RE PEREGRINE INVESTMENTS HOLDINGS LTD.

 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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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:

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:

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). 

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

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Reasons for Decision on Taxation

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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.

Representation:

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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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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

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 :

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 :

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.

Representation:

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

The Official Receiver

HCCW 32/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO.32 OF 1998

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D E C I S I O N

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The nature of the application

1. This is an application by the Liquidators of Peregrine Fixed Income Limited (In Liquidation) ("PFIL"), pursuant to section 209A of the Companies Ordinance, Cap.32, for an order that the current compulsory winding-up of PFIL be converted into a creditors' voluntary winding-up.

2. The purpose of the application (made at the request of the creditors of PFIL) is to maximize the assets available to PFIL's creditors in that a creditors' voluntary winding-up will avoid certain fees otherwise exigible pursuant to the Companies (Fees and Percentages) Order.

3. In a compulsory winding-up, on an application for release by a liquidator, the fee payable is half a percent of the gross amount of assets realized and brought to credit (Schedule 3, Table A, Item 9). It is to be noted that whilst both the Liquidators and the Official Receiver are of the view that fees payable under Schedule 3, Table A, Item 9 are payable to the court, this is not at all evident from the terms of the Companies (Fees and Percentages) Order. Contrast sections 3 and 4 with section 6 which deals specifically with Schedule 3 fees. However, it matters not, for present purposes, to whom the fees are payable : from the creditors' perspective, the important point is that such fees would be exigible. In addition, there is a fee payable on the aggregate amount of assets realized which is based on a sliding scale. As at 17 July 1998, a total of $2,174,490,832 have been realized, and fees on this amount have already been incurred under Schedule 3, Table B. A fee equal to 0.1% of the gross value (Schedule 3, Table B, Para.I(f)) will be taken on further realizations.

4. Estimated further realizations by the Liquidators range from a low of HK$1.45 billion to a high of HK$5.6 billion. The fees involved, if a conversion were sanctioned, thus range between HK$32.5 million and HK$95 million.

5. As at 20 August 1998, the proofs of debt submitted were of the order of HK$12.8 billion. Depending on whether the actual realization approximates the low or the high estimate, the fees sought to be avoided can be translated into an increase in the rate of dividend distributable to a creditor of between 0.25% to 0.7%.

Section 209A

6. As noted in the Consultation Paper (at para.9.6) recently issued by the Sub-Committee on Insolvency of The Law Reform Commission of Hong Kong ("the Sub-Committee") :

"Section 209A is Hong Kong's own : no other jurisdiction to the best of [the Sub-Committee's] knowledge, has adopted a similar provision."

7. The history of section 209A is conveniently set out in the following passage of the judgment of Godfrey JA in Re Conso Electronics (Far East) Limited (In Liquidation) [1995] 2 HKC 327 at 329I-330G :

" The genesis of s 209A is to be found in the report, in 1962, of the English Company Law Committee (the Jenkins Committee), Cmnd 1749, which recommended the introduction, into the English companies legislation, of a provision giving the court power, on the application of the liquidator or any creditor, to direct that the winding up of a company ordered to be wound up by the court should be conducted as if the winding up were a creditors' voluntary winding up. It did not prescribe in detail the machinery by which this change was to be effected; no doubt, if the recommendation had been accepted, the details could and would have been considered and included in the amending legislation. In fact, the recommendation was not accepted.

However, the recommendation received a more favourable (if belated) reception in Hong Kong. In 1984, the local ordinance was amended by the insertion in it of a new s 209A in the following terms:

209A(1) The court may, on the application of the liquidator or any creditor, direct that the winding up of a company ordered to be wound up by the court shall be conducted as if the winding up were a creditors' voluntary winding up.

(2) In the exercise of its power under this section, the court shall have regard to the wishes of the creditors and the contributories of the company, as proved to it by any sufficient evidence, in the same manner and to the same extent as provided in s 287.

The marginal note to the new s 209A reads as follows:

Power of court to order winding up to be conducted as creditors' voluntary winding up.

Unfortunately, it does not seem to have occurred to those responsible for the new s 209A that the recommendation which they were implementing needed to be fleshed out if it were to work. When years later this did finally dawn on those responsible for the operation of the local ordinance, some thought was given to the matter. This resulted in a comprehensive code regulating the powers of the court to make such an order and providing for its consequences, to be found in new ss 209A and 209B, introduced into the Ordinance in 1990..."

8. It will be noted that the interval between the recommendation of the Jenkins Committee and the appearance of section 209A as part of Cap.32 was some 22 years. The Jenkins Report appears to be silent as to the rationale for that provision which, incidentally, formed part of a series of miscellaneous provisions that the Committee recommended should be adopted. As noted in Conso Electronics, the recommendation never found favour in England. Then some 22 years later, the provision suddenly appeared in the Hong Kong legislation. The Sub-Committee having looked into the genesis of section 209A is of the view that it became law "by default" because of the long delay in putting together the Companies (Amendment) Bill. The Second Report of the Companies Law Revision Committee was published on 12 April 1973. But the Bill which it brought about came a decade later. After setting out the provision which appeared in paragraph 503(1) of the Jenkins Report, all the Committee had to say (at para.8.19) was :

"We agree, and so recommend."

In short, the rationale for that provision remains wholly obscure.

9. The desirability of its retention as part of Hong Kong's companies legislation was considered by the Sub-Committee. The majority voted for its retention : the Official Receiver who was in the minority was in favour of abolishing the section. The Sub-Committee summarized the current position as follows :

"...Nobody denies that the major reason that applications under section 209A have happened is because, by converting to a creditors' voluntary winding-up, the company can avoid payment to the Official Receiver of the scale fees set out in paragraph I of Table B of the Companies (Fees and Percentages) Order. Section 7 of the Order provides that the percentages shall be paid by a private sector liquidator on submission of his accounts to the Official Receiver under section 203, or, where the Official Receiver is liquidator, before he is released under section 205. There are other legitimate reasons for converting, however, as there is less court supervision, fewer procedures and generally less expense in a creditors' voluntary winding-up than in a winding-up by the court."

10. The power conferred on the court to convert a compulsory winding-up into a creditors' voluntary winding-up is discretionary. Sub-section (2) of section 209A, introduced into Cap.32 by the Companies (Amendment)(No.4) Ordinance (No.59 of 1990), provides as follows :

"(2) Where an application is made under subsection (1), the court shall have regard to-

(a) the wishes of the creditors and contributories of the company, as proved to it by sufficient evidence;

(b) the progress of the winding up (including in particular assets realized, proofs of debts submitted by creditors and whether a statement of affairs has been submitted under s 190);

(c) whether any report has been made to the court under-

(i) section 191(1); or

(ii) section 191(2) that in the liquidator's opinion a fraud has been committed;

(d) whether any director, former director or other officer of the company has been convicted under this Ordinance or any other law for any offence involving fraud, dishonesty, fraudulent trading, misfeasance or breach of duty in relation to the affairs of the company;

(e) whether any criminal proceedings in respect of any offence referred to in para (d) are contemplated or have been instituted against any person referred to in that paragraph;

(f) whether the company forms part of a group of companies the affairs of which are proposed to be investigated or are being investigated under this Ordinance or any other law;

(g) whether there has been a failure on the part of the directors to provide a statement of affairs which the court considers satisfactory or to co-operate with the Official Receiver or liquidator or to comply with any requirement under this Ordinance in relation to the winding up of the company;

(h) whether any director or former director of any other company which has gone into liquidation within five years of the date when the company went into liquidation, has been directly or indirectly concerned in the management of the company;

(i) the fact that the insolvency of the company is a matter of public concern; and

(j) any other matter which the court considers appropriate in the particular circumstances."

11. The Official Receiver has provided the following statistics : to date, a total of 19 orders for 'conversions' have been made pursuant to section 209A. Historically, it would appear that every application made in the past has succeeded.

The relevant factors

12. I now turn to the factors that a court is required to take into account in exercising its discretion :

(a) The wishes of the creditors and contributories

The creditors have voted overwhelmingly, by a majority in value of HK$9 billion, in favour of the conversion.

(b) The progress of the winding-up

The statement of affairs is currently being reviewed by the directors at the request of the Official Receiver. Meanwhile, assets to the value of HK$2.17 billion have been recovered and as at 20 August 1998, 149 proofs of the order of HK$12.8 billion have been received.

(c) Whether any preliminary report has been made under section 191(1) or (2) of the Companies Ordinance

A report has been filed with the court under section 191(1) by the Liquidators and the Official Receiver in which it is stated that further investigations into the collapse of PFIL and of the Peregrine Group are desirable.

(d) Whether any of the officers of PFIL had been convicted of any offences of fraud, dishonesty etc. in relation to the affairs of PFIL

The Liquidators' understanding is that no such persons have been so convicted.

(e) Whether any criminal proceedings in respect of the matters referred to in (d) above are contemplated

Since further investigations are desirable and ongoing, the Liquidators are not in a position to come to any conclusion at this stage.

(f) Whether PFIL forms part of a group companies which may required to be investigated

The Liquidators accept that the collapse of the Peregrine Group is a matter that will require investigation.

(g) Whether there has been any failure on the part of the directors to provide a statement of affairs or to co-operate with the Official Receiver and the Liquidators

The directors have essentially complied with their obligations to date with the exception of one director who failed to attend the meeting of creditors. As noted above, a statement of affairs is currently being reviewed by the directors, following comments from the Official Receiver.

(h) Whether any director or former director has been involved with companies that have gone into liquidation within the last five years

Other than the Peregrine Group companies that have gone into liquidation since the collapse of the Group in January, the Liquidators are not aware of the directors having been involved in the insolvent liquidations of other companies.

(i) Whether the insolvency of PFIL is a matter of public concern

The Liquidators consider that the liquidation of PFIL and the collapse of the Peregrine Group as a whole is a matter of public concern.

Should the discretion be exercised?

13. At one end of the spectrum in favour of the exercise of the discretion is the clear wish of the majority of creditors for a conversion (factor (a)). At the other end of the spectrum against such a conversion (which would preserve the court's and the Official Receiver's continuing involvement in the liquidation) is the acknowledged need for further investigation, and the fact that the insolvency not only of PFIL but of the Group as a whole is a matter of public concern (factors (c), (f) and (i)). Because the investigation is still at its preliminary stages, factor (e) which is closely allied to factors (f) and (i) is as yet unknown but it would be premature to rule out the possibility at this stage for it to weigh in favour of the discretion. Factor (b) may at best be said to be neutral although the fact that the statement of affairs has not been finalized may point against the exercise of the discretion, again, at least at this stage.

14. The Liquidators, recognizing that the insolvency of PFIL is plainly a matter of public concern as well as the need for continuing investigation into the reasons for the insolvency of PFIL and the collapse of the Peregrine Group in general, put their case on the basis that "such further investigations can and should be carried out in the context of a voluntary liquidation" and that "those investigations may take place as effectively within the confines of a voluntary winding-up as within a compulsory winding-up". Accordingly, the order sought includes the following provisions :

"5. pursuant to section 255(1) of the Companies Ordinance the Liquidators may exercise all or any of the powers which the Court might exercise if the Company were being wound up by the Court;

7. if at any time in the future the Liquidators come across any matters relating to criminal aspects or fraud, the Liquidators shall report these matters to the appropriate authorities;"

As I understand it, para.5 of the proposed order is meant to dispense with the need to make a preliminary application required by section 255(1) on each occasion, with a view to saving costs. It does not seek or result in any general delegation by the court of the exercise of its powers thereunder. A general delegation would, in any event, be ultra vires the court's power. Paragraph 7 is intended to ensure that there is a positive obligation on the Liquidators (as there would be in a compulsory liquidation but not in a creditors' voluntary liquidation) that matters of fraud or other criminal activity which are required to be investigated by the relevant authorities are reported by the Liquidators to the appropriate authorities. These provisions are meant to address the perceived differences between compulsory and voluntary liquidations in the context of further investigations.

15. Reliance was placed on the order made in L & D Associates Ltd. CWU 534 of 1996, a case where apparently further investigation was required into certain transactions and where the liquidation was also said to be a matter of public concern. But the order is of limited assistance in the absence of written reasons for the exercise of the discretion. It would not be correct to infer from the supporting affidavit and the Report which was before the judge in that case his reasons for making the order. Suffice to say that the fact that it is appropriate in one case to make a section 209A order where the matter was of public concern and required further investigation does not mean that it is appropriate to do so in every case. The exercise of the discretion must depend on the facts peculiar to each application.

16. The Official Receiver chose to stay neutral in view of his "financial interest in the outcome of the application". That approach meant that the court was left with no assistance in testing the validity of the Liquidators' submissions. With the greatest respect, the correctness of the Official Receiver's approach to the application is questionable. It would mean that the court can never expect any assistance from the Official Receiver in such applications since by definition the "financial interest" arises in every case, effectively rendering all such applications ex parte or unopposed and depriving the court the assistance it has a right to expect. The Official Receiver may well wish to reconsider his stance in further cases in the light of those observations.

17. To my mind, what is being proposed by the Liquidators raises a question of principle. The subsection is cast in mandatory terms : the court "shall" and not "may" have regard to the listed factors. So far as any legislative intent is discernible from the subsection, prima facie, the only sensible interpretation of the list of factors to which the court is to have regard appears to support the view that liquidations that are of public concern and/or which require further investigation or, put shortly, where impropriety or wrong-doing cannot be ruled out, should remain under the court's control. If, having regard to the factors set out in subsection (2) of section 209A, the balance points against the exercise of the discretion, it appears wrong in principle to seek to surmount that difficulty by imposing conditions so as to subject the Liquidators to obligations they would not normally be under under a voluntary liquidation regime. A more fundamental objection is that this approach cannot address the key issue which is not the question of continuing investigations but whether the liquidation should be divorced from the control of the court.

18. As the Court of Appeal's decision in Re Conso Electronics (supra) makes clear, a section 209A order brings an end to the compulsory winding-up. Once an order for conversion is made, the liquidation will not be one with the presence of the Official Receiver in the background and the court's control over the liquidation would cease. By way of example, provisions such as section 204 of the Companies Ordinance would no longer apply. Section 204 provides as follows :

"204. Control of Official Receiver over liquidators

(1) The Official Receiver shall take cognizance of the conduct of liquidators of companies which are being wound up by the court, and, if a liquidator does not faithfully perform his duties and duly observe all the requirements imposed on him by statute, rules, or otherwise with respect to the performance of his duties, or if any complaint is made to the Official Receiver by any creditor or contributory in regard thereto, the Official Receiver shall inquire into the matter, and take such action thereon as he may think expedient.

(2) The Official Receiver may at any time require any liquidator of a company which is being wound up by the court to answer any inquiry in relation to any winding up in which he is engaged, and may, if he thinks fit, apply to the court to examine him or any other person on oath concerning the winding up.

..."

19. The Peregrine liquidations brought about by the collapse of Hong Kong's largest investment bank are matters of public concern affecting as they do Hong Kong's standing as a financial centre. There is considerable speculation and disquiet over the possible reasons for the collapse which are still to be identified. Further, the Peregrine liquidations have not been exactly trouble-free. During the period of provisional liquidation, the conduct of the Provisional Liquidators came under judicial criticism. The Official Receiver's continuing involvement in the background is plainly desirable. These factors clearly outweigh the wishes of the creditors who stand to benefit from a marginally increased rate of dividend if a section 209A order is made. In my judgment, it would not be a proper exercise of the discretion for the court to divest itself of its control of the liquidation of PFIL in these circumstances.

20. For these reasons, the application is dismissed.

21. I make an order nisi that the costs, charges and expenses of and occasioned by the application be costs, charges and expenses in the liquidation of PFIL.

Representation:

Mr Mark Hyde of M/s Clifford Chance, for Applicant (Liquidators)

Ms Phyllis McKenna for the Official Receiver

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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R E A S O N S

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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

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)

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J U D G M E N T

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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 :

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