

27. Second, as to the need to justify every dollar claimed, it was submitted that in taxation, the underlying acceptance is that what a solicitor says he has done was done. Therefore the court should accept the word of the Provisional Liquidators at face value and be very slow to disbelieve them or question the integrity of their assertions.

28. I have some difficulty in accepting this last proposition for the reason that a clear conflict of interest exists. A similar argument was put forward in Maxwell which was rejected by Ferris J (at 338H-339C) :

" A particular argument against assessment of remuneration by a taxing officer which was presented by Mr. Purle is that the Receivers in this case are insolvency practitioners unused to taxation procedures, and that although they have records of the amount of time spent in the receivership by them and their employees these records do not show, as the records of a solicitor would do, how much time was spent by any particular individual on a particular task. The suggestion was that it would be unreasonable for insolvency practitioners to be required to justify their charges in the same way that a solicitor would have to justify his charges on the taxation of costs.

I have to say that I find this argument wholly unacceptable. Although court-appointed receivers are officers of the court and, in the absence of positive misconduct on their part, are entitled to support and protection from the court, when they seek to have their remuneration fixed they must, as I have already indicated, justify their claim. In the present case this claim is based exclusively on time expended charged at hourly rates. The evaluation of this claim inevitably involves consideration of two main questions, namely (i) whether the time charged for was reasonably and properly expended in the course of the receivership having regard to the other material factors which I have mentioned and (ii) if it was, what is the appropriate hourly or other charge. Mr. Purle's argument appeared to me to come close to saying that the court cannot investigate the first of these matters, but must accept the Receivers' account of the time they have spent, because the Receivers may be in difficulty in showing what they or their employees did during the time they have recorded as being spent on the receivership. If this were indeed the case it would show, I think, that the Receivers have not properly understood their fiduciary position."

As Mr Yu pointed out, the court cannot take the Provisional Liquidators' say so at face value since it is not the court's money that is in issue but somebody else's money. The effect of any approval is to allow the Provisional Liquidators to take money away from their principals. It is for that reason that office-holders are required to attain the same high standard that fiduciaries are required to attain when they charge remuneration.

29. Third, Mr Fok does not accept that transactions carried out at high cost in relation to the benefit received should attract a different kind of scrutiny.

30. But it is not a corollary that transactions carried out at low cost attract little or no scrutiny. The basis for the objection is difficult to follow : for one thing, the high cost when juxtaposed to the amount recovered might conceivably raise questions as to the reasonableness of the action taken.

31. As noted above, it is not now suggested that the Maxwell principles do not apply where express provision has been made for remuneration to be on a time basis. This is because the basis of remuneration does not alter the fundamental principle that provisional liquidators, like other office-holders, are fiduciaries and have an obligation to account.

32. In the course of their submissions, both counsel for the Provisional Liquidators and the Official Receiver suggested that as the matters to which the court is to have regard under rule 4.30 of the Insolvency Rules are matters of common sense, the court can somehow be guided by the considerations set out thereunder, such as the complexity of the Peregrine liquidation, the exceptional kinds or degrees of responsibility that did fall upon the Provisional Liquidators due to the complexity of the tasks, the time pressures involved, the value of the assets and the high profile nature of the liquidations in a particularly sensitive economic climate as well as the effectiveness of the action taken in preserving and realizing property of the companies in question even though rule 4.30 is not part of the law of Hong Kong. It was also suggested by the Official Receiver that rule 4.30 could be adopted into the Hong Kong system either by way of a Practice Direction or by incorporating those principles in a judgment.

33. Mr Yu submitted, correctly, in my view, that where remuneration has been ordered to be on a time basis, it would be inconsistent then to bring all the other factors back into consideration. The basis of remuneration could have been on one of several bases : a time basis, a realization basis, or the all encompassing test under rule 4.30. Once one basis has been selected, it would not be consistent with the order to apply a basis which has effectively been rejected.

34. Both Mr Fok and the Official Receiver appeared to have difficulty with the so-called test of the reasonably prudent businessman. The test is not what a reasonable businessman would do but as Lightman J explained :

"I would summarise the essential lesson to be derived from the Maxwell case as follows: that in all his decision-making an office-holder must transparently display the care and anxiety of a prudent businessman acting in his own affairs at his own costs and risk."

([1998] 19 Company Lawyer at 74)

35. In my judgment, the Maxwell principles set out above apply without being qualified in the manner suggested by the Provisional Liquidators.

Solicitors' bills

36. The treatment of the bills of the solicitors employed by office-holders in Maxwell was also a major aspect of Ferris J's judgment. The main features (at 344B-F) are summarized below :

(1) An office-holder's own claim for remuneration and the bills of solicitors employed by them are governed by different principles.

(2) As between the office-holder and his solicitors, there is a contract and the office-holder is personally bound to pay to the solicitors their proper charges for work done in accordance with that contract.

(3) As between the office-holder and the estate which he was appointed to administer, the question is whether and to what extent sums which the office-holder is obliged to pay his solicitors are allowable as disbursements in settling the office-holder's accounts.

(4) Sums payable to solicitors engaged by office-holders are in no different position from any other disbursements.

(5) As regards each bill, two questions arise : what is the proper amount payable by the office-holder as clients, and how much of the amount so payable is to be allowed as payment out of the estate.

37. As to (5), in the first instance, it is for the office-holders as the paying party to decide whether or not they accept their solicitors' accounts in full. If, the accounts are accepted and paid, the office-holders' conduct may subsequently be attacked on the ground that the charges were excessive and should have been reduced by negotiation or taxation. If such an attack were successful, it would necessarily affect the amount that falls to be satisfied out of the estate with the consequence that the office-holders will have to absorb the shortfall.

38. Ferris J went on (at 344G-H) to consider the steps open to office-holders who were not willing to run the risk to avoid or reduce it :

"At the very least they must subject the bills to critical scrutiny. If they simply pay them without such scrutiny they will obviously be vulnerable. They may be able to negotiate certain reductions, thus facilitating an argument that the negotiated reductions are preferable to the possibility of obtaining greater reductions at greater costs ... Finally they can require the bills to be taxed ... A taxation will, of course, put beyond doubt the amount that the [office-holders] are liable to pay their solicitors. This result is, however, achievable only at a significant cost in terms of the fees payable on taxation and, unless at least one-fifth of the bill is taxed off, the costs of taxation. Moreover, even the taxation of the bill will not dispose of all the issues which may arise ... there may, for example, be a question whether the solicitors should have been retained to do a particular work." (emphasis supplied)

39. What is made abundantly clear in Ferris J's judgment is that it is not an acceptable attitude for office-holders to leave it to the court to decide to what extent their solicitors' bills are to be paid out of the estate. This is because it suggests a degree of flexibility and if there is flexibility, the bills should be reduced by negotiation to the level the solicitors are prepared to accept. It is the minimum duty of office-holders to subject the bills to critical scrutiny : it simply will not do to pass on the bills to the court without comment. Moreover, it is to be noted that the court has no means other than taxation to scrutinize bills of large scope and for large amounts.

Other unpaid disbursements

40. No meaningful distinction exists between solicitors' bills and other unpaid disbursements save those that cannot be quantified by an independent process because there does not exist a process similar to taxation as regards those disbursements.

41. Where the court has not been asked for prior authority to incur particular liability, it cannot be right for the court to be asked whether or not a liability incurred without such authority should be discharged. As Ferris J noted (at 345H) :

"[Office-holders] are appointed in the expectation that they will use their commercial judgment without continually referring matters to the court. The court will be generally supportive of them in dealing with the consequences to the estate of particular exercises of that judgment. Nevertheless the question of the allowance of disbursements made out of the estate as the result of the exercise of that judgment remains a separate question from that of the liability of the [office-holders] to pay that disbursement."

42. What emerges very clearly from Maxwell is that the onus is upon the office-holder to scrutinize the bills and then pay the bills before they come to court for reimbursement.

43. I now turn to consider how the Maxwell principles are to be applied to the fee applications before me.

Fees of the Provisional Liquidators

44. The critical issue is whether the Provisional Liquidators have discharged the burden on them of showing that the fees they wish sanctioned by the court were justified applying the test enunciated by Ferris J in Maxwell. Mr Yu has helpfully summarized the questions which the court should ask :

- have the Provisional Liquidators adduced sufficient evidence to explain the nature of each task undertaken and the considerations which led them to embark upon that task?
- have the Provisional Liquidators linked the time spent to the explanation?
- is the court satisfied that a reasonably prudent man faced with the same circumstances in relation to his own affairs, would have laid out or hazarded his own money in doing what the Provisional Liquidators have done?
- have the Provisional Liquidators produced contemporaneous records of what they have done and why they did it?
- have they produced contemporaneous records of all items of expenditure and of services rendered, how they were calculated and how they were justified?
- should the fees for any item of work be disallowed as being unnecessarily incurred?
- should the fees for any item of work be disallowed as being incurred in breach of duties?

45. The bills and supporting schedules of the Provisional Liquidators have to be examined in that light.

46. The supporting schedules list the tasks and sub-tasks, identify the personnel involved, their grade and rate and the total number of hours spent by each named individual on that particular task or sub-task during the period from 16 January to 17 March 1998. In this connection, it is a complete mystery why, in respect of PIHL and PDL, the period should only run from 16 January rather than 13 January, the date the Provisional Liquidators were appointed for PIHL and PDL when the bills themselves are expressed to be for services rendered from 13 January. There is no breakdown to show when each individual spent time on any particular task and what he did as opposed to the sum total of hours spent by him during the whole period in question.

47. The covering letter from the Provisional Liquidators to the court dated 25 April 1998 explains how the schedules in support of the bills came into being :

"- Detailed listing of major activities undertaken. Price Waterhouse does not have a timekeeping system (like the systems most law firms have) whereby fee earners input their time and a brief description of tasks performed such that at a later date the information can be 'sorted' into a form of billing. ..... we did our best to modify our internal billing system to incorporate Activity Codes for major tasks undertaken to which staff would input their time. Thus, instead of charging all of their time for a given day to a main 'Peregrine' billing code, our fee earners' time was/is allocated to various Activity Codes such as 'Job Administration', 'Employee Issues', 'Compliance and Legal Issues' etc. It is important to note that we have modified these Activity Codes as we have progressed in this matter as appropriate categories have cropped up.

- Detailed description of each task undertaken in each Activity Code. As mentioned above, our time and billing system does not enable our fee earners to input a contemporaneous task for each hour or portion of an hour billed. Thus, whilst each fee earner has accounted for his time by placing it into an appropriate Activity Code, within each Activity Code we have had to list out manually the various tasks undertaken, and have had to apportion each fee earner's time to the various tasks. For example, we have identified 9 major tasks undertaken relating to the 'Compliance and Legal Issues' Activity Code. Each fee earner who charged time to the 'Compliance and Legal Issues' Activity Code was subsequently asked to apportion his total time to one or more of the 9 tasks.

- Total hours and fees incurred for each task and Activity Code. We have broken down the total hours incurred and the total fee charged for each task within each Activity Code and for each Activity Code itself. ....." (emphasis added)

48. Two matters call for specific comment : first, I find it an astounding admission that the Provisional Liquidators do not have a time and billing system that enables fee earners to input a contemporaneous task for each unit of time spent. After all, they asked to be remunerated on a time basis : the provision for remuneration contained in the Order appointing them gave effect to that request. Although there was a belated attempt (in the form of Clifford Chance's letter of 9 June 1998) to salvage the situation, the fact is that the system maintained does not cater for a time input and a contemporaneous brief description of tasks performed.

49. In this connection, I have to say that in my experience (limited though it may be), the time basis appears to be the preferred basis of remuneration of provisional liquidators generally. This might conceivably stem from a misconception that if X hours were spent on a particular task, then the Provisional Liquidators would get X times the appropriate hourly rate. That of course is not the case. If such a misconception does exist amongst insolvency practitioners, the sooner they are disabused of it, the better. The office-holder has to show that a reasonably prudent man would have laid out or hazarded his own monies on the particular task, that it was reasonable to spend X hours doing it and there is evidence that X hours were actually expended.

50. This matter throws into question whether remuneration on a time basis whilst popular with practitioners is a satisfactory solution. In future, office-holders who seek remuneration on that basis will have to satisfy the court that they do have internal office systems that would render such a basis workable. Where such a system is not in place, remuneration on a time basis is plainly out of the question. Even where such a system is in place, the court is likely to consider whether other bases of remuneration would be appropriate, and in particular, the all encompassing test under rule 4.30 of the Insolvency Rules. The deficiencies of the time basis were identified some 75 years ago by P.O. Lawrence J in Re Carton Ltd. (1923) 39 TLR 194, 197 in a passage cited in Maxwell (at 336G) :

"... Even the best accountant may spend hours over unproductive work, let alone his more or less efficient staff of clerks. Moreover it is quite impossible to check charges based on such a system and to gauge the value of odd hours said to have been spent on the affairs of the company."

51. Second, the supporting schedules are subsequent reconstructions and not contemporaneous records.

52. At the hearing, it emerged that each employee at Price Waterhouse is required to fill a time sheet on a bi-monthly basis. Mr Fok gave an explanation of the procedures within Price Waterhouse and how the bi-monthly time sheets which effectively constituted the raw data for compiling the total number of hours expended by any individual on any particular task during the relevant period. Unlike the solicitors, the Provisional Liquidators do not work to the usual 6-minute units. Moreover, from the single example that I have seen which relates to Mr Osborne, one of the Provisional Liquidators, time sheets entries are expressed in units of hours and half-hours only. This of itself is a matter of some concern since billing rates range from $2,800 to $4,000 per hour for senior managers and $4,200 to $5,400 per hour for partners.

53. Subsequent to the hearing, in their letter dated 9 June 1998, Clifford Chance stated that in Price Waterhouse's corporate recovery department, it is "the almost invariable practice to complete time sheets on a daily basis". This, of course, is somewhat different from the impression conveyed to the court at the hearing. Be that as it may, there is no contemporaneous record of what was done on any particular day other than under a general heading. Inarguably, the apportionment of time spent by any individual to the sub-tasks comprised in any one task was an ex post facto exercise.

54. In any event, there is no evidence as such before the court regarding Price Waterhouse's internal procedures, as well as details (including the dates) the 'activity codes' came to be refined and when and how the ex post facto exercise took place. It would be most unsatisfactory for the court to proceed in the absence of such evidence.

55. In relation to PIHL, the Provisional Liquidators have written-off $2,225,225 in fees "as we have recognized that it would be inappropriate to seek to recover from the estate certain time charged by certain individuals". This amount represents 8.91% of the total fees recorded in the internal timekeeping system. They also recognize that it is likely that they have not 'caught' or identified all such inappropriate cases and are therefore prepared to write-off an additional 1.09% or $272,529, making the total write-off 10%. In addition, they are 'volunteering' a write-off of 50% of time costs incurred relating to the court approval process of the BNP transaction, namely HK$340,885 having regard to criticism of their conduct made by Rogers JA and by me. However, I note that in the summary of fees attached to their letter of 25 April 1998 to the court relating to PIHL, the BNP write-off is of a different amount, i.e. $307,690. Quite, apart from this unexplained discrepancy, it is wholly unclear how the BNP transaction costs are apportioned between the court approval process and the transaction itself. It is certainly not apparent from the face of the schedule relating to the BNP costs.

56. In relation to PDL, an amount of $99,030 or 3.66% of the total charge were written off as being 'inappropriate'. A further 1.34% or $36,407 was written off, in recognition that the Provisional Liquidators may not have 'caught' or identified all such inappropriate cases making the total write-off 5%.

57. Finally, in the case of PFIL, $273,230 or 2.43% of the total charged was written off as being 'inappropriate' and an additional 2.57% or $289,698 was written off, again to cater for inappropriate cases that have not been 'caught' or identified, making the total write-off 5%.

58. No explanation has been given as to the "certain time charged by certain individuals" which the Provisional Liquidators recognize as inappropriate to recover from the estate. In any event, such write-offs are not write-offs in any true sense in that the Provisional Liquidators are plainly not entitled to be paid time costs that even they concede cannot be justified.

59. As noted above, the Provisional Liquidators have written off 50% of the costs of the court approval process for the BNP transaction. No doubt this specific write-off was engendered by the adverse criticisms made of the conduct of the Provisional Liquidators concerning that application. Quite apart from that transaction, there are several others that come to mind where applications were brought on prematurely at a time when the Provisional Liquidators were not in a position to deal with the matters raised by the court thereby causing unnecessary adjournments and incurring unnecessary costs. There are also other instances where it is at least questionable whether certain applications should have been made at all. It would not be satisfactory to deal with these matters piece-meal and a separate chambers hearing will be scheduled to deal with such outstanding matters at one go. Obviously, any adverse conclusion reached by the court could also impact upon the legal costs incurred.

60. At the hearing, I intimated that I did not consider that the Maxwell test has been satisfied. I confirm that view.

The bills of Deacons and Clifford Chance

61. The Provisional Liquidators' attitude to the solicitors' bills is precisely that which Ferris J disapproved of in Maxwell. On 5 May 1998, the Provisional Liquidators wrote to the court in the following terms :

"Deacons' total time costs for this period amount to HK$20,941,300 and their out-of-pocket expenses amount to HK$567,543. As discussed below, with respect to Deacons' professional fees, we recommend approval of payment of HK$18,438,937. We recommend all out-of-pocket expenses be approved for payment."

Pausing here, it is to be noted that the letter appears to ignore or leave out of account altogether the category (2) disbursements. The letter goes on to describe the review procedures undertaken by the Provisional Liquidators :

"We reviewed the time charges for each fee earner in each activity for appropriateness. In so doing, we had the Price Waterhouse professional who had the most interaction with the activity in question undertake the review. ...

As a result of our review, we identified various areas that required further clarification from Deacons. For example, we might query why certain research needed to be performed or what was 'prepared' when they stated they were preparing for a meeting. Deacons would clarify the queries raised and in most cases we were satisfied with their clarifications. However, in some cases, we mutually agreed that it would be inappropriate to charge the estate for certain time charges of certain individuals. In addition, we agreed that due to the (necessary) size of certain legal teams assigned to various tasks and the total number of hours charged by certain individuals, inefficiencies may have resulted and certain time charges may have been duplicative.

..... In connection with this, we negotiated with Deacons a 10% reduction in their time costs for each activity category (save two where specific write-offs in excess of this percentage were taken). This percentage took into account the less identifiable but possible duplications of efforts and inefficiencies as well as the specific instances in which we felt it would be inappropriate to charge the estate. In total, this amounted to HK$1,970,841, the vast majority of which is not attributable to our specific enquiries. Please note that this 10% discount is not inclusive of the specific write-offs as discussed below."

62. So, it was submitted, Deacons' bill had been subjected to critical scrutiny. As a result, negotiated reductions were achieved. But of course, the letter is wholly unspecific as to which areas required further clarification and which were the cases in which it was mutually agreed that it would be inappropriate to charge the estate.

63. So far as the two specific write-offs are concerned, they relate to 'voluntary' deductions in respect of Deacons' fees for the BNP transaction in so far as it related to the court approval process and to the application relating to employees' remuneration. The specific write-offs amount to approximately $530,000. The 10% negotiated reduction is not inclusive of the specific write-offs. What is also clear beyond peradventure is that the Provisional Liquidators have not sought to scrutinize category (2) disbursements by Deacons at all. Rather, they appear to rely on Deacons' own assessment of the reasonableness of those costs.

64. The Provisional Liquidators adopted a similar approach as regards Clifford Chance's professional fees. They 'recommended' approval of Clifford Chance's professional fees which reflected a 5% discount on the full time charges as well as category (1) disbursements. Category (2) disbursements did not feature at all in the covering letter of the Provisional Liquidators. For the reasons already given in relation to Deacons' bill, that is not an acceptable attitude.

65. Again, the Provisional Liquidators had the Price Waterhouse professional who had the most interaction with the activity in question to undertake the review of Clifford Chance's fees. In their letter dated 24 April 1998 to the court in relation to PIHL, the Provisional Liquidators state :

"... Whilst it would have been impossible for us to verify forensically that each, for example, telephone conversation recorded took place, we did review such entries with an eye towards confirming that such communications were necessary for the activity identified, and that the time allocated seemed reasonable in the circumstances.

As a result of our review, we identified various areas that required further clarification from Clifford Chance. For example, we might query why certain documents required review or what was 'perused' when they simply stated they were 'perusing documents'. Clifford Chance have clarified the queries raised and in most cases we were satisfied with their clarifications. However, in some cases, we mutually agreed that it would be inappropriate to charge the estate for certain time charges of certain individuals. In addition, we agreed that due to the size of certain legal teams assigned to various tasks and the total number of hours charged by certain individuals, inefficiencies undoubtedly would have resulted and certain time charges likely may have been duplicative, for example, where there has been a change of personnel. We must say that it was difficult to isolate all such cases from the hundreds of individual time entries. As a result, we ultimately agreed that to account for the specific instances in which we felt it would be inappropriate to charge the estate, and for the less identifiable but likely duplications of efforts and inefficiencies, Clifford Chance should discount their total billed by 5% or HK$176,545. Thus, our recommendation above, which has been accepted by Clifford Chance."

Letters in similar terms were written in relation to Clifford Chance's fees for PDL and PFIL. It would appear that there were 'specific instances' where it was 'inappropriate' to charge the relevant estate and that there were also 'less identifiable' but likely duplications of efforts and inefficiencies. No details of these appear in the letters from the Provisional Liquidators.

66. There is one baffling feature of the Clifford Chance bills that deserve mention. It would not appear that Clifford Chance work to 6-minute units. For example, I find recorded time expressed as "0.13", "0.08" and "0.52" hours which appear to translate into 7 minutes 48 seconds, 4 minutes 48 seconds and 31 minutes and 12 seconds respectively. If I have not wholly misunderstood the entries, I can only express amazement at the charging basis and question how such entries can really be accurate. In any event, a great deal of time must have been spent calculating the time spent on any task for which I hope the client is not being charged.

67. Have the bills been subjected to critical or serious scrutiny? The answer is definitely 'no'. It is not enough to pay lip-service to the requirement of critical or serious scrutiny. The review undertaken appeared to be both cursory, superficial and lacking in particularity. The impression given is that it is altogether too cosy an arrangement. I do not accept that the bills can possibly have been subject to critical scrutiny. Take Clifford Chance's entries for PIHL for 12 February 1998 : partner A recorded time spent (0.47) on discussions with partner B. Partner C recorded a telephone call to partner B (0.25). Partner B's entries do not reflect any discussion/telephone conversation with either partners A and/or C. Although what is in issue here is 0.72 of an hour, it is not a trifling amount since partners' rates for that firm range from $3,800 to $4,500 per hour. Under Deacons' Schedule for Co-ordination, Project Management and General Insolvency Issues there is an entry by a partner for 16 February 1998 for 1.4 hours. The charging rate is $4,400 per hour. The description of work done is "Prayers". What is the court to make of that? Then there are entries reflecting telephone calls to my clerk regarding hearings, done at the top end of partners' rates.

68. The Provisional Liquidators have not paid their solicitors' bills. They say they do not have the resources to do so. They are leaving it to the court to decide to what extent the solicitors' bills are to be paid out of the estate and as Ferris J had very clearly pointed out, that is not an acceptable attitude.

69. Mr Yu has correctly pointed out that it remains unclear whether the negotiated discounts are binding on the Provisional Liquidators. Recommending acceptance by the court is not equivalent to their having accepted this liability as a matter of legal obligation.

70. If the Provisional Liquidators find themselves in a conundrum, there is the taxation procedure which will put beyond doubt the amount that they are liable to pay their solicitors. I note that to-date, there has been a clear reluctance on their part to avail themselves of this procedure which, incidentally, is also available in respect of some of the category (2) disbursements.

71. I do not accept for one moment that the solicitors' bills have been scrutinized to the degree required. But of course this is ultimately a matter for the Provisional Liquidators. If they are satisfied that the bills have been properly scrutinized, they can then pay those bills and apply to the court for recoupment. Until they do so, it is premature for this court to be considering approval of the extent to which disbursements (which solicitors' fees are) may be recouped out of the estate. If the Provisional Liquidators feel that there is nothing else they can do about scrutinizing these bills but are unwilling to take the risk of a shortfall, a taxation is the only solution. From the material before me, it would not appear that the Provisional Liquidators have any proper grasp of what is required of them and it may well be that there is no real alternative to a taxation.

72. In that connection, the court was informed that taxation would incur further substantial costs, estimated to be in the region of $750,000 for Clifford Chance's bills and $700,000 for Deacons' bills. No doubt taxation will give rise to further substantial costs, but whether they would have to be borne by the Provisional Liquidators rather than by the firm of solicitors concerned would depend on the outcome of the taxation. In so far as the fees that have to be paid for the taxation process, under the High Court Fees Rules, Cap.4, the Registrar has power under rule 2(2) to remit or defer payment. I understand that that discretion has recently been exercised in relation to the fees of one of the longest civil cases in recent years.

73. It would appear to be the position of Clifford Chance and Deacons that the reductions would be written back into the bills if a taxation were undertaken. This much appears in Mr Fok's written submissions. I confess I have some difficulty in understanding how fees that have mutually been agreed as 'inappropriate' which made up the bulk of the reductions can properly be written back into the bills.

74. Should the Provisional Liquidators decide to have those bills taxed (and it seems to be unavoidable unless they are willing to absorb any shortfall), application should be made by the firms concerned to defer or remit payment of the taxation fees. If further interim payments on account are desired, skeleton bills should be lodged as soon as practicable in any event before any such application.

Further conduct

75. To proceed further with their application for their own fees, the Provisional Liquidators will have to file evidence to justify their claim as explained in Maxwell. The Provisional Liquidators must prove that they or their staff have expended time. In this connection, the evidence will need to identify those who have inputted their time on a daily basis and those who did not. The internal system will need to be explained identifying the person whose approval is required as envisaged by the time sheets, a sample of which I have seen, and whether, if time is inputted directly, how such approval would be given. Each individual will have to show how that time was spent. So far as this constituted an ex post facto reconstruction, details will have to be given on when that was done, how the activity codes came to be refined, etc. The Provisional Liquidators will also need to prove that they reached a properly considered and prudent decision to undertake the particular exercise on which time was expended and to carry it out using the resources that they did. To the extent that the records are not contemporaneous, the Provisional Liquidators and their staff must do the best that they can in the circumstances.

76. Revised bills should be produced to reflect the effect of any costs that the court may disallow in the forthcoming hearing 'omnibus' on costs.

77. The next question is who is to undertake the task of fixing the Provisional Liquidators' remuneration. There are essentially two possibilities :

(1) Order 36, rule 1 of the Rules of the High Court provides as follows :

"1. Trial before, and inquiry by, master (O.36, r.1)
In any cause or matter other than a criminal proceeding by the Crown, the Court may, with the consent of the parties, order that the cause or matter, or any question or issue of fact arising therein, be tried before a master or that the master do inquire and report thereon and, in the case of inquiry and report, giving consequential directions."
This rule is applicable in the winding-up context by reason of rule 210 of the Companies (Winding-Up) Rules. The master undertakes the task of inquiring into a particular matter and reports back to the court. Thus, the court retains the overriding power of control over the fixing of remuneration. However, to proceed under this rule requires the consent of the Provisional Liquidators.

(2) The alternative is to proceed under rule 6 of the Companies (Winding-Up) Rules :

"6. Applications in Chambers
Subject to the provisions of the Ordinance and Rules:
(a) the Registrar may, under the general or special directions of a judge, hear and determine any application or matter which, under the Ordinance or Rules, may be heard and determined in chambers."

The task is effectively delegated to the Registrar. This rule does not require the consent of the Provisional Liquidators.

78. There is a third possibility which was mentioned but doubted in Maxwell. It was suggested that an expert might be appointed to assist the judge in carrying out the task. Ferris J doubted the power to appoint a court expert under Order 40 (at 339F). I share that view.

79. The Provisional Liquidators are at liberty to make representations as to their preference (if any) in this regard.

Generally

80. The problem of high costs that insolvencies seem to generate is not a phenomenon peculiar to Hong Kong. Following Ferris J's judgment in Maxwell, a working party was appointed in England to review this difficult question. The report of the working party is due to be released shortly. It may contain recommendations that would resolve some of the problems and which Hong Kong may wish to consider and adopt if appropriate.

81. Whilst it may be thought that the court is requiring an exacting standard, I am in the unenviable position of being the guardian of funds that belong to the creditors out of which the fees and disbursements are to be paid. Approval for payment can only be made in accordance with the law.

82. I should add that the principles set out in this judgment are equally applicable to the liquidation after the date of the winding-up order except that their enforcement is a matter for the committee of inspection and, ultimately, the creditors.

Interim payments

83. At the hearing, I allowed an interim payment on account of 25% of the fees submitted by the Provisional Liquidators, Deacons and Clifford Chance for approval, such sum to be released to the Provisional Liquidators to be distributed by them. This amount was topped-up by all category (1) disbursements which again represents a payment on account and not approval of the individual items.

84. I am prepared to allow a further interim payment on account to bring the total percentage up to 33% of the fees.

85. So far as the fees of Deacons and Clifford Chance are concerned, I have already indicated what steps should be taken if further applications for interim payment are to be made.

Representation:

Mr Joseph Fok, inst'd by M/s Clifford Chance, for the Applicants (Provisional Liquidators)

Mr Benjamin Yu, SC, as amicus curiae

Mr Hearder, the Official Receiver

	(Doreen Le Pichon)
	Judge of the High Court Court of First Instance

30023-EN-1998-04-03

PEREGRINE INVESTMENTS HOLDINGS LTD.

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HCCW000020C/1998

1998, No.CWU 20

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP

------------

	IN THE MATTER OF PEREGRINE INVESTMENTS HOLDINGS LIMITED

	and

	IN THE MATTER OF THE COMPANIES ORDINANCE Cap.32

------------

Coram : The Hon Mrs Justice Le Pichon in Chambers

Dates of Hearing : 1 and 3 April 1998

Date of Decision : 3 April 1998

Reasons Handed Down : 7 April 1998

------------------------

D E C I S I O N

------------------------

1. This is an application by the Provisional Liquidators in relation to the further conduct of the action instituted in the name of Peregrine Investments Holdings Limited ("PIHL") and its subsidiary Peregrine Infrastructure Investments Limited ("PIIL"). By Summons dated 30 March 1998, the Provisional Liquidators sought directions as to whether a receiver ad litem or a special manager should be appointed to take over an action (HCA No.A2853 of 1998) commenced on behalf of and in the name of PIHL and PIIL by the Provisional Liquidators pursuant to leave granted on 24 February 1998. Leave was also granted on that occasion to serve the writ out of the jurisdiction under Order 11 on the 1st to 8th Defendants who are overseas entities.

2. PIIL had substantial shareholdings in two management companies, namely the 1st and 7th Defendants. The action was brought against these companies and the other shareholders. The 1st to 8th Defendants, through their solicitors, have intimated that they intended to challenge the Hong Kong court's jurisdiction over them. In this connection, they have raised a conflict of interest issue. This appears to have been first raised at a meeting on 27 February 1998 between Mr Ted Rule of Asian Infrastructure Fund Advisers Limited, the 9th Defendant, and the senior partner of Price Waterhouse as appears from the correspondence passing between Price Waterhouse and Mr Rule during the period 3 to 20 March, copies of which are exhibited to Mr Hague's affidavit dated 31 March 1998 filed in support of the present application.

3. As disclosed in Mr Hague's affidavit made in support of the application for leave to commence the action, Price Waterhouse was the auditor and tax adviser of two Funds, i.e. the Asia Infrastructure Fund ("the A Fund") and the AIF Telecommunications Fund ("the T Fund") as well as the two management companies of the two Funds, namely the 1st and 7th Defendants. As such tax adviser, Price Waterhouse has given advice in the past to the AIF Group in relation to the residence of the companies within the Group with reference to Hong Kong tax liabilities. The 1st to 8th Defendants take the view that the Provisional Liquidators who are members of the firm of Price Waterhouse should stand down and not have any direct involvement in those proceedings. The basis appears to be that the issue whether the 1st and 7th Defendants are resident in Hong Kong for jurisdictional purposes, i.e. whether they are subject to the jurisdiction of the Hong Kong court, and the issue whether the 1st and 7th Defendants are resident for tax purposes are one and the same, or substantially the same. The 1st and 7th Defendants have intimated that should either the Funds or the management companies be liable to Hong Kong tax, they would seek redress through a negligence claim against Price Waterhouse. Suffice to say that at first blush the issues appear to be quite different but, as will become apparent below, it is unnecessary for present purposes to come to any conclusion about the conflict of interest issue.

4. In addition to the correspondence referred to above, exhibited to Mr Hague's affidavit are the affidavit of Philip Wedgwood Wallace as well as letters from Herbert Smith dated 11 and 30 March. According to their letter dated 31 March which was placed before the court at the hearing, the Defendants' solicitors (who were given notice of the ex parte application) are still finalising their evidence in support of an intended application for the removal of the Provisional Liquidators from further involvement in the action and to set aside the order of 24 February granting leave to commence the action. It is their position therefore that not all material evidence in support of their contention on the conflict of interest issue is before the court.

5. Whilst the court has not reached any conclusion as to the validity or otherwise of the conflict of interest issue raised by the Defendants, not least because there is apparently other material relevant to the issue not before the court, it is nonetheless appropriate to appoint a receiver ad litem to take over the conduct of the action from the Provisional Liquidators. Considerations such as the fact that the threat of legal proceedings against Price Waterhouse might be perceived by the creditors of PIHL as possibly affecting the ability of the Provisional Liquidators to conduct the litigation effectively and in the best interests of the creditors and the possibility of minimising costs which a protracted dispute on the conflict of interest issue would engender are, of themselves, sufficient to warrant the exercise of the court's discretion in favour of an appointment of a receiver ad litem.

6. Subject to the court being satisfied as to the fitness of the proposed receiver to act and his consent, an order will be made in terms of the draft order.

Representation:

Mr Ronny Tong, SC and Mr Godfrey Lam, inst'd by M/s Deacons, Graham & James, for the Provisional Liquidators

	(Doreen Le Pichon)
	Judge of the High Court Court of First Instance

33427-EN-1998-03-05

RE PEREGRINE INVESTMENTS HOLDINGS LTD.

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32143-EN-1998-02-20

RE PEREGRINE INVESTMENTS HOLDINGS LTD

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HCCW000020B/1998

1998, No.CWU 20

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP No. 20 of 1998

IN THE MATTER OF PEREGRINE INVESTMENTS HOLDINGS LIMITED

and

IN THE MATTER OF THE COMPANIES ORDINANCE Cap.32

---------------

Coram : The Hon Mrs Justice Le Pichon (in Chambers)

Dates of Hearing : 18 19 and 20 February 1998

Date of Order : 20 February 1998

Date of Delivery of Judgment in Court : 27 February 1998

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J U D G M E N T

------------------------

Le Pichon, J.:

1. By summons dated 17 February 1998, the joint and several Provisional Liquidators ("the Provisional Liquidators") of Peregrine Investments Holdings Limited (the "Company") sought the court's sanction to enter into a sale and purchase agreement with Banco Santander S.A. ("Santander") relating to certain assets in some of the Company's subsidiaries as well as the shares of its Singapore subsidiary, Peregrine Singapore Securities Pte Ltd ("PSS"). A draft of the proposed agreement ("the draft Agreement") is exhibited to the 8th affidavit of David Richard Hague, one of the Provisional Liquidators, filed in support of the application.

The hearings

2. A preliminary hearing in chambers took place the following day. The purpose of that hearing was to outline in some detail to leading counsel for the Provisional Liquidators the matters which, upon an initial reading of Mr Hague's 8th affidavit and the accompanying exhibits, appeared to the court to require further elucidation and/or evidence. The application was urgent. This was due to the fact that PSS was technically insolvent and steps might have to be taken to liquidate it which would inevitably have meant the end of the Santander transaction. Accordingly those matters were dealt with that same afternoon by Mr John Mitchell, a director of Price Waterhouse employed by the Provisional Liquidators in relation to the proposed transaction.

3. Mr Mitchell provided the explanations orally in court. He was examined at length by the court and a number of documents not exhibited to Mr Hague's 8th affidavit were produced. Mr Mitchell was not sworn, but the explanations given by Mr Mitchell orally would be summarized in and confirmed by an affidavit and the additional material presented to the court exhibited to that affidavit.

4. Whilst Mr Mitchell was able to answer the matters raised by the court on 18 February, there were additional matters arising from the answers given that on reflection required explanation. A further chambers hearing was accordingly held on 19 February when leading counsel was advised that the application would be adjourned into court in due course for judgment.

5. At the conclusion of the hearing on 19 February which again lasted much of the day, attention focused on a new point. It concerned clause 9.3 of the draft Agreement which provided for an undertaking by, inter alia, the Provisional Liquidators not to bring any claims against the employees of the Peregrine Group in the U.K., Malaysia, Hong Kong and the U.S. whose employment would be transferred to Santander should the transaction be sanctioned ("Transferred Employees") and in particular in relation to bonuses for the employees of the Company's U.K. subsidiary, Peregrine Securities (UK) Ltd. ("PSUK"). The board of PSUK had passed resolutions in late January 1998 to pay bonuses for 1997 to its employees (including the board members) as well as an incentive bonus to most but not all of the employees. Letters to that effect had been issued on 30 January 1998 by the PSUK board.

6. When it became apparent that the draft Agreement containing this particular provision would not be sanctioned, the court was asked to consider the addition of a proviso to clause 9.3 which would preserve future action on the part of the Provisional Liquidators against such of the U.K. Transferred Employees as were directors of PSUK between certain dates. As Santander had entered into contracts with each of the Transferred Employees which were being held in escrow pending the application, deletion of clause 9.3 altogether would result in all the contracts having to be renegotiated which was considered impracticable given the urgency that had arisen.

7. The hearing continued on 20 February. At its conclusion, I indicated that I was prepared to give the sanction sought only if the draft Agreement were to be amended by incorporating a revised form of proviso to clause 9.3 to preserve future action by the Provisional Liquidators against such of the Transferred Employees as were directors of PSUK at any time between 1 January 1997 and the date of the Order.

8. The matter then stood adjourned on the basis that if Santander were prepared to accept two amendments to the draft Agreement including in particular the revised proviso to clause 9.3, the Order could be drawn up and sealed without another hearing but that the application would nonetheless be adjourned into court for delivery of the judgment. (The other amendment is not material for present purposes.)

9. The amendments were accepted and the Order sanctioning the Provisional Liquidators to enter into the draft Agreement dated 20 February was sealed on 21 February. On the same day, the court received Mr Mitchell's 16 page affidavit summarizing the matters dealt with by him at the hearings in chambers on 18 and 19 February. The exhibits to this affidavit run to some 180 pages.

10. The reasons for my decision to adjourn the application into court are twofold : first, to explain to the creditors the reasons for sanctioning the Santander transaction; second, to apprise them of certain events that have occurred which impinge on the amount of dividend ultimately distributable in the liquidation.

The bids

11. By way of background, soon after the appointment of the Provisional Liquidators, Santander expressed an interest in acquiring all or part the business of the equity products group in Hong Kong, China, U.K., U.S.A, India, Taiwan and Singapore. Santander terminated its bid after certain key employees of the Greater China Team advised that they did not want to be part of a transaction with Santander. On 27 January 1998, the day before Chinese New Year, the Provisional Liquidators entered into a conditional agreement with BNP for the sale of certain assets, liabilities and shares in various subsidiaries to BNP. That transaction ("the BNP transaction") remains conditional inasmuch as the application for the court's sanction is still pending.

12. Santander continued to be interested in acquiring some parts of the equity products businesses other than the Greater China business such as the London, New York, Singapore businesses as well as certain assets of the Hong Kong business other than assets comprised in the conditional sale to BNP, although by then Santander no longer had any interest in acquiring the businesses in Taiwan or India. By 27 January 1998, BNP and Santander were the only two parties interested in equity products and businesses not covered by the conditional agreement with BNP. Bids were invited.

13. On 29 January 1998, another prospective purchaser expressed an interest in acquiring the U.K. business.

14. On 30 January 1998, BNP made a written offer to acquire certain assets and to assume certain liabilities of the business of PSUK. In summary, the offer was to acquire the trading position (i.e. PSUK's own position) at market value, the fixed assets and some debtors.

15. On 5 February 1998, Santander made a written offer. In respect of the London business, it offered to acquire the fixed assets, counterparty receivables less counterparty payables, both to be ascertained at book value. It did not wish to acquire PSUK's trading position nor any of the debtors which formed the subject matter of the BNP offer. But in addition to the London assets it wished to acquire, Santander's offer extended to two seats on the Hong Kong Stock Exchange, the shares of PSS, some fixed assets in Malaysia and some personnel in Hong Kong and New York :11 in Hong Kong and 17 in New York. Santander also offered a premium of US$1.85 million.

16. On the same day, i.e. 5 February, BNP revised its earlier offer. The only difference between BNP's revised offer and its earlier offer is that PSUK was no longer required to meet any liabilities to staff that were outstanding at the time. As noted above and dealt with in greater detail below, by this date i.e. 5 February, the board of PSUK had issued letters to employees on 30 January 1998 informing them what their bonuses for 1997 would be, which, according to Mr Mitchell, were to be payable in three equal tranches, on 2 February, 16 February and 2 March. So by the date of the Santander offer and the BNP revised offer, one tranche had already been paid. Effectively, BNP, but not Santander, was willing to assume liability for the payment of the second and third tranches. On the other hand, both BNP and Santander were willing to assume liability for the so-called incentive bonus, that being then a liability of PSUK as will become apparent.

17. Time constraints have meant that the third prospective purchaser was not able to enter a bid for the London operations. Nevertheless, it continues to express an interest in purchasing assets not affected by either the Santander or BNP offer and is currently performing due diligence.

18. The Provisional Liquidators continued to negotiate with Santander and BNP after receipt of their offers of 5 February. Those efforts did not result in any significant improvements. Negotiations with Santander on the draft Agreement concluded on 15 February.

Evaluation of the offers

19. A summary of the terms of the Santander offer appears in Appendix I. The premium of US$1.85 million offered by Santander has been reallocated amongst London, Singapore and Hong Kong. On current estimates, the amount of cash consideration to be received at completion is approximately US$6.3 million.

20. From the creditors' perspective, the value is considerably greater. There has to be added to that figure the approximate amount of liabilities (comprising unpaid remuneration, redundancy costs and guaranteed bonuses) to be assumed by Santander in respect of employees in Malaysia, Hong Kong and Singapore which have an aggregate value of US$2,112,000. There is also an existing subordinated non-interest bearing loan of S$3 million advanced by Peregrine Securities Limited to PSS which is repayable on 10 June 2001. Santander is prepared to be substituted for PSS which will have the effect of giving the subordinated loan a present value of US$1.5 million. Accordingly, taking into account the value of the subordinated loan, the aggregate benefits to accrue for the general body of creditors if the proposed transaction with Santander is sanctioned is of the order of US$10 million.

21. It is relevant to mention that when the documentation was negotiated, it was envisaged that Santander would take 60 of the 97 employees of PSUK. Santander has indicated that another 12 will be taken thereby further reducing the redundancy costs.

The offers compared

23. The Provisional Liquidators have prepared a table which evaluates the Santander offer and the revised BNP offer in summary form. The table (which is in substance reproduced (without the notes) as Appendix II) itemizes the assets involved in each of the Santander and BNP bids. In respect of any item which either offeror was not interested in acquiring, there is a separate column giving its liquidation value. For each of the bids, there is thus a value shown for the value of that bid plus the liquidation value of assets not covered by the bid.

24. In comparing the value of the two bids, there is factored into the calculation BNP's assumption of the second and third tranches of the 1997 bonuses amounting to US$4,237,000. The so-called incentive bonuses described by Mr Mitchell as 'signing on' bonuses were originally PSUK's liability. Both Santander and BNP are willing to assume liability for incentive bonus payments, so the omission of this item from the table is not significant since the values are the same and would cancel each other out.

25. The table shows that the aggregate value of the Santander bid plus liquidation value exceeds the BNP bid plus liquidation value by some US$3.2 million. The difference is accounted for by the fact that the liquidation values of the assets which BNP does not wish to acquire have significantly reduced values or even no value on a liquidation basis. In particular, the counterparty receivables which BNP does not wish to acquire from the London operations have to be discounted by some 40% on liquidation vis-á-vis their book value because, by and large, these receivables are "stale", and cover relatively small amounts distributed amongst a large customer base. The view of the insolvency department of Price Waterhouse in London is that they should be discounted by some 50%. I have no reason to think that for liquidation purposes, the relevant discount applied is not appropriate. The other major difference is the value of the Singapore subsidiary. That subsidiary is technically insolvent. The Provisional Liquidators have been advised by their Singapore liquidation expert that PSS has a nil liquidation value whereas Santander is prepared to acquire PSS at its net asset value at closing which is estimated to be worth US$2.6 million.

26. In addition to the net difference in value stated above, the Provisional Liquidators have identified other values that ought to be added in order for a true view to be obtained. These are guaranteed bonus payments and redundancy costs of US$1.4 million in respect of Hong Kong employees if they were not to be employed by Santander and the assumption of guaranteed bonuses in respect of Singapore and Malaysian employees of US$660,000 and US$50,000 respectively. As noted above, although the present value of the subordinated loan (assuming Santander were to be substituted for PSS) is US$1.5 million, it has no value on liquidation.

27. It should be mentioned that although the New York business is shown as having a nil value because it is insolvent so that no dividend will be received, Santander will hire 17 employees from the New York office and assume liability for contractual bonuses of US$1.53 million. This benefit has not been factored into the calculation.

28. Aggregating the net difference with the value of the first three items (i.e. disregarding New York), the Santander offer plainly has the edge over the BNP offer : in monetary terms, it would yield some US$6.7 million more for the creditors.

Assets remaining in PSUK

29. To the extent that the assets are not being acquired by Santander, they remain with PSUK. They comprise the lease, the trading positions, the debtors, licences and cash. On liquidation, the trading positions and debtors are expected to yield about US$8 million. There is also a substantial cash balance available.

Clause 9.3

30. I now turn to clause 9.3 of the draft Agreement which was inserted at Santander's request. It reads as follows :

"Subject to Clauses 9.4 and 9.5, each of the Vendors and the Liquidators undertake to the Purchaser (for itself and for the benefit of the Singapore Companies, the Transferred Employees and the employees of the Singapore Companies), that they will not themselves bring, and will endeavour to procure that other Peregrine Group companies will not bring, any claims against any of the Singapore Companies, the Transferred Employees or the employees of any of the Singapore Companies (including, subject to paragraph 1 of Schedule IX, for any money owed) and that, in particular, they will not bring any claims against any of the UK Transferred Employees in relation to the decision to pay, or the payment of, any bonus to any employees prior to the date hereof." (emphasis added)

The concluding sentence of clause 9.3 apparently reflects a specific request made to Santander by the board of PSUK. The exception contained in clause 9.4 is confined to claims relating to any actual or alleged fraud whilst clause 9.5 reads :

"The Liquidators and the Vendors are only required to comply with Clause 9.3 to the extent that they are able to do so while also complying with relevant requirements and duties applicable to them under relevant laws."

31. The reasons for the court's refusal to sanction clause 9.3 as originally drafted appear below.

sLondon bonuses

33. As at 13 January 1998, the day the Provisional Liquidators were appointed, PSUK had 97 employees. Late on 29 January 1998, the board of PSUK informed the Provisional Liquidators' representatives in London that they intended to issue letters to employees the following day telling them what their bonus for 1997 would be. Despite being instructed not to do this by the Provisional Liquidators' representatives in London and similarly so instructed earlier on 30 January 1998 by the Provisional Liquidators' representatives in Hong Kong, the letters were issued. As appears from Mr Mitchell's affidavit, the end of year bonuses referred to in these letters were, in the main, discretionary bonuses. He refers to their being payable under the bonus letters in three equal tranches on 2 February, 16 February and 2 March respectively. However, according to the pro forma examples of the types of letters issued by the PSUK board exhibited to Mr Mitchell's affidavit, the payment dates are 2 February, 17 February and 27 February. Be that as it may, two of three instalments have already been paid and the third is either due today or early next week.

34. It would appear that two types of bonus letters were issued to employees by PSUK : the first type informed the recipient of the amount of bonus and that it would be payable on 3 February, 17 February and 27 February unless that employee's employment is terminated prior to any of the payment dates, in which event the recipient would not be entitled to receive any further bonus payment. The second type which was sent out to the majority of the employees contained an additional provision entitling the recipient to receive a further sum (i.e. the incentive bonus) upon the occurrence of a Triggering Event, that is to say upon the successful conclusion of a sale of PSUK's share capital or business. Each of the letters referred to the board's wish "to reward those who remain with [PSUK] over the next few weeks."

35. A schedule of the 1997 bonuses showing the amount of each payment as well as the amount of the incentive bonus, if any, was before the court. Each of the three payments constituting the 1997 bonus is of an equal amount. The incentive bonus, where payable, is also in respect of an identical amount as each of the three payments except in the case of four of the directors.

36. The Provisional Liquidators stress that they were throughout opposed to the payment of bonuses other than contractual or guaranteed bonuses. In particular, they strenuously deny the suggestion that the resolutions of the board of PSUK had "the full support of the Provisional Liquidators" as stated in a board minute of PSUK.

37. There does not appear to be any standard form of contract of employment for the employees of PSUK. Three broad categories have so far been identified, namely,

(1) those that provide for a guaranteed year end bonus with no provision for any other bonus payment;

(2) those that provide for an annual bonus to be paid at the discretion of PSUK with no provision for any other bonus payment;

(3) senior executive contracts that provide for a minimum guaranteed bonus in the first financial year of service together with an entitlement to participate in a bonus pool calculated by reference to net revenues generated from the area of business in which the employee is involved, such bonus pool to be divided between named key executives and other executives, with final allocations being determined by representatives of Peregrine Securities Limited.

The resolutions passed by the PSUK board were designed to 'crystallize' the discretionary bonuses. So far as the Provisional Liquidators are aware, only a small proportion of the bonuses can properly be described as contractual or guaranteed bonuses.

Events between 13 and 30 January 1998

39. The events as they unfolded leading up to the board resolutions are described below.

40. The Provisional Liquidators were appointed on 13 January 1998. The PSUK board acted with considerable alacrity in seeking and obtaining written advice from a leading city firm in relation to proposed payment of bonuses in relation to the year ended 30 November 1997. PSUK's solicitors were asked to identify the factors that the PSUK board "may properly take into account in resolving to make such payments in any event". The written advice was apparently distributed in draft to the board on 15 January. The directors were advised to consult a separate law firm regarding their own personal positions which was accepted and acted upon by the PSUK directors.

41. A meeting of the PSUK board was then convened for 23 January 1998 to discuss the issue of bonus payments. There is an unsigned copy of the minutes of this meeting from which it appears that in normal circumstances, bonuses would have been decided by early December. In fact the minutes refer to Mark Elswood, the Chairman of PSUK having recommended bonuses ("figure A+") for staff and directors in November. After discussion with Mr Jamieson, the Chief Executive Officer of Peregrine Brokerage Ltd., these were adjusted and a revised lower figure ("figure A") put forward to Mr Jamieson. In early December, Mr Jamieson suggested a lower figure ("figure B") to Mr Elswood for consideration. No consensus or final decision was ever reached, no doubt because of the predicament in which the Peregrine Group found itself at the end of 1997. 1997 was anything but a normal year for Peregrine and senior management could not have been oblivious of the looming disaster. The minutes state that all issues relating to bonus payments had been discussed with Price Waterhouse in London and in Hong Kong and that it was the board's view that the proposed bonus payments had the full support of the Provisional Liquidators. As noted above, the Provisional Liquidators take issue with this statement.

42. The PSUK board met again on 29 January 1998. The copy of the minutes of that meeting exhibited to Mr Mitchell's affidavit is unsigned and refers to extensive discussions on 28 and 29 January between Mr Elswood with PSUK's solicitor as to the proposed payment of bonuses and the 'sensitivity' in making those bonus payments. It also referred to the fact that the payments of bonuses to PSUK's staff and directors which had been agreed in principle on 23 January, entailed that overall payments amounted to approximately US$8 million (i.e. figure A) and not the amount of US$6.1 million (i.e. figure B) which was the amount of the bonus provision in the PSUK balance sheet. It was noted that the US$6.1 million was the balance sheet figure at the time of the provisional liquidation of the Company and that the figure had remained in the balance sheet in the financial information sent by PSUK to Hong Kong. The Chairman then proposed a bonus payment mechanism which was adopted by the meeting.

43. The purpose of the mechanism proposed was to create the impression that the bonus payments were in line with the figure in the accounts (viz. US$6.1 million) by withholding a quarter of the bonus otherwise payable to staff other than directors until the successful conclusion of a sale of the business or assets provided the employees/directors were still being employed at PSUK at that time. This mechanism thus 'reduced' the 1997 bonuses to US$6.354 million and was the genesis of the incentive bonuses. For the directors, the incentive bonus figure represented the difference, if any, between figure A and figure B. It was resolved unanimously, inter alia, that "in principle it would be in the best interests of [PSUK] to make the bonus payments" set out in the schedule to the unsigned minutes.

44. It is plain from these minutes that at the time the resolutions were passed, liability for the incentive bonus was that of PSUK and not of any prospective purchaser although, subsequently, in negotiations with Santander and BNP, both were willing to assume this liability.

Bonuses and profits

46. The aggregate amount of 1997 year end bonus the PSUK board saw fit to resolve to pay amounts to ￡3,962,451 (or US$6.354 million applying an exchange rate of USD1.6 = GPB1) whilst the aggregate incentive bonuses amount to ￡945,939 (or US$1,513,502). The total amount of bonuses resolved to be paid was therefore US$7.85 million. Although under the terms of the transaction Santander is assuming the liability for the incentive bonuses, in considering the propriety of the resolutions, the relevant amount must be the aggregate of the 1997 bonuses as well as the incentive bonuses in respect of which PSUK had rendered itself liable.

47. The relevant bonus payment board meetings were attended by the eight members of the board, each being a recipient of bonus payments. The aggregate bonus payments for directors including incentive bonuses amount to ￡2.338 million or US$3.74 million. This represents almost 50% of the total bonuses of US$7.85 million declared.

48. The minutes of the board meetings held on 23 and 29 January as well as the legal advice obtained on 15 January went to enormous lengths to 'justify' the bonus payments generally and, in particular, as regards each director individually, possibly with a view to discouraging any challenge to the legality or propriety of the board's actions. It is to be noted that in the case of one of the directors, the bonuses did not achieve their stated purpose. He resigned, presumably so as to head for greener pastures, after receiving the first tranche. So much for rewarding those remaining with PSUK over the few weeks of uncertainty.

49. The total profits of PSUK before bonus payments for the year ended 1997 are in the region of US$10 million. The year end and incentive bonuses taken together of US$7.85 million wipe out approximately 80% of those profits although, admittedly, US$1.5 million of that amount is only payable upon the successful conclusion of a sale of the business or assets. This might well be considered an improvement from the previous year when PSUK saw fit to declare bonuses of US$4.3 million out of total profits of US$4.8 million. So in 1996, almost 90% of the profits was creamed off for bonus payments when staff salaries were not in any sense nominal : they were US$6.5 million in 1996 and the annualized salary of PSUK staff for 1997 was US$8.3 million. What is certain is that the amount of bonuses declared (less the amount of guaranteed bonuses) must, correspondingly, diminish the amount ultimately available for distribution to the creditors.

The bonus resolutions

51. Directors are fiduciaries and owe a duty to the shareholders of the company to act bona fide in their best interests. But when a company is insolvent, it is the creditors' interests that are paramount. See West Mercia Safetyware Ltd. v. Dodd [1988] BCLC 250 at 252-253.

52. As PSUK is a wholly owned subsidiary of the Company, its shareholder is its parent i.e. the Company. Although PSUK is itself not insolvent, it is a wholly owned subsidiary of a parent that became insolvent. To follow the logic through, the insolvency of the parent must cast a whole new dimension on how the fiduciary duties of the PSUK board fall to be discharged since the relevant shareholders in that situation must mean the creditors. Certainly, the directors may not carry on as usual, as if nothing had befallen the parent company. As explained earlier, monies expended in the payment of bonuses other than contractual bonuses must necessarily be at the expense of the creditors.

53. The matters set out above (which are not findings of fact) appear to have the makings of a prima facie case of wrongdoing on the part of the directors of PSUK. Despite the carefully drawn minutes of the two board meetings of 23 and 29 January, they are certainly not conclusive of the bona fides of the directors of PSUK in declaring the bonuses. In that regard, I make two observations : first, the resolutions were wholly unnecessary so far as the payment of guaranteed bonuses is concerned; second, the very fact that the concluding part of clause 9.3 was added at the behest of the PSUK board is telling and betrays an underlying uneasiness which does not sit comfortably with a clear conscience.

The amendment to clause 9.3

55. Clause 9.3 as originally drawn is designed to tie the hands of the Provisional Liquidators and forestall any misfeasance proceedings that the facts, once fully investigated, may warrant. Put differently, this court is indirectly being asked to 'bless' conduct on the part of the directors of PSUK which, justifiably, may be considered outrageous. The request is as unmeritorious as it is bold : it is little short of an affront to the court and deserves to be rejected out of hand.

56. The revised form of proviso will enable the Provisional Liquidators to enquire further into the matter. They should seriously consider whether misfeasance proceedings are warranted.

57. As noted earlier, for the years 1996 and 1997, bonuses absorb as much as 90% and 80% respectively of the profits of PSUK for those years leaving precious little for the shareholders. These stark figures give the impression that PSUK's raison d'être is to generate profits in order to fund bonus payments to its employees. It is a remarkable state of affairs that substantially all of PSUK's profits (which are not insubstantial) should be applied in this fashion. The bonus issue may well merit further consideration by the Provisional Liquidators. They may also need to consider the duties of the main board of the Group. As the Company is a public company, its senior management are accountable to investors who, in the present case, are members of the public.

	(Doreen Le Pichon)
	Judge of the Court of First Instance High Court

Representation:

Mr John Bleach, S.C., inst'd by M/s Deacons, Graham & James, for the Provisional Liquidators

APPENDIX I

Vendor Company	Description of what is intended to be sold	Consideration
Peregrine Research Malaysia Sdn Bhd	Fixed assets	US$100,000
Peregrine Securities (UK) Limited	Fixed assets and goodwill of the business	US$1,140,000
	Accounts receivable and payable	(+/-) a cash amount equal to the net book value of the UK Receivables/UK Payables as at Completion Estimate (as at 29 January): US$+2,207,777 (less: US$2,118,000 in respect of the third tranche of 1997 year end bonuses to be borne by PSUK) (less : the amount of any employee contractual entitlements (excluding bonuses) unpaid as at signing Current estimate: US$nil)
Peregrine Brokerage Limited	Certain ancillary items relating to the business in Hong Kong other than assets comprised in the conditional sale to BNP	US$5,000
	Two "A" Shares in The Stock Exchange of Hong Kong Limited	US$1,500,000
Peregrine Securities Limited	Certain ancillary items relating to the business in Hong Kong other than assets comprised in the conditional sale to BNP	US$5,000
	Shares in Peregrine Securities Singapore Pte Limited ("PSS")	US$750,000 plus net asset value of PSS as at signing (estimate of net asset value as at 26 January: US$2,600,000)
Peregrine Investment Holdings Limited	Licence to use the Peregrine trademarks for the Peregrine name on a non-exclusive basis worldwide (apart from the PRC, Hong Kong and Macau)	US$100,000
		US$6,289,777

Add: Approximate amount of liabilities assumed by Santander including rights waived by departing employees :

	Malaysia Hong Kong Singapore	US$ 50,000 US$1,402,000 US$ 660,000
Total value		US$8,401,777

APPENDIX II

Comparison of Santander vs BNP Offers

	Santander deal US$	Liquidation Value US$	Santander deal plus liquidation value US$	BNP bid US$	Liquidation value US$	BNP Bid plus liquidation value US$
Hong Kong
HKSE seats	1,500,000	0	1,500,000	0	1,300,000	1,300,000
Trademark	100,000	0	100,000	0	0	0
Research	10,000	0	10,000	0	0	0

Malaysia
Fixed assets	100,000	0	100,000	0	30,000	30,000
Bonuses	50,000	0	50,000	0	0	0

New York	0	0	0	0	0	0

Singapore
NAV	2,600,000	0	2,600,000	0	0	0
Goodwill	750,000	0	750,000	0	0	0

London
Fixed assets	400,000	0	400,000	500,000	0	500,000
Trading Position	0	7,072,142	7,072,142	7,593,782	0	7,593,782
Other debtors	0	1,069,886	1,069,886	614,000	609,385	1,223,385
Counter -Rec.	9,228,752	0	9,228,752	0	5,537,250	5,537,250
Counter -Pay	(7,020,975)	0	(7,020,975)	0	(7,020,975)	(7,020,975)
Bonus	(4,236,000)	0	(4,236,000)	0	0	0
Goodwill	740,000	0	740,000	0	0	0
	4,221,777	8,142,028	12,363,805	8,707,782	455,660	9,163,442

	Net excess of Santander deal over BNP offer		3,200,363
Added values of the Santander transaction not considered above.

	Hong Kong
		Bonus and redundancy costs saved by Santander employment offers	1,402,000
	Singapore
		Assumption of bonuses per offer letter	660,000
		Subordinated Loan	1,500,000
	Total benefits of selling to Santander rather than BNP		6,762,363