THE JOINT AND SEVERAL LIQUIDATORS OF B+B CONSTRUCTION CO LTD (IN LIQUIDATION) v. ULRICH WEINMANN AND OTHERS

HCCW 114/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 114 OF 2001

____________

____________

_____________

D E C I S I O N

_____________

The application

1. This is the hearing of a summons issued on 20 November 2002 by the liquidators of B+B Construction Company Limited (in liquidation) ("the Company") under section 221 of the Companies Ordinance, Cap. 32. They seek an order to examine Ulrich Weinmann, Allan Li Sik Lun, Paul James Cresswell, Alex Au Wing Piu, Herbert Bodner and Jürgen Max Georg Schneider (respectively the 1st to 6 respondents herein, collectively "the respondents"), in respect of the affairs of the Company, and for production of all books, correspondence and documents in their custody or power relating to the Company insofar as the same relate to "the Transaction" as defined in the report of the liquidators exhibited to the 3rd affidavit of Joanne Oswin filed in support of this summons.

2. Of the six respondents, the liquidators are unable to serve the 2nd respondent with the summons as correspondence sent to his last known address in Hong Kong by ordinary post had been returned by the Post Office. The 2nd respondent was absent at the hearing and it is not known if he has notice of this application. Three of the respondents, the 1st, 5th and 6th respondents, are resident in Germany. The liquidators have sent the summons to the addresses of these respondents in Germany without seeking leave to serve the summons out of the jurisdiction. The other two respondents, the 3rd and 4th respondents, are resident in Hong Kong and they have been served with the summons.

3. Directions for the hearing of the summons were given on 18 December 2002 for the liquidators and the respondents to file evidence. As an issue is raised as to whether the court has jurisdiction to make the orders sought against three of the respondents who are outside the jurisdiction, the Official Receiver was informed of the application and was invited to make submissions on this issue.

4. Except for the 2nd respondent, all the respondents have filed evidence in opposition; the 1st, 5th and 6th respondents did so without prejudice to their contention that the court has no jurisdiction to make the orders sought against them. Mr Richard Khaw appeared on their behalf. The Official Receiver has instructed Mr Roger Beresford to address the court on jurisdiction. I have very detailed submissions from them and from Miss Roxanne Ismail who appeared for the liquidators and I am obliged to all counsel for their researches into the law.

5. Before I go to the law, it would be convenient to set out the background facts and matters giving rise to this application.

The background

6. The Company was incorporated in Hong Kong on 23 December 1977 under the name of Franki Contractors Limited. It changed its name to its present name on 7 January 1997. It is a wholly owned subsidiary of B+B Asia Limited, which was also incorporated in Hong Kong and has changed its name to Kin Ching China Limited ("Kin Ching"). The Company and Kin Ching are part of the Bilfinger Berger group of companies. The ultimate parent company is Bilfinger Berger AG, a stock corporation established in Germany.

7. Provisional liquidators were appointed for the Company on 2 February 2001 and a winding-up order was made on 18 April 2001. The liquidators were appointed on 1 August 2001 and a committee of inspection was appointed to act with them. Kin Ching was a member of the committee of inspection and the 1st respondent was Kin Ching's representative on the committee.

8. The Company was a construction company and had carried out public sector work. To be considered by the Works Bureau of the Hong Kong government as a tenderer for public works, the contractor must be registered on the Approved Contractors for Public Works List I for the various areas of public construction work. This list is further divided into classes A, B or C, depending on the value of the government contract. A contractor who wishes to tender for public works valued at more than HK$50 million must have a class C registration. As a condition precedent for registration, a company must meet certain criteria as to minimum working capital.

9. As of 27 July 1995, the Company was apparently indebted to Kin Ching in the total amount of HK$200 million, as recorded in the minutes of a meeting of the directors of the Company on that day, although this figure does not reconcile with the known month-end balances and the liquidators have not been able to establish from the books and records of the Company why this figure was used. The directors discussed at that meeting the Company's application for accreditation to the Approved Contractors for Public Works List I and resolved to approve and execute a deed dated 27 July 1995 between the Hong Kong government, Kin Ching and the Company ("the Deed of Undertaking").

10. By the Deed of Undertaking, Kin Ching undertook with the Company and the government that in respect of an amount due from the Company of HK$200 million, Kin Ching would not, during the continuation of the Deed, demand or in any way enforce or take steps to have the debt repaid. The Deed of Undertaking was executed to meet the working capital requirements for accreditation as a class C contractor. The government agreed that in consideration of the undertaking and during the continuance of the Deed, the government should not have regard for the debt when determining if the Company was maintaining the minimum working capital. Clause 4 of the Deed provided that it could be terminated by any party giving to the other parties three calendar months' notice in writing. The liquidators have not been able to locate in the books and records of the Company a form of notice by which the Deed of Undertaking had been properly terminated.

11. The Company's registration as a class C contractor was renewed annually for the subsequent years, with the representation that the minimum working capital was maintained. Every year, Kin Ching stated its intention not to demand repayment from the Company so the Company could continue to meet the working capital criteria. For the years of accreditation 1996 and 1997, the annual re-confirmations were recorded in the board minutes of the Company dated 11 August 1995 and 25 July 1996. There was a letter from the Company to the Hong Kong Housing Authority dated 28 April 1998 enclosing a letter from Kin Ching to the Company dated 23 April 1998 that Kin Ching would not demand repayment of its loan to the Company at any time before 30 April 1999.

12. The Company's accounts showed that prior to 1998, the Company was operating as a solvent concern. The retained earnings brought forward for the year 1997 were HK$106 million. The unaudited management accounts reported an accumulated profit of HK$142 million as at the end of September 1998, but as at the end of December 1998, there was an accumulated loss of HK$148 million.

13. It was in 1998 that the Company ran into difficulties with a number of ongoing contracts. There was an investigation into the piling defects at the Hong Kong Station since October 1997, with the involvement of the Building Department and the Independent Commission against Corruption. Much of the remedial work carried out in respect of the short pilings of the Hong Kong Station works was carried out between February and July 1998. Following the much-publicised piling problems associated with the Hong Kong Station works, post-construction investigations were carried out at the Kowloon Station between April and July 1998. Discussions between the Company and the employer of the Kowloon Station works broke down in July 1998 and the employer commenced arbitration proceedings by a notice in October 1998. Further, the Company had failed to meet contractual completion dates of 20 March 1998 and 19 May 1998 in respect of two phases of the Olympic Station works.

14. From the above, the liquidators drew the inference that as in June 1998, the directors of the Company were or ought to have been aware of the potential substantial liability that the Company would face arising out of piling defects in the Hong Kong Station works and the Kowloon Station works and for liquidated damages in respect of delay in the Olympic Station works. The Company had prepared a risk analysis on or about 11 June 1998 in respect of the Hong Kong Station works and the assumed liquidated damages on the basis of a worst-case scenario amounted to HK$125 million. As for the Olympic Station works, the employer subsequently made a claim against the Company for liquidated damages due to delay in the amount of HK$229 million.

15. In June and July 1998, the Company entered into a series of agreements with Kin Ching and another subsidiary of Kin Ching, B+B Equipment Rental Limited ("B+B Equipment"). The effect of these agreements was (1) to repay the Company's debt to Kin Ching; and (2) to sell all of the Company's plant and machinery. The sale was effected notwithstanding the award of new contracts to the Company in 1998, including two contracts for public works in May 1998, and with eight contracts to be performed in the period after June 1998.

16. These agreements and transactions in chronological sequence are as follows.

17. A loan note dated 10 June 1998 ("the Loan Note") evidenced the terms and conditions of a loan advanced by Kin Ching to the Company. This recited that the amount of the loan outstanding as at 30 April 1998 was HK$360,792,000.00 ("the Loan"), although the figure does not match the amount outstanding at month end April 1998 as set out in the liquidators' analysis of current and loan accounts, which has a figure of HK$268,322,279.00. The Loan was stated to be repayable on written demand.

18. By a first fixed charge dated 11 June 1998 ("the Charge"), the Company created a fixed charge over all its plant and machinery as security for all present and future obligations and liabilities of the Company arising from or in connection with the Loan Note. There was a board resolution of the Company of the same date approving the terms of the Charge and authorising any two directors to execute the same. The minutes of the board meeting do not record any discussion as to the commercial benefit to the Company of entering into the Charge.

19. On 30 June 1998, Henry Butcher (H.K.) Limited provided a valuation report to Kin Ching in respect of the plant and machinery of the Company at 18 locations in Hong Kong ("the Valuation"). The fair market value for continued use of the subject plant and machinery as part of an on-going business was valued at HK$259,214,000.00.

20. On 8 July 1998, B+B Equipment was incorporated in Hong Kong. There was a subsequent change of name to Kin Ching Equipment Rental Limited on 18 December 1998.

21. By a letter dated 22 July 1998 from Kin Ching to the Company ("the Demand Letter"), a demand was made for immediate repayment of part of the Loan in the sum of HK$200 million. It was stated in the Demand Letter that funding for the repayment was by way of the sale of the plant and machinery of the Company over which Kin Ching had the Charge and the payment of the sale proceeds to Kin Ching, and that to effect this arrangement, Kin Ching agreed to execute a deed of partial release of the Charge in favour of the Company. Kin Ching duly executed this deed dated 22 July 1998 ("the Partial Release"), whereby it released from the Charge the plant and machinery as listed in the Valuation. By a sale and purchase agreement dated 23 July 1998 ("the Sale and Purchase Agreement"), the Company agreed to sell and B+B Equipment agreed to buy the plant and machinery listed in the Valuation for a consideration of HK$259,214,000.00. Notwithstanding the provision in the Demand Letter that payment under the Sale and Purchase Agreement was to be made directly from B+B Equipment to Kin Ching, B+B Equipment in fact made payment to the Company directly between 14 and 21 August 1998. Immediately upon receipt of the funds, the Company made payment to Kin Ching.

22. The "Transaction" in the liquidators' report being the subject matter of the investigation of the present summons is defined in that report as that series of transactions evidenced by the Loan Note, the Charge, the Demand Letter, the Partial Release and the Sale and Purchase Agreement.

23. Between September and November 1998, the Company sold its remaining stock to B+B Equipment and received sale proceeds of HK$31 million which were recorded in the Company's current account with B+B Equipment in October 1998.

24. In October and November 1998, further plant and machinery were transferred by the Company to B+B Equipment and the sums received by the Company, together with the net gain on disposal, accounted substantially for the total net gain of HK$66.9 million recorded in the accounts for the year 1998. In November 1998, the Company received HK$11 million from B+B Equipment believed to have emanated from the subsequent sale of plant and machinery and this sum was used by the Company to settle certain bank loans.

25. According to the unaudited management accounts, the net book value of fixed assets after the sale was about HK$2.4 million as of 31 December 1998 but the audited accounts showed zero fixed assets for the year ended 31 December 1998.

26. After the transactions in 1998, the Company continued to feature as an approved contractor for public works and it continued to negotiate or re-negotiate banking facilities with its four main bankers.

27. At the time of negotiating, entering into and implementing the Transaction in 1998, of four of the respondents who were directors of the Company, two were also directors of Kin Ching and B+B Equipment. The respective involvements of the six respondents in the various undertakings given to secure the status of a class C contractor between 1995 and 1998 and the Transaction are best presented in table form, which I took from the submissions of Miss Ismail:

28. The liquidators are unable to discern any commercial benefit flowing to the Company as a result of the Transaction. By the Loan Note and the Charge, an existing unsecured debt was turned into a secured debt and secured against the entire asset-base of the Company. The advantage to Kin Ching was obvious. Further, by entering into the Sale and Purchase Agreement and selling significantly the whole of the plant and machinery assets of the Company, the Company rendered itself unable to operate as a construction contractor and effectively deprived itself of its sole means of livelihood. Again, a clear benefit could be seen from the perspective of Kin Ching as it had been repaid substantially its debt due from the Company on terms wholly more favourable than could have been expected in the liquidation of the Company, and notwithstanding the undertakings of Kin Ching to the Company and the government that there would be no such repayment during the continuance of the Deed of Undertaking.

29. No independent legal advice would appear to have been given to the Company at the time the Transaction was entered into. The liquidators received only limited documents from the solicitors who drafted the documentation for the Transaction. The documents provided do not include legal advice, whether given to the Company or to Kin Ching.

30. The liquidators consider that they must investigate the Transaction in the interests of the creditors of the Company. They seek to examine the respondents on oath as this would appear to be the most appropriate and efficient method of obtaining information, particularly as regards the state of knowledge of the respondents and their intentions when they entered into the Transaction, and any undocumented agreements or actions which are to be explored.

Hearing jurisdiction and order jurisdiction

31. In this instance, it is important to distinguish between two different senses in which the expression "jurisdiction of a court" may be used. In Guaranty Trust Co. of New York v Hannay & Co. [1915] 2 KB 536, the question was whether the court has jurisdiction to make a declaration at the instance of a plaintiff who has no cause of action apart from the provision of the Rules of the Supreme Court permitting the grant of declaratory relief. Pickford LJ analysed the two different senses of the expression in this manner at 562 to 563:

"The next question is whether if this be the meaning of the rule [i.e. the provision in the Rules of the Supreme Court giving general power to make a declaration] it is ultra vires. It is said to be so because it adds to the jurisdiction of the Court, which cannot be done by rules of practice and procedure. The word 'jurisdiction' and the expression 'the Court has no jurisdiction' are used in two different senses which I think often leads to confusion. The first and, in my opinion, the only really correct sense of the expression that the Court has no jurisdiction is that it has no power to deal with and decide the dispute as to the subject-matter before it, no matter in what form or by whom it is raised. But there is another sense in which it is often used, i.e., that although the Court has power to decide the question it will not according to its settled practice do so except in a certain way and under certain circumstances."

32. This distinction between the strict and wider meanings of the expression "jurisdiction of a court" was endorsed by Diplock LJ in Garthwaite v Garthwaite [1964] P 356 (in which the court was concerned with the question whether it has jurisdiction to make a declaration that a marriage was subsisting, the parties to which were domiciled outside England) at 387:

"The High Court is the creation of statute, and its jurisdiction is statutory. As was pointed out by Pickford LJ in Guaranty Trust Company of New York v Hannay & Co., the expression 'jurisdiction' of a court may be used in two different senses, a strict sense (which he regarded as the only correct one) and a wider sense. I think, with respect, that he defined the strict sense too narrowly, for it would not embrace the court's lack of jurisdiction to entertain a suit based upon the personality of a party, as, for instance, in the case of a suit against a foreign sovereign or ambassador. But it is important for the purposes of the present appeal to distinguish between the two senses in which the expression is used. In its narrow and strict sense, the 'jurisdiction' of a validly constituted court connotes the limits which are imposed upon its power to hear and determine issues between persons seeking to avail themselves of its process by reference (1) to the subject-matter of the issue or (2) to the persons between whom the issue is joined or (3) to the kind of relief sought, or to any combination of these factors. In its wider sense it embraces also the settled practice of the court as to the way in which it will exercise its power to hear and determine issues which fall within its 'jurisdiction' (in the strict sense) or as to the circumstances in which it will grant a particular kind of relief which it has 'jurisdiction' (in the strict sense) to grant, including its settled practice to refuse to exercise such powers, or to grant such relief in particular circumstances."

33. See also the decision of Scott J in In re Tucker [1987] 1 WLR 928 at 939F to 946C in holding that Rule 86 of the Bankruptcy Rules 1952 as amended in 1962 does not represent an extension of the jurisdiction of the court in the strict sense in so far as it authorised service of a summons under section 25(1) of the Bankruptcy Act 1914 (section 221 of Cap. 32 is the equivalent provision in the winding up context) out of the jurisdiction on a stranger to the bankruptcy. On appeal in [1990] 1 Ch 148, this holding was affirmed at 156G but the decision was reversed on another point, namely that section 25(1) on its true construction does not assert jurisdiction over British subjects resident abroad; I will return to this decision.

34. The distinction between the two senses of the word jurisdiction was also applied by the Hong Kong Court of Appeal in a different context in Ip Cheung-kwok v Sin Hua Bank Trustee Ltd. [1990] 1 HKLR 497 at 509 to 510 and 524.

35. In The Law of Tracing, by Lionel D Smith, 1997 ed., pages 120 to 121, the author gave the labels of "hearing jurisdiction" and "order jurisdiction" to the two senses in which the word jurisdiction may be used. "Hearing jurisdiction" means "the ability to hear and adjudicate the plaintiff's claim". "Order jurisdiction" means "the scope of the court's power to make orders in relation to some matter of which it is seised". The author went on to state as follows:

"No issue of order jurisdiction arises, as a matter of logic, unless the court has taken hearing jurisdiction. Conversely, it is important that an absence of order jurisdiction excludes hearing jurisdiction, not as a matter of logic but as a matter of practicality. If a plaintiff asks for an order which is beyond the court's order jurisdiction, then the court will not take hearing jurisdiction; there would be no point. This is so even though, in an abstract sense, the court has hearing jurisdiction; it would hear a claim based on the very same facts, if only the plaintiff asked for an order which the court had the power to grant."

36. The use of the word jurisdiction in the sense of "order jurisdiction" in the present context is best illustrated by the judgment of Wright J in In re Drucker (No. 2) [1902] 2 KB 210 at 211 to 212:

"As at present advised, I am of opinion that under s. 27 [of the Bankruptcy Act 1883, the predecessor of section 25 of the Bankruptcy Act 1914; the local equivalent is section 29 of the Bankruptcy Ordinance, Cap. 6] I have no power to make the order asked for. Although the words 'or in any other place out of England' in sub-s. 6 of that section are prima facie wide enough to include a place not within the British dominions, yet I think they must be construed as limited to places within the jurisdiction of the British Crown. It seems to me that that restriction is prima facie necessary. It is impossible to suppose that the Legislature intended to empower the Court to order the examination of persons in foreign countries; for instance, in France or Germany. If I made the order, I could not compel these persons to come up for examination, nor could I punish them if they refused to come, or came and would not answer. I regret I cannot make the order. Nor can I make it in the optional form that they should be examined, if they think fit to submit. I do not think that is within the function of the Court at all, or is the kind of thing the section intended."

37. This decision was considered by the English Court of Appeal in In re Tucker, supra. at 159H to 161B. As a matter of hearing jurisdiction, in view of the procedures which were already established for the taking of evidence in foreign countries which were not within the British dominions, Dillon LJ (with whom the other members of the court agreed) could not reach the same conclusion as Wright J that, as a matter of construction, section 25(6) of the Bankruptcy Act 1914 was limited to places within the jurisdiction of the British Crown. However, as a matter of order jurisdiction, Dillon LJ considered that the actual decision of In re Drucker was right, as Parliament "did not intend to confer on the bankruptcy court any jurisdiction which could be exercised in breach of the established criteria of international law with regard to comity" and "the question whether any person ordered to attend for examination abroad could be compelled to come up for examination or could be punished if he refused to come, or came and would not answer, are highly material to the making of any order". "If therefore, what was sought under section 25(6) was examination of a person before a court of the foreign country through the machinery of letters of request, the English court would, before it could properly make any such order, have to be satisfied that the case was covered by available machinery".

The rival contentions

38. I will first summarise the rival contentions. Both Mr Beresford and Miss Ismail submitted that the court does have jurisdiction,

(1) as a matter of construction, to make an order for private examination where a respondent is out of the jurisdiction (hearing jurisdiction); and

(2) in an appropriate case, to order service of the order for private examination out of the jurisdiction (order jurisdiction).

39. Their submission is contrary to the view taken by the editors of Butterworths Hong Kong Company Law Handbook, 5th ed., paragraph [221.07], which is that an order for private examination cannot be made against a person out of Hong Kong.

40. Mr Khaw submitted for the respondents that section 221 does not have extra-territorial effect for these reasons:

(1) there is nothing "expressly stated" or "plainly implied" in section 221 which overrides the fundamental rule of statutory interpretation that legislation promulgated in one country is applicable only to the subjects in that country or to foreigners who have come to that country and made themselves subject to the jurisdiction;

(2) this interpretation of section 221 is supported by authorities which deal particularly with the issue of territoriality regarding the provisions on private examination in insolvency proceedings; and

(3) given section 221(4) (for the terms of this provision, see below), it is impossible for the court to enforce any order for private examination made against a person residing out of the jurisdiction.

41. It is common ground that whether section 221 does have extra-territorial effect is a question of statutory interpretation.

The legislative provisions and history

42. Section 221 of Cap. 32 reads as follows:

"(1)	The court may, at any time after the appointment of a provisional liquidator or the making of a winding-up order, summon before it any officer of the company or person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs, or property of the company.
(2)	The court may examine him on oath concerning the matters aforesaid, either by word of mouth or on written interrogatories, and may reduce his answers to writing and require him to sign them.
(3)	The court may require him to produce any books and papers in his custody or power relating to the company, but, where he claims any lien on books or papers produced by him, the production shall be without prejudice to that lien, and the court shall have jurisdiction in the winding up to determine all questions relating to that lien.
(4)	If any person so summoned, after being tendered a reasonable sum for his expenses, refuses to come before the court at the time appointed, not having a lawful impediment (made known to the court at the time of its sitting, and allowed by it), the court may cause him to be apprehended and brought before the court for examination."

43. The Companies Ordinance, when enacted in 1933, already contained this provision. Since then, the provision has remained the same save for a typographical error rectified in 1996 (by L.N. 235 of 1996, the words "be claims" in section 221(3) have been amended as "he claims"). Section 221 is derived from section 214 of the Companies Act 1929, which was replaced by section 268 of the Companies Act 1948. A corresponding provision, broadly the same as section 268 but with some differences in wording, is now contained in section 236 of the Insolvency Act 1986.

44. For ease of reference, I set out the relevant provisions in section 236 of the Insolvency Act, which read as follows:

"(2)	The court may, on the application of the office-holder, summon to appear before it -
	(a)	any officer of the company,
	(b)	any person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or
	(c)	any person whom the court thinks capable of giving information concerning the promotion, formation, business dealings, affairs or property of the company.
(3)	The court may require any such person as is mentioned in subsection (2)(a) to (c) to submit an affidavit to the court containing an account of his dealings with the company or to produce any books, papers or other records in his possession or under his control relating to the company or the matters mentioned in paragraph (c) of the subsection.
(4)	The following applies in a case where -
	(a)	a person without reasonable excuse fails to appear before the court when he is summoned to do so under this section, or
	(b)	there are reasonable grounds for believing that a person has absconded, or is about to abscond, with a view to avoiding his appearance before the court under this section.
(5)	The court may, for the purpose of bringing that person and anything in his possession before the court, cause a warrant to be issued to a constable or prescribed officer of the court -
	(a)	for the arrest of that person, and
	(b)	for the seizure of any books, papers, records, money or goods in that person's possession.
(6)	The court may authorise a person arrested under such a warrant to be kept in custody, and anything seized under such a warrant to be held, in accordance with the rules, until that person is brought before the court under the warrant or until such other time as the court may order."

45. Section 237 makes provision for further enforcement powers under section 236, including the power to order delivery up of property or payment of money due, on consideration of any evidence obtained under section 236 or this section. As some of the provisions in section 237 are important to the understanding of the English authorities to be considered, I also set them out in full:

"(3)	The court may, if it thinks fit, order that any person who if within the jurisdiction of the court would be liable to be summoned to appear before it under section 236 or this section shall be examined in any part of the United Kingdom where he may for the time being be, or in a place outside the United Kingdom.
(4)	Any person who appears or is brought before the court under section 236 or this section may be examined on oath, either orally or (except in Scotland) by interrogatories, concerning the company or the matters mentioned in section 236(2)(c)."

The principles of statutory interpretation

46. At common law, there is an established general principle that legislation promulgated in one country, unless the contrary is expressly enacted or plainly implied, is applicable only to the subjects in that country or to foreigners who have come to that country and made themselves subject to the jurisdiction (Statutory Interpretation, by F.A.R. Bennion, 2002 ed., pages 306 to 309; Dicey & Morris, The Conflict of Laws, 13th ed., paras. 1-032 to 1-034; Macleod v Attorney-General for New South Wales [1891] AC 455 at 458 to 459).

47. In Re Sawers, ex p Blain (1879) 12 Ch D 522, a judgment creditor sought leave to serve bankruptcy petitions under the Bankruptcy Act 1869 on two Chilean subjects who were partners with persons in England carrying on business in England even though they had never been in England. In dismissing the appeal against the discharge of the ex parte order for serving the petitions on the Chilean subjects, members of the court had said as follows:

"It appears to me that the whole question is governed by the broad, general, universal principle that English legislation, unless the contrary is expressly enacted or so plainly implied as to make it the duty of an English Court to give effect to an English statute, is applicable only to English subjects or to foreigners who by coming into this country, whether for a long or a short time, have made themselves during that time subject to English jurisdiction." (at 526, per James LJ)

"The governing principle is that all legislation is prima facie territorial, that is to say, that the legislation of any country binds its own subjects and the subjects of other countries who for the time bring themselves within the allegiance of the legislating power." (at 528, per Brett LJ)

"I take it the limitation is this, that all laws of the English Parliament must be territorial - territorial in this sense, that they apply to and bind all subjects of the Crown who come within the fair interpretation of them, and also all aliens who come to this country, and who, during the time they are here, do any act which, on a fair interpretation of the statute as regards them, comes within its provisions. Of course it is not necessary that a person to be subject to an English Act should be domiciled here. If he is resident here temporarily, and does an act which comes within the intent and purview of a statute, he, as regards that statute, as does every alien who comes here in regard to all the laws of this realm, submits himself to the law, and must be dealt with accordingly." (at 531 to 532, per Cotton LJ)

48. It should be noted that Ex p Blain is no longer good law on the points which it decided, as legislative change was introduced in England in 1913 to extend the class of persons liable to bankruptcy proceedings as "debtors" to include a member of a firm or partnership which carried on business in England, although this decision remains an authority for the general principle that legislation is prima facie territorial.

49. Further examples in which this general principle had been maintained are In re Anglo-African Steamship Co. (1886) 32 Ch D 348 (in which it was held that the court has no jurisdiction under the Companies Act 1862 to give leave to serve notices of orders and other proceedings in the winding up of a company on persons residing out of the jurisdiction) and Cooke v Charles A Vogeler Co [1901] AC 102 (in which it was held that the court has no jurisdiction under the Bankruptcy Act 1883 to make a receiving order against a foreigner resident abroad, who, without coming into the jurisdiction, had carried on business and contracted debts within the country and was not a "debtor" within the legislation).

50. More recently, in Clark v Oceanic Contractors Inc. [1983] 2 AC 130, the House of Lords considered the question whether it was necessary on practical grounds to imply some territorial limitations on the obligation imposed by section 204 of the Income and Corporation Taxes Act 1970. After referring to the relevant passages in Ex parte Blain, some of the Law Lords went on to state as follows:

"Put into the language of today, the general principle being there stated is simply that, unless the contrary is expressly enacted or so plainly implied that the courts must give effect to it, United Kingdom legislation is applicable only to British subjects or to foreigners who by coming to the United Kingdom, whether for a short or a long time, have made themselves subject to British jurisdiction. Two points would seem to be clear: first, that the principle is a rule of construction only, and secondly, that it contemplates mere presence within the jurisdiction as sufficient to attract the application of British legislation. Certainly there is no general principle that the legislation of the United Kingdom is applicable only to British subjects or persons resident here. Merely to state such a proposition is to manifest its absurdity. Presence, not residence, is the test." (at 145D to F, per Lord Scarman)

"[The 'territorial principle'], which is really a rule of construction of statutes expressed in general terms, and which as James LJ [in Ex parte Blain] said a 'broad principle', requires an inquiry to be made as to the persons with respect to whom Parliament is presumed, in the particular case, to be legislating.

Who, it is to be asked, is within the legislative grasp, or intendment, of the statute under consideration? The contention being that, as regards companies, the statute cannot have been intended to apply to them if they are non-resident, one asks immediately - why not?" (at 152C to D, per Lord Wilberforce).

51. In considering whether, as a matter of construction, the court has hearing jurisdiction to make an order for private examination where a respondent is out of the jurisdiction, the inquiry should be directed to the class of persons for whom the legislature in Hong Kong is presumed to be legislating in section 221.

52. There are no local authorities on this point. I have been referred by counsel to a number of authorities in the United Kingdom and Australia where the courts had regard to the territorial principle in construing various statutory provisions in the context of insolvency, as illustrations of how the rule of construction should be applied and whether similar reasoning should be adopted. In considering these authorities, I bear in mind the difference in the wording of section 221 and the foreign legislation. I also bear in mind that it is not yet settled law in England whether section 236 of the Insolvency Act is wholly or only partially of extra-territorial effect.

The relevant authorities

53. I propose to consider the relevant authorities in chronological order.

(1) In re Tucker [1987] 1 WLR 928; appeal allowed in [1990] Ch 148

54. I have already referred to this decision. One of the questions on appeal was whether, as a matter of construction, section 25(1) of the Bankruptcy Act 1914 would empower the court to issue a summons under that provision against a person resident outside the jurisdiction. Section 25(1) provided that the court may summon before it "the debtor or his wife, or any person known or suspected to have in his possession any of the estate or effects belonging to the debtor, or supposed to be indebted to the debtor, or any person whom the court may deem capable of giving information respecting the debtor, his dealings or property", and under section 25(3) the court may examine on oath any person so brought before it. Section 25(1) would appear to be similar to the wording in our section 221(1) as regards the scope of the persons that may be summoned for examination.

55. Scott J took the view that any qualification apt to exclude persons out of the jurisdiction would contradict the meaning of the term "any person" in section 25(1), but he did not find it necessary to decide whether, as a matter of construction, foreigners domiciled or resident outside the jurisdiction are outside the scope of section 25(1), as he held that British subjects are within the scope of the provision whether or not they are resident outside the jurisdiction (at 939D to E).

56. On appeal, it was held that section 25(1) did not empower the court to summon before it for examination British subjects resident abroad. In coming to this construction, Dillon LJ noted the general practice in international law that "the courts of a country only have power to summon before them persons who accept service or are present within the territory of that country when served with the appropriate process" and that the English court has never had any general power to serve a subpoena ad testificandum or subpoena duces tecum out of the jurisdiction on a British subject resident out of the jurisdiction. He then referred to section 25(6), which provided that "the court may, if it thinks fit, order that any person who if in England would be liable to be brought before it under this section shall be examined in Scotland or Ireland, or in any other place out of England." The words "liable to be brought before it under this section" must mean "liable to be brought before it by summons under this section". Thus, section 25(6) confirmed that a person who is not at any relevant time in England, so cannot be served with a summons of the English court in England, cannot be examined by that court under section 25(1) (at 158D to 159F).

57. There is no provision equivalent to section 25(6) in our section 221. This seems to be a distinction of some importance as could be seen from In re Seagull Manufacturing Co. Ltd. [1992] Ch 128 at 137B to 138A, 139C and 140B; [1993] Ch 345 at 358B to C. I do not agree with the submission of Mr Khaw that the English Court of Appeal would inevitably have come to the same construction even in the absence of section 25(6).

58. The decision was the subject of two notes by Ian Fletcher published in [1988] JBL 168 and 341, in which the author argued that it would have been more appropriate to hold that the relevant provision has conferred a wide and unfettered jurisdiction on the court to summon before it a person resident abroad and leaving it to the discretion of the court to have due regard to the requirements of comity in relation to any purported exercise of this jurisdiction in the actual circumstances prevailing.

(2) In re Seagull Manufacturing Co. Ltd. [1992] Ch 128; appeal dismissed in [1993] Ch 345

59. The provision under consideration was section 133(1) of the Insolvency Act 1986, which provided that where a company is being wound up by the court, the court may direct a public examination of "any person who - (a) is or has been an officer of the company; or (b) has acted as liquidator or administrator of the company or as receiver or manager or, in Scotland, receiver of its property; or (c) not being a person falling within paragraph (a) or (b), is or has been concerned, or has taken part, in the promotion, formation or management of the company."

60. Mummery J held, in contrast with the private examination provisions, on its true construction section 133 applies to those who are within the class of persons specified in subsection (1), namely those who have voluntarily participated in the affairs of the company, whether or not they are British subjects and whether or not they are within the jurisdiction at the relevant time, even though they cannot be served with the necessary summons within the jurisdiction of the English court. The provisions for private examination are different from section 133 in two important respects: firstly, the power of the court to summon persons to appear before it for private examination extends to a much wider class, the very width of that class is an important factor leading the court to conclude that the relevant class of persons must be limited by the territoriality principle; secondly, the provisions for private examination contain express provisions in section 237(3) in the case of a company and section 367(3) in the case of a bankrupt (equivalent to section 25(6) of the Bankruptcy Act 1914), which, in the words of Dillon LJ in In re Tucker, "conclusively" and "inevitably" connote that if the person in question is not in England he is not liable to be brought before the English court, such a provision is absent from section 133 and the provisions for its enforcement in section 134 (at 138F to 139C).

61. On appeal, the decision of Mummery J was affirmed (at 353E to G, 357F to 358F). The court found no reasons of comity which would prevent those who voluntarily were officers or otherwise participated in the formation or running of an English company to be capable of being summoned by the English court for public examination. Further, Parliament had provided for the winding up of foreign companies, where there was a sufficient connection with the jurisdiction, knowing that section 133 should apply in such a case, thus indicating an intention that officers who may well not be within the jurisdiction should be examined publicly (at 356E to F). Peter Gibson J said at 354F to 355A as follows:

"Where a company has come to a calamitous end and has been wound up by the court, the obvious intention of this section [i.e. section 133] was that those responsible for the company's state of affairs should be liable to be subjected to a process of investigation and that investigation should be in public. Parliament could not have intended that a person who had that responsibility could escape liability to investigation simply by not being within the jurisdiction. Indeed, if the section were to be construed as leaving out of its grasp anyone not within the jurisdiction, deliberate evasion by removing oneself out of the jurisdiction would suffice. That seems to me to be a wholly improbable intention to attribute to Parliament. Further, section 133 must be construed in the light of circumstances existing in the mid-1980s when the legislation was enacted. By use of the telephone, telex and fax machines English companies can be managed perfectly well by persons who need not set foot within the jurisdiction. There is no requirement that an officer of an English company must live in England, nor of course need an officer of an overseas company which may be wound up by the court. Such a company is very likely to have officers not within the jurisdiction."

62. The scope of persons intended to be caught by our section 221 is obviously wider than that under section 133. I bear in mind that that is a significant distinguishing factor. I recognise that the above dicta of Peter Gibson J was said in the context of section 133 and should be read with the purposes that can be served by a public examination as set out in the Cork Committee's report (at 355E to 356A, 360F to H), but I do not think the dicta would have no application in considering who should come within the legislative grasp of the section for private examination, as, after all, "both public and private examinations have a significant role to play in the investigation of a company failure" (at 355C). I also bear in mind that there is no provision in our section 221 equivalent to section 237(3), which may cast doubt as to whether the English court has jurisdiction to order a person residing abroad to attend a private examination in England.

(3) Re Paramount Airways Ltd. [1992] Ch 160; appeal allowed in [1993] Ch 223

63. Here, the court was concerned with the extra-territoriality of section 238 of the Insolvency Act 1986, by which the court may grant relief in respect of a transaction entered into with "any person" at an undervalue at the relevant time by a company which is being wound up or in relation to which an administration order is in force. The administrators of a company sought relief against a bank which was incorporated out of the jurisdiction and had no place of business in England.

64. Mervyn Davies J held the court has no jurisdiction to make an order under section 238 against the bank, given the presumption of territoriality implicit in the provision. As by virtue of section 241(2), section 238 would operate not only against a person who had directly entered into a transaction with the company but also against a person who was once or more removed from the company, the judge did not think the legislative grasp should extend to persons or entities abroad (at 177E to F).

65. The decision was reversed on appeal. On its face, the legislation is of unlimited territorial scope. The court is predisposed to seek for a limitation "which can fairly be read as implicit in the scheme of the legislation", however the difficulty lies in finding an acceptable implied limitation. To treat presence of the other party within the jurisdiction as the factor which determines whether a transaction is within the ambit of the section would be to adopt a criterion "capricious in the extreme"; it would leave outside the scope of the legislation a transaction by a debtor with an overseas company wholly controlled by him, which is a typical way of siphoning money abroad (at 235F to 236E). As stated by Sir Donald Nicholls V-C:

"The case for some limitation is powerful, but there is no single, simple formula which is compelling, save for one expressed in wide and loose terms (e.g., that the person, or the transaction, has a 'sufficient connection' with England) that would hardly be distinguishable from the ambit of the sections [i.e. sections 238 and 239] being unlimited territorially and the court being left to display a judicial restraint in the exercise of the jurisdiction." (at 237G to H)

"In my view the solution to the question of statutory interpretation raised by this appeal does not lie in retreating to a rigid and indefensible line. Trade takes place increasingly on an international basis. So does fraud. Money is transferred quickly and easily. To meet these changing conditions English courts are more prepared than formerly to grant injunctions in suitable cases against non-residents or foreign nationals in respect of overseas activities. As I see it, the considerations set out above and taken as a whole lead irresistibly to the conclusion that, when considering the expression 'any person' in the sections, it is impossible to identify any particular limitation which can be said, with any degree of confidence, to represent the presumed intention of Parliament. What can be seen is that Parliament cannot have intended an implied limitation along the lines of Ex parte Blain, 12 Ch D 522. The expression therefore must be left to bear its literal, and natural, meaning: any person." (at 239C to E)

66. The safeguard built into the statutory scheme lies in the discretion the court has under the sections as to the order it will make (at 239F to 240G). In holding that the court has an unlimited territorial jurisdiction and leaving it to judicial restraint in the exercise of that jurisdiction by taking into account and weighing all relevant factors, the English Court of Appeal would appear to have approached the problem in a similar way as advocated in the note in [1988] JBL 168.

(4) In re Skase (1991) 104 ALR 229; and In re Skase, ex p Donnelly (1992) 114 ALR 303

67. In the first decision, Pincus J of the Federal Court of Australia was concerned with the question whether a summons under section 81(1) of the Bankruptcy Act 1981 could validly be issued to a bankrupt and another person out of the jurisdiction. A distinction was drawn between the power to issue the summons and the question of service and enforcement (at 232). Given the ready availability of international travel, it was held that the expression "examinable person" in section 81 should be read literally, as it seemed improbable that the Commonwealth Parliament intended there should be no power to issue such a summons unless the person summoned was within the jurisdiction at the time (at 233). In re Tucker was not followed, and the first instance decision in Seagull Manufacturing was followed. An order was made for substituted service of the summons.

68. In the second decision, Drummond J of the Federal Court of Australia was concerned with whether the court has power under section 264B(1) of the Bankruptcy Act 1966(Cth) to issue a warrant for the arrest of a person for non-compliance with a summons for examination and who at the time of the issue of the warrant was outside the jurisdiction. It was held that the court does have the power, even though Parliament did not intend such a warrant would be executed outside Australia. There was no reason to apply the presumption against extra-territoriality in construing the section, given that Re Skase established that a summons issued under section 81(1) can be effectively served on a person outside Australia and as the power to issue the warrant was conditioned only on the failure of the person in question to attend for examination after he had been served with the summons (at 307 to 309). However, as a matter of discretion, the warrant should not be issued in that case as it would not serve any useful purpose and was unnecessary since the warrant could not be executed unless and until the bankrupt chose to return to Australia (at 306). In holding that the court has jurisdiction and leaving it to the exercise of the discretion whether the warrant should be issued, the Federal Court was apparently using the same approach as in Paramount Airways.

(5) In re Seagull Manufacturing Co. Ltd. (No. 2) [1994] Ch 91

69. The provision considered by Mary Arden, QC, sitting as a deputy High Court judge, was section 6(1) of the Company Directors Disqualification Act 1986 and the question was whether the court has jurisdiction to grant leave to issue and serve disqualification proceedings out of the jurisdiction. It was held that the reference to the word "company" in this provision embraced any company wherever incorporated which could be wound up under the Insolvency Act and anyone, of whatever nationality, could be disqualified under the section for conduct rendering him unfit to be a director of a company irrespective of where the conduct complained of occurred (at 103H to 104E). The court has discretion not to order service of the disqualification proceedings out of the jurisdiction where there is a good arguable case that the conditions in section 6(1) have not been satisfied (at 105E to H). Reliance was placed on the decisions of the English Court of Appeal in Seagull Manufacturing and Paramount Airways.

(6) McIsaacs and Wilson, Petrs 1995 SLT 498

70. In this Scottish case, the Court of Session (Outer House) decided that the court has jurisdiction to make an order for production of documents and examination on oath of a person residing in New York under section 236 of the Insolvency Act 1986. It was held that "any person" in section 236(2) is not confined to persons who are resident in the jurisdiction or who have been served personally within the jurisdiction, but extends to any person whether in the United Kingdom or not. In re Tucker was not followed. The effectiveness of the court's power to make an order, and the propriety of making an order where the person is in a place outside the jurisdiction, will then depend on whether the court can use effectively the provisions of section 426 (at 500).

71. Section 426(4) provides that the courts having jurisdiction in relation to insolvency law in any part of the United Kingdom shall assist the courts having the corresponding jurisdiction in any other part of the United Kingdom or any relevant country or territory. There is no equivalent provision in Hong Kong.

72. The reasoning for the decision had been criticised in an article headed "Cross-Border Insolvency" by Philip Smart in (1996) 41 Journal of the Law Society of Scotland 141 at 142 to 143 and referred to in Re Casterbridge Properties [2002] BPIR 428 at 460. Section 426 only governs "in-coming" requests; it determines which foreign and Commonwealth countries can request the assistance of the courts in the United Kingdom, and does not govern when and how a court in any part of the United Kingdom can send a request to a court outside the jurisdiction. Further, the United States has never been designated a relevant country within section 426. The basic approach was misconceived, as the court was not asked to order the examination of the person to take place in Scotland but in New York, this involved consideration of section 237(3), as would appear in Re Casterbridge Properties.

(7) Mid East Trading Ltd. [1998] 1 BCLC 240

73. It was held by the English Court of Appeal that the court has power under section 236 to order disclosure of documents situated abroad in the winding up of an overseas company. Insofar as the making of an order under section 236 does involve an assertion of sovereignty (Mackinnon v Donaldson, Lufkin & Jenrette Securities Corpn. [1986] Ch 482 at 494), that is an assertion which the legislature must be taken to have intended the courts to make in appropriate cases. It must have been in contemplation of the legislature that an investigation into the affairs of an overseas company for the purposes of winding up would require information and documents which would be abroad, and that, subject to questions of service, the courts would be able to, and in appropriate circumstances, exercise those powers (at 256).

(8) Re Casterbridge Properties [2002] BPIR 428; appeal dismissed in [2004] 1 BCLC 96

74. Here, an application was made to set aside an order for public examination granted without notice under section 133 in respect of an individual resident outside the jurisdiction, with a cross application by the Official Receiver for an order for private examination under section 236 in the event that the order for public examination should be rescinded. Burton J declined to rescind the order for public examination, so there was no need to resolve the potential issue of full extra-territoriality of an order for private examination, namely, to order a person resident abroad to attend private examination in England. He considered the arguments in favour to be "more logical" and the arguments against to have "the greater backing of authority, albeit not binding" (i.e. In re Tucker on section 25 of the Bankruptcy Act and the obiter statements of Mummery J on section 236 in Seagull Manufacturing at 137F to 138A).

75. Burton J noted that there is undoubted full extra-territorial effect of section 133 and expressed the view that on the wording of section 237(3) there is no doubt about the limited or partial extra-territorial effect of section 236, namely, that the court may order private examination to take place in the foreign country, as opposed to full extra-territoriality (at 462). Mummery J in Seagull Manufacturing did not appear to recognise that there is partial extra-territorial effect of section 236 to make an order not only in relation to "a person who is in England at the relevant time and can be served" but also a person who "if within the jurisdiction of the court would be liable to be summoned" (at 459).

76. On appeal, the decision was affirmed. It was held that if the court was satisfied that the person whose public examination was sought fell within the categories in section 133(1), it was required by the mandatory language of the section to grant the application for an order for public examination, unless the exceptional case arose where the examination order would serve no useful purpose, for example, where it could be seen, at the time of the application, there were no questions which it would be proper for the court to put, or allow to be put to the examinee (para. 44).

Whether the court has hearing jurisdiction as a matter of construction

77. Who then is within the legislative grasp or intendment of section 221? Does the class of persons with respect to whom the legislature is presumed to be legislating include those residing out of the jurisdiction? The categories of persons covered by the provision are set out in section 221(1) as follows:

(1) any officer of the company, or

(2) any person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or

(3) any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs, or property of the company.

78. The above encompasses both persons responsible for the formation or running of the company as well as persons who may be strangers to the company. Prima facie, given their natural and literal meaning, the expressions "any officer" and "any person" in the provision are not limited territorially.

79. In construing section 221, Mr Beresford and Miss Ismail urged me to have regard to the following matters:

(1) This provision appears in the context of legislation relating to Hong Kong companies in respect of which non-residents may be directors (compare section 153 which relates to directors with section 154 which relates to the company secretary).

(2) The section appears in the context of Part V, division (ii), the provisions of which relate to winding up by the court and which apply to unregistered companies including an oversea company registered under Part XI (see sections 326 and 327). The court will exercise its jurisdiction to wind up a foreign company where there is sufficient connection with Hong Kong. The winding up of a company under Cap. 32 is governed by Hong Kong law (Dicey & Morris, op. cit., Rule 157(2), paras. 30R-071, 30-075). There is no provision excepting overseas directors from such provisions.

(3) Under section 224, it is provided that the court, at any time before or after making a winding-up order, on proof of probable cause that a contributory or any past or present officer of the company has absconded or is about to quit Hong Kong for the purpose of, inter alia, avoiding examination respecting the affairs of the company, may order that the contributory or officer be arrested.

(4) When a director agrees to become a director of a Hong Kong company, such agreement would be meaningless without reference to the company's constitution, including the provisions of Cap. 32. "A company exists because there is a rule (usually in a statute) which says a persona ficta shall be deemed to exist and to have certain of the powers, rights and duties of a natural person" (Meridian Global Funds Management Asia Ltd. v Securities Commission [1995] 2 AC 500 at 506B, per Lord Hoffmann). An agreement to act as a director of a Hong Kong company should be regarded as in effect a submission to be bound by the provisions of Cap. 32, including 221.

(5) Although different considerations may apply to a person who is a stranger to the company and who may just be in possession of information sought by the liquidator, this category of persons is included in section 221(1) with any officer of the company and any person known or suspected to have in his possession any property of the company or supposed to be indebted to the company. This may just indicate that the decision whether to order an examination is fact-sensitive and one for the discretion of the court. There is no single formula apt to limit the operation of section 221 which would not produce capricious results.

(6) The need for a proper and effective investigation into company failure through public and private examinations is self-evident. Both kinds of examinations serve essentially the same purpose. If there were no jurisdiction to order an examination of a person residing out of the jurisdiction, this clear objective of the legislature in having a proper and effective investigation into company failure would be defeated, as the power to order examinations could easily be thwarted by a person removing himself out of the jurisdiction.

(7) The important distinguishing factor between the pre-1986 English bankruptcy legislation and the modern insolvency regime was drawn out by Mummery J in In re BusytodayLtd. [1992] 1 WLR 683 at 687G to 688B. Formerly, the bankruptcy courts strained in favour of a more rigorous interpretation of the rules on service of process because of the penal or semi-penal nature of the old bankruptcy legislation, whereas under the Insolvency Act 1986, the approach to the rules is that they should be interpreted in accordance with the ordinary canons of construction. In Hong Kong, the Bankruptcy Ordinance has been amended to remove the penal or semi-penal nature it once had. The Companies Ordinance has never been regarded as being of such a nature.

80. I am inclined to think that the above are valid points. Is there any reason why a similar approach should not have been adopted in construing section 221 as in the decisions of the English Court of Appeal in Seagull Manufacturing, Paramount Airways and Mid East Trading with regard to other legislative provisions in a similar context? Is there any good reason to imply a limitation that only such persons as are present within the jurisdiction who are deemed capable of giving relevant information should be within the legislative grasp? Mr Khaw has put forward these reasons:

(1) Although it was held by the English Court of Appeal in Seagull Manufacturing that the class of persons that may be summoned for a public examination is not limited by the territoriality principle, the ambit of persons specified in section 133 of the Insolvency Act is much narrower than sections 236 and 366, which govern private examinations.

I recognise this as an important distinguishing factor, but I do not think this is determinative or conclusive. This should be considered with other pertinent factors in the round. Further, it seems to me that its importance may be much less if one applies similar reasoning in the decision of the English Court of Appeal in Paramount Airways, that the width of the persons who may be summoned for a private examination could be left to judicial restraint and discretion.

(2) The English Court of Appeal in In re Tucker came to the view that the provision for private examination under section 25(1) of the Bankruptcy Act 1914 has no extra-territorial effect. As the scope of persons covered in section 25(1) is very similar to our section 221(1), the reasoning in that decision has much greater bearing to the present situation.

I am inclined to think that the persuasive value of In re Tucker in the present situation is somewhat less. As pointed out earlier, there is no provision in our legislation equivalent to section 25(6), which was an important basis for the conclusion arrived at in that decision. Further, as observed in Re Casterbridge Properties, when Mummery J in Seagull Manufacturing accepted obiter the effect of In re Tucker as regards private examinations in the Insolvency Act, he did not appear to have acknowledged that there is partial extra-territoriality of section 236.

(3) According to section 221(4) of Cap. 32, if a person summoned to attend for examination refuses to attend, the court may order that he be apprehended and brought before the court for examination. However, such an enforcement provision can hardly serve any purpose in respect of a person resident abroad. The reasoning of Wright J in In re Drucker (No. 2) is applicable, this is a significant pointer that section 221 does not have extra-territorial effect, as it is unlikely for a legislature to make laws which cannot be enforced (Commissioners of Stamps (Queensland) v Wienholt (1915) 20 CLR 531 at 540).

It seems to me a distinction should be drawn between hearing jurisdiction and order jurisdiction here. As I have mentioned earlier, it would appear from the way in which In re Drucker (No. 2) was considered by Dillon LJ in In re Tucker that the words of Wright J should be understood in the context of a deliberation if there should be order jurisdiction. Further, I note that provisions similar to section 221(4) are found in sections 134 and 236(5) of the Insolvency Act. Reference was made to section 134(1) in Seagull Manufacturing at 353C, it did not appear to have posed any difficulty for the English Court of Appeal in arriving at the conclusion that section 133 does apply to a person outside the jurisdiction and at 355B, it was emphasised that the question before the court was one of the scope of the Act and the court was "not concerned with whether the order for public examination can be effectively enforced against a person out of the jurisdiction".

(4) The modern trend in favour of extra-territoriality in the interpretation of insolvency legislation in the United Kingdom with the enactment of the Insolvency Act 1986 should have no application to section 221, which was enacted in 1933 with no significant amendment up to present.

I do not agree with this approach. The weight to be given to a particular interpretative criterion as a guide to the legislative intention may change from time to time, due to changes in social policy or prevailing attitudes. It does not mean that a piece of legislation should be interpreted only with reference to the time it was enacted.

81. For the above reasons, I accept the submissions made on behalf of the liquidators and the Official Receiver. I hold that as a matter of construction, section 221 is not confined to persons who are present within the jurisdiction and the court does have hearing jurisdiction to make an order for private examination in respect of a person who is out of the jurisdiction.

Whether the court has order jurisdiction

82. If a party asks for an order which is beyond the order jurisdiction of the court, the court will not take hearing jurisdiction as a matter of practicality as there would be no point in so doing. Here, one is concerned with jurisdiction in the wider sense, and the question to go into is whether, as a matter of discretion or practice, the order should be made. The court does not make orders in vain. The issue of whether any person abroad ordered to attend for private examination could be compelled to do so or be punished if he should refuse to comply would be material to the making of any order. This was the basis upon which In re Drucker (No. 2) was approved by the English Court of Appeal in In re Tucker on the facts.

83. Mr Beresford drew my attention to the fact that judicial co-operation in cross-border insolvency matters is becoming more common. Comity in these days is more likely to involve international co-operation and recognition of a unitary proceeding in the state of incorporation (Insolvency in Private International Law, by Ian Fletcher, 1999 ed., pages 147 to 152). If it were proposed that the order to be made is for examination in Germany and the order is to be enforced there, whether through the issue of letters of request or otherwise, the court would have to be satisfied that the case is covered by available machinery (In re Tucker, at 161B).

84. Although the letter of request procedure is available in respect of Germany, I have no submissions from Miss Ismail and no evidence on German law whether this procedure may be invoked in respect of a private examination under section 221. In this instance, the liquidators have not sought an order for the private examination of the foreign respondents to be conducted in Germany. I note that an order was made in this liquidation on the application of a creditor on 25 April 2002 for letters of request to be issued to the judicial authorities in Germany for the examination of two individuals (not the respondents here), but was met with difficulty as these persons refused to give evidence, notwithstanding they were summoned by the German courts and one was fined for disobeying the court order (ReB + B Construction Co. Ltd. (in Liquidation), HCCW No. 114 of 2001, 11 April 2003, paragraphs 34 to 37). Eventually, the letters of request which had remained pending before the German courts since 2002 were formally withdrawn on the application of the creditor in April 2004. As the liquidators have not sought to examine the foreign respondents in Germany by the letter of request procedure, it is not necessary to consider order jurisdiction on that basis. I proceed on the basis that the order is for these respondents to attend the examination in Hong Kong. I note also that in Seagull Manufacturing and Casterbridge Properties, the orders made were for the public examination of the persons living abroad to take place in England.

85. Mr Beresford submitted that the making of an order for examination in respect of a person abroad does not necessarily involve an assertion of sovereignty. He drew an analogy with a Mareva injunction extending to the defendant's assets outside the jurisdiction (Babanaft International Co. S.A. v. Bassatne [1990] 1 Ch 13. This form of world wide injunction now commonly in use is restricted to bind the defendant personally, with a qualification that it does not affect third parties, unless and to the extent it is enforced by the courts of the state in which the assets are located, to ensure that it does not purport to have an unintended extra-territorial operation.

86. As for sanction for non-attendance, I have referred to sections 221(4) and 224, although it would appear that a warrant is unlikely to be issued as a matter of discretion unless the person summoned is to return to Hong Kong (cf. In re Skase, ex p Donnelly). There are also provisions in Part IVA of Cap. 32 which were not available before and may be material. These relate to the disqualification of directors. In an appropriate case, the Official Receiver may wish to apply for the disqualification of a foreign director who has refused to attend for examination when ordered to do so. In Seagull Manufacturing (No. 2), it was held that the court has jurisdiction to grant leave to issue and serve out of the jurisdiction disqualification proceedings under the Company Directors Disqualification Act on a director who had refused to co-operate with the Official Receiver's investigation into the affairs of the company on the basis that he was outside the jurisdiction of the English court and could not be compelled to do so. So it cannot be said that an order for examination would be ineffective merely because it cannot be directly enforced abroad, and it may be a necessary step in the protection of public interest.

87. It does not appear to me that there is any principle or rule of practice to prevent an order being made where the person to be examined is residing outside Hong Kong. There is machinery for service of the order out of the jurisdiction to implement the order made, as considered below.

Power to grant leave to serve the order out of jurisdiction

88. A related matter to order jurisdiction is whether there is power to grant leave to serve the order for examination out of the jurisdiction. This is a different question from the objection taken by Mr Khaw that the liquidators have not sought leave of the court in serving the summons for the present application, seeking an order to examine the respondents and for production of documents, out of the jurisdiction. I agree with Mr Beresford the fact that notice of the present application was given to those respondents in Germany does not involve a question of service giving rise to jurisdiction, as this was done to comply with the practice laid down in Re Hing Wah Blanket Co. Ltd., HCMP No. 2745 of 1994, 27 October 1994, that applications under section 221 should, in normal circumstances, be made on notice to the person to be examined, notwithstanding there is no statutory requirement to that effect. The requirement for seeking leave of the court in effecting service out of jurisdiction does not apply to cases where, "for mere grounds of, convenience or interest, it is desirable or proper to give a person abroad notice by way of information of proceedings pending here" (Hong Kong Civil Procedure 2004, Vol. 1, para. 11/9/1).

89. The provision for effecting service of the order for private examination out of the jurisdiction is found in Order 11 rule 9(4) of the Rules of the High Court. This provides that "service out of the jurisdiction of any summons, notice or order issued, given or made in any proceedings is permissible with the leave of the Court". Under rule 9(5), it is provided inter alia that rule 4(2) shall, so far as applicable, apply and rule 4(2) in turn provides that no leave shall be granted "unless it shall be made sufficiently to appear to the Court that the case is a proper one for service out of the jurisdiction under this Order."

90. Order 11 rule 9(4) is applicable to proceedings under section 221 by virtue of rule 210 of the Companies (Winding-up) Rules. The latter stipulates that "in all proceedings in or before the court, or any Registrar or officer thereof, or over which the court has jurisdiction under the [Companies] Ordinance and [the Companies (Winding-up)] rules, where no other provision is made by the Ordinance or rules, the practice, procedure and regulations shall, unless the court otherwise in any special case directs, be in accordance with the rules and practice of the court". See also Buckley on the Companies Act, 14th ed., Vol. 1, page 661, footnote 1 and Vol. 2, page 1732, on the comparable provision in rule 227 of the Companies (Winding-up) Rules 1949.

91. Where an order is made under section 221, the court would have been satisfied of the merits of the application that it is proper to exercise its discretion in favour of making the order. When it comes to granting leave for service of the order out of the jurisdiction, it seems to me that the applicant would also have discharged the burden in Order 11 rule 4(2) that the case is a proper one for service out of the jurisdiction.

Exercise of the discretion

92. I turn to consider if the discretion should be exercised in making the order sought in respect of each of the respondents. It would be convenient to consider first the matters raised by Mr Khaw against the exercise of that discretion that apply to all the respondents, or at least all respondents except the 2nd respondent who did not take part in this application.

93. Firstly, Mr Khaw submitted that the liquidators have failed to discharge the essential requirement that the information and documents sought are reasonably required for them to discharge their functions. The summons in this application did not set out with particularity the information or documents requested. The report of the liquidators made in support of this application merely focused on the events and transactions I have set out in the earlier part of this decision and was silent on the deficiencies, if any, in the information and documents already in the possession of the liquidators and the nature and scope of the information and documents sought to be acquired from the respondents by the order sought. Furthermore, the Transaction would appear to fall outside the ambit of "unfair preference" in section 266B of Cap. 32 in that it was more than two years from the commencement of the winding up on 2 February 2001.

94. Secondly, Mr Khaw submitted that even if the first requirement were satisfied, the court would need to strike a careful balance between the reasonable needs of the liquidators and need to avoid making an order which is wholly unreasonable, unnecessary or oppressive to the individuals concerned. He contended that the liquidators have failed to justify why there should be an order for immediate oral examination without a prior submission of written questions being made requisite.

95. To make good these submissions, I was taken to the correspondence exchanged between the solicitors for the liquidators and the solicitors for the respondents after the summons for this application was issued.

96. In the first letter of the respondents' solicitors dated 17 December 2002, it was asserted that the respondents are "ready and willing to assist the Liquidators" and it would be "far more expeditious, cost effective and appropriate for the Liquidators to formulate the questions that they wish [the respondents] to address in writing", without the need of an oral examination. The liquidators' solicitors replied on the same day that an oral examination in court is the preferred method of investigation as they wanted to hear from the respondents themselves their recollection of the events surrounding the Transaction and its rationale, "not a version of events synthesised ... with the benefit of professional advisers".

97. In the letter of the respondents' solicitors dated 20 February 2003, they again raised the issue of a questionnaire in lieu of oral examination. The liquidators' solicitors replied on 20 and 24 February 2003 that there would not be a questionnaire as they wanted to "explore the mindset of the various individuals involved in the Transaction" and pointed out that the uniform nature of the evidence filed by the respondents in this application is the very thing they wanted to avoid. The liquidators proposed that the respondents do submit themselves for an informal recorded interview with the liquidators and with regard to those who reside in Germany, the interviews are to take place in Germany. The liquidators would review the situation after the interviews whether it would still be necessary to have an examination in court with regard to any of the respondents. The proposal was not accepted by the respondents' solicitors as in their letter dated 4 March 2003, they continued to press the liquidators to "identify the specific matters that [the liquidators] wish to discuss with the former directors before any examination or meeting", otherwise there would be "a fishing expedition undertaken on a speculative basis".

98. In the letter of the respondents' solicitors dated 8 April 2003, they repeated their proposal that the present application be adjourned sine die with liberty to restore on the basis that the respondents are to provide answers in writing to the liquidators' questionnaire and that "their responses would not be used or relied upon other than as informal replies to requests for comment and information". The liquidators' solicitors replied on 24 April 2003, stating that their offer of conducting informal interviews remained open, with a concession that they would reduce into writing, in "broad-brush" terms, an indication of the issues which the liquidators would wish to explore with each of the respondents. The liquidators however, would not agree that the responses given at the interviews would not be used or relied upon other than as "informal replies to requests for comment and information". Further correspondence was exchanged but no agreement was reached.

99. In determining what are the reasonable requirements of the liquidators, great weight should be given to their views as they would have detailed knowledge of the problems which exist in relation to the affairs of the company and the information required. The liquidators consider that they must investigate the Transaction in the interests of the creditors, in particular as regards the state of knowledge of the respondents and their intentions when they entered into the Transaction. Although the Transaction would be outside the ambit of unfair preference, there may be possible claims against the directors for breach of duty and against Kin Ching and B + B Equipment for defrauding creditors. The circumstances here are compelling, there is clearly a need for further investigation. I do not think this is a fishing expedition. The specific matters which the liquidators would wish to explore with the respondents are the Transaction as set out in the report and related matters. The relevant core documents have been exhibited by the liquidators. As stated in correspondence, the liquidators have offered to provide to the respondents additional documents on request and to give a broad-brush outline of the areas of inquiry.

100. As for the appropriate method of investigation, whether this should be by questionnaire and answer in writing in the first instance instead of an immediate oral examination, there is no invariable requirement that an examination should be preceded by a questionnaire, the court has to determine how the investigation of the company's affairs might best be carried out (In re Rolls Razor Ltd. (No. 2) [1970] 1 Ch 576 at 595H to 596C; Re Norton Warburg Holdings Ltd. [1983] BCLC 235). Unlike Norton Warburg, in which there was no question of misconduct on the part of the auditors sought to be examined (at 239c and 241h), we are here concerned with persons involved in suspect dealings with the company in liquidation, either as officers of the company or as officers of associate companies. I agree with the liquidators that it would be more appropriate and effective to have an oral examination in this situation. From the tenor of the correspondence between solicitors, it is very likely that a questionnaire and answer would only lead to an endless exchange, quite apart from the undesirability of having a uniform response settled by lawyers.

101. I do not think the two broad grounds of objection advanced by Mr Khaw are of any substance. I turn to consider the circumstances of each respondent.

102. Of all the respondents, the 1st respondent apparently had the greatest involvement in the Transaction. He was an officer of all three companies, the Company, Kin Ching and B + B Equipment. He is residing and working in Germany, as the director of finance and administration for a substantial construction company. He asserted that having conducted a diligent search, he does not have in his custody any books, correspondence and documents relating to the Company. His last contact with the liquidators was in 2001. During the time he was with the B + B Asia Group, his role in the various companies, with businesses in Hong Kong, Macau, Singapore, Malaysia and the Philippines, was not an executive role in their operations on a day to day basis, although he was involved in major decisions. Given his present work commitments, which involve him in frequent travel abroad, he claimed that it would be highly impractical and difficult for him to travel to Hong Kong for an examination.

103. I am satisfied that an order for examination should be made against the 1st respondent, with leave to serve the order on the 1st respondent out of the jurisdiction. He has turned down an offer to conduct informal interviews with him in Germany at a time convenient to him, so any claim of difficulty on his part to travel to Hong Kong for the examination would carry no weight. I am not minded to make an order against the 1st respondent for production of documents. He has stated on oath he does not have in his custody any documents relating to the Company after a diligent search. There is no reason to believe otherwise.

104. The 2nd respondent has not filed evidence in this application. He too had substantial involvement in the Transaction. He was an officer of all three companies involved in the Transaction. According to the 1st respondent's affirmation, like him the 2nd respondent was involved in various major decisions concerning the companies in the B + B Asia Group and they kept themselves informed about the affairs of the various companies from monthly management meeting where the executive directors of the group reported.

105. The 2nd respondent is in a similar position to the 1st respondent as far as his involvement in the affairs of the Company is concerned. I will make an order against him for examination and production of documents in his custody or power relating to the Company insofar as the same relate to the Transaction. As the order was made without notice to the 2nd respondent in that the liquidators have not been able to serve him with the summons of this application, he may apply to set aside the order if so wished.

106. The 3rd respondent was an officer of the Company and B + B Equipment. He was clearly involved in the Transaction. He asserted that having conducted a diligent search, he does not have any books, correspondence and documents in his custody or power relating to the Company insofar as they relate to the Transaction, other than copies of documents which he believes the Company itself holds and he would be willing to forward these copies to the liquidators if required. He now works for another construction company in Hong Kong as a contracts manager. Due to his work commitments, there are many restrictions on his time and availability. He claims he had worked closely with the liquidators at the initial stages of the liquidation and was co-operative.

107. I am of the view that the involvement of the 3rd respondent in the affairs of the Company and the Transaction is such as to justify an order for examination against him. I will not make an order for production of documents, on the basis of his willingness to produce to the liquidators the copy documents in his possession if so required.

108. The 4th respondent was an officer of the Company when the Transaction took place. He also had direct involvement in the Transaction. He is now the managing director of a Hong Kong company carrying on the business of engineering consultancy. During his employment with the Company, which was from October 1995 to January 1999, he was mainly responsible for the technical side of the business, and this was the case even after he was appointed a director in January 1998. Having conducted a diligent search, he believes he does not have any books, correspondence and documents in his custody or power relating to the Company in respect of the Transaction, other than copies of documents and correspondence which the Company itself holds. The company now served by the 4th respondent has operations in Hong Kong and south China and he is often involved in extensive travel between the various operations. His work commitments impose restrictions on his time and availability.

109. I will make an order for examination against the 4th respondent, on account of his involvement in the Transaction. On the basis that the copy documents and correspondence will be produced to the liquidators as required, I will not make an order for production of documents at this stage.

110. The 5th respondent is the chairman of the executive board of Bilfinger Berger AG, the ultimate parent of the Company, and is residing in Germany. He was an officer of the Company from October 1994 to November 1996. He was also an officer of Kin Ching up to August 1999. He had no direct involvement in the Transaction. His only involvement was in the board meetings of the Company in 1995 and 1996 when Kin Ching undertook not to demand payment of the amount due to it from the Company, during the continuation of the Deed of Undertaking. He claimed he does not have any books, correspondence and documents in his custody relating to the Company so far as they relate to the Transaction; there might be copies of various correspondence and documents held by Bilfinger Berger AG, but none in addition to those the Company itself would hold. He has extensive responsibilities as the chief executive of Bilfinger Berger AG, his time is "extremely committed", and it would be a grave burden on him and Bilfinger Berger AG for him to travel to Hong Kong for an examination. He claimed to have no involvement in the affairs of the Company since he resigned as director on 13 November 1996.

111. Miss Ismail submitted that the events in 1995 and 1996 cannot be regarded as irrelevant to the liquidators' inquiries, although the main focus is on the Transaction in 1998. Further, Kin Ching may be regarded as a "shadow director" of the Company within the meaning of section 168C and the 5th respondent was a director of Kin Ching up to August 1999. Kin Ching was also the parent company of B + B Equipment. The Valuation of the plant and machinery of the Company was prepared on the instructions of Kin Ching.

112. Although the 5th respondent was one of the four directors of Kin Ching at the time of the Transaction, there is no evidence to suggest that he might have personal involvement of some kind. On the basis of the available information, I would decline to exercise my discretion to order the 5th respondent to be orally examined. The production of documents is a different matter. It would appear from the 5th respondent's affirmation that there might be correspondence and documents relating to the Company so far as they relate to the Transaction held by Bilfinger Berger, and would be in his power to produce, if such documents existed. I would make an order for production of documents against the 5th respondent and grant leave to serve the order on the 5th respondent out of the jurisdiction.

113. The 6th respondent is the chief financial officer and a member of the executive board of Bilfinger Berger AG and is residing in Germany. He had never been an officer of the Company and claimed he had no involvement in it. He was only an officer of Kin Ching, up to August 1999, but did not have an executive role. It was not shown he had any involvement in the Transaction or even in the Deed of Undertaking given by Kin Ching to the Company. He does not have any books, correspondence and documents in his custody relating to the Company so far as they relate to the Transaction; there might be copies of various correspondence and documents held by Bilfinger Berger AG, but none in addition to those which the Company itself would hold. He said it would be very disruptive and burdensome to him and to Bilfinger Berger AG if he is required to travel to Hong Kong for an examination.

114. I am not minded to make an order for examination against the 6th respondent on the available information, on account of his apparent lack of involvement in the Transaction. I would make an order for production of documents against him similar to the 5th respondent, and grant leave to serve the order on the 6th respondent out of the jurisdiction.

Orders

115. I would leave it to the liquidators' solicitors to submit for my approval a draft order on the terms as stated earlier. On the basis that allowance should be made for time for service of the order out of the jurisdiction, I would also give leave to the 5th and 6th respondents to comply with the order for production of documents within 42 days from today. In respect of the 2nd respondent, I would order that he is to produce the documents as required within 28 days from today.

116. As for costs, I make an order nisi as follows. The liquidators' costs of issuing the application, the preparation of the 1st supporting affidavit, and the attendance of the first hearing on 18 December 2002 are to be borne by the estate of the Company. Thereafter, the liquidators' costs of the application, as well as the Official Receiver's costs of the hearing on 29 October 2003, are to be borne by the respondents who resisted the application and lost. The liquidators' costs will be taxed if not agreed. The Official Receiver's costs are assessed at HK$70,000.00 on a gross sum basis.

Representation:

Miss Roxanne Ismail, instructed by Johnson, Stokes & Master, for the Applicants

Mr Richard Khaw, instructed by Baker & Mckenzie, for the 1st, 3rd, 4th, 5th and 6th Respondents

The 2nd Respondent, acting in person, absent

Mr Roger Beresford, for the Official Receiver

Appeal by the applicant to Court of Appeal. Appeal dismissed. Please refer to the appeal judgment of CACV196/2004.

HCCW 114/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 114 OF 2001

____________

____________

Coram: Hon Kwan J in Chambers

__________________________________

REASONS  FOR  DECISION

__________________________________

The application

1. This is an application by the Hong Kong Housing Authority ("HKHA") on 4 July 2001 under section 186 of the Companies Ordinance, Cap. 32, for an order that notwithstanding the winding-up order dated 18 April 2001, HKHA do have leave to commence proceedings against B+B Construction Company Limited ("the Company"), by joining the Company as a defendant in the High Court action being HCCT No. 39 of 2001, alternatively to commence arbitration proceedings against the Company pursuant to the contract between HKHA and the Company dated 7 March 1997, provided that no judgment or order obtained by HKHA in the High Court action or in the arbitration proceedings shall be enforced against the Company without leave of the court. The summons was issued on 4 July 2001 and the amended summons seeking leave in the alternative to commence arbitration proceedings against the Company was issued on 28 March 2003.

2. The summons was initially scheduled to be heard on 14 September 2001. The hearing was adjourned to 16 January 2002 and later to 19 March 2002 and eventually to 4 April 2003, for HKHA to ascertain the existence of insurance policies that may provide indemnity for the claim of HKHA against the Company and to obtain documents relating to such policies.

3. This is not the first occasion on which an application was made for leave to commence proceedings against the Company. On 12 June 2001, Yuen J (as she then was) granted leave, on the application of Union Charm Development Limited ("Union Charm"), to proceed with arbitration proceedings against the Company notwithstanding the liquidation. The issue of whether there is insurance cover for the claim of Union Charm, which is in the region of HK$1,100 million, was not raised by Union Charm or the provisional liquidators (who were subsequently appointed joint and several liquidators of the Company on 1 August 2001) at the hearing before Yuen J and I was not told the reason why this was not raised. At the hearing before me, the existence of insurance for the claim of HKHA and the indemnity that such insurance may provide for legal costs in resisting the claim assumed great importance. At the conclusion of the hearing, I made an order granting leave as sought. These are the detailed reasons for my decision.

The discretion under section 186

4. It would be convenient first to set out the legal principles on the exercise of the discretion under section 186. I have taken them from the submissions of Mr Bleach, SC, who appeared for HKHA. They are accepted by Mr Harris, who appeared for the liquidators.

5. The test as to the exercise of the court's discretion whether or not to grant leave is what is right and fair according to the circumstances of each case and this involves a balancing exercise (In Re Aro Co. Ltd [1980] 1 Ch 196 at 209E to H; Re Axona International Credit & Commerce Ltd [1985] 2 HKC 675 at 680A to 681F; Re King's Dyeing & Weaving Factory Ltd (No. 2) [1986] HKC 621 at 623E to H).

6. If the issue can be conveniently decided in the course of the winding up, leave will be refused in the absence of special circumstances, as there is a positive benefit in having the issue decided by the liquidator since this should be less expensive and quicker than an independent action and the liquidator is obliged to act even-handedly as between each class of claimant so prejudice would not normally be caused to any particular class of claimant (Re Exchange Securities & Commodities Ltd & Ors. [1983] BCLC 186 at 195h to 196e).

7. Proceedings will be allowed to be commenced or continued where an action is the most convenient method of trying a question, and specifically so when the questions would involve substantial issues of facts that are in dispute and also matters of law of complexity (Halsbury's Laws of England, 4th ed., Vol. 7(3), para. 2654; Re King's Dyeing and Weaving, supra).

8. Leave is more likely to be granted where the company in liquidation is insured in respect of the claim made against it as the judgment will be funded to the limit of the cover by the insurance company and the costs of the action will be borne by the insurance company (Bristol & West Building Society v. Trustee of the property of Back and another (bankrupts) [1998] 1 BCLC 485 at 488g to 489h, 490h to i).

The claim of HKHA against the Company

9. For present purpose, it is unnecessary to investigate the merits of the claim of HKHA against the Company, so long as the court is satisfied that the claim is "not clearly unsustainable" (Bristol & West Building Society, supra at 489a to d). There is no suggestion by the liquidators that this claim, which they have estimated to be in the region of HK$500 million, is unsustainable.

10. How the claim of HKHA arose, as taken from the supporting affidavit filed by HKHA, may be summarised as follows.

11. HKHA was the employer of a Home Ownership Scheme Project at Tin Shui Wai Area 31, Phase 1 ("the Project"), which involved the construction of six 41-storey blocks of flats. The Company was engaged by HKHA to design and construct the piling foundations pursuant to a contract dated 7 March 1997 for the contract sum of HK$77 million. HKHA appointed Hsin Yieh Architects Associates Limited ("HKA") and Joseph Chow & Partners Limited ("JMK") as, respectively, the architectural and engineering consultants for the Project. The Company carried out and completed the foundation works between September 1996 and June 1997.

12. In July 1999, with the superstructure almost completed, it was discovered that there was uneven settlement to the foundations and investigations revealed that the settlement was caused by irregularities in the construction of the piles accompanied by falsification of the piling records. The resulting scandal has attracted a great deal of publicity and public concern. HKHA brought proceedings in the High Court against HYA and JMK in May 2001, being HCCT No. 39 of 2001, shortly after the winding-up order was made against the Company. The Statement of Claim in that action ran into 69 pages with 14 appendices. The acts and omissions of the Company featured prominently in the Statement of Claim. From the pleading, it would appear that the claim for unliquidated damages against the Company would be founded in breach of contract in the design of the pile foundations and in fraudulent mispresentation and/or deceit as to the length of the as-built piles. The losses suffered by HKHA comprise, inter alia, the cost of remedial works and associated reinstatement works, the compensation payable to the superstructure contractor consequent upon the interruption to the superstructure works, and the loss of interest and other incidental costs arising from the return of deposits to purchasers and from delay in receipt of the completion monies.

13. On behalf of HKHA, it was submitted that the technical issues pertaining to the Company's liability and the quantum of damages are numerous and highly complex, and that it is not within the usual sphere of competence of a liquidator to resolve these issues when called upon to adjudicate HKHA's proof of debt. Further, as there are serious issues of fraud raised in the proposed proceedings, it would be more appropriate for such issues to be determined through the due process of law. It is not known if the allegations of fraud and dishonesty would be disputed by the Company.

14. HKHA has appointed engineering experts to investigate the cause and extent of differential settlement for the purpose of litigation and substantial reports have been prepared. A summary of the technical issues arising from the investigation was given in the first affirmation of the solicitor for HKHA. Some of the findings of HKHA's experts have been disputed by the experts for HYA in the High Court action. A thorough understanding of the theory of geotechnical and structural engineering, and of on-site testing procedures, will be required to evaluate the alleged liability of the Company for breach of its contractual duty of care. Further, to determine whether remedial works are required and whether the scope of the remedial work done is reasonable to mitigate its loss, extensive structural analysis has been carried out by the experts engaged by HKHA. The interpretation of such analysis will require an understanding of the mechanism of failure and the capacity of the individual parts of the structure to withstand stressing. Further, as the restoration works that have been carried out are novel and unprecedented in nature, an in-depth assessment of the efficacy of the remedial measures is required in the event that the need and the scope of the remedial work is challenged.

15. It is accepted by the liquidators that the above technical matters are not within their sphere of competence. There is no mechanism within the procedure for adjudication of proofs of debt by the liquidator in section 263 of Cap. 32 and Rules 79 to 105 of the Companies (Winding-up) Rules for any issues in respect of such technically complex matters to be resolved in a fully informed manner. What the liquidators have proposed is that they would call on their legal advisers and engineering experts to assist them in assessing the merits and quantum of the claim of HKHA. With this assistance, the liquidators claim that they would be able to make a credible determination.

16. It is not impossible for the liquidators to make a determination in the manner as proposed with the assistance of professional expertise. However, given the nature of the dispute and the complexity of the technical issues that may be raised, I am satisfied that these issues ought to be litigated, whether in the High Court action or in an arbitration, for the dispute to be resolved fairly on a fully informed basis, with the benefit of cross-examination and detailed submissions.

17. To date, almost two years after the winding-up order was made, the liquidators have not called on the creditors to lodge their proofs of debt. The reason for this delay, as I was given to understand, is that the liquidators have concentrated on their efforts to generate revenue for the Company instead of expending funds to adjudicate any claims, until they are satisfied that there will ultimately be funds available for distribution and they are able to adjudicate the claims of all creditors.

18. I should also mention that under rule 95 of the Companies (Winding-up) Rules, a creditor dissatisfied with the decision of the liquidator in respect of a proof of debt has an unrestricted right of appeal to the High Court. If this right of appeal were exercised by HKHA, the dispute could only be resolved after a full trial.

19. I mention the above matters because it does not necessarily follow that adjudication by the liquidators of the proof of debt would be a more expeditious and cheaper way of determining the claim of HKHA as compared to litigation in the High Court action or in an arbitration.

The financial position of the Company

20. As mentioned earlier, the court would need to do a balancing exercise in this situation and consider all the circumstances of the case to reach a decision of what is fair and right in the circumstances. Mr Harris has submitted that the liquidators are not taking an adversarial position and they are merely asking the court to exercise its discretion with regard to the best interests of the general body of creditors.

21. The financial position of the Company is one of the matters that should be taken into account. This is dealt with in two of the affidavits filed by the liquidators.

22. In summary, as at 28 February 2003, the liquidators have realised assets in the approximate sum of HK$26.52 million. Taking into consideration the estimated preferential claims, outstanding legal and professional bills received, and the liquidators' fees incurred as at that date, the liquidators estimated that the Company's net assets have been reduced to a sum of approximately HK$8.11 million.

23. The total claims against the Company are in the region of HK$2,500 million.

24. The liquidators have estimated the costs of contesting HKHA's claim (covering legal costs, liquidators' fees and expert's fees) to be in the region of HK$15.2 million, and the costs of adjudication of the proof of debt to be submitted by HKHA at HK$3 million. Leaving aside the question if these are realistic and reasonable estimates (which HKHA does not accept), the costs of contesting HKHA's claim in litigation would have exhausted the net assets of the Company as currently estimated. This is where the importance of insurance cover for HKHA's claim comes in.

The local insurance cover

25. HKHA has obtained a copy of a contractors "all risks" policy issued by the American Home Assurance Company on 9 October 1996 in respect of the Project covering inter alia the Company as an insured. Clause 4.3.1 of the policy provided for an indemnity of all costs and expenses of litigation recovered by any claimant against the insured. The period of insurance covered by this policy was in respect of a construction period of 12 September 1996 to 11 June 1997 and a maintenance period of 12 June 1997 to 11 June 1998. The limit of indemnity was HK$10 million for any one occurrence unlimited for the period of insurance.

26. There is evidence before the court that from January 1997, Bilfinger + Berger AG ("B+B Germany"), the ultimate parent company in Germany, arranged global third party liability insurance for its subsidiaries worldwide, for claims exceeding Duetsche Marks 1 million (which was then equivalent to about HK$5 million), up to a limit of DM 50 million (then equivalent to about HK$250 million) per occurrence. The global insurance covered Kin Ching China Limited ("Kin Ching"; then named B+B Asia Limited) and the subsidiaries of Kin Ching, which included the Company. The lead global third party liability insurer was Nordstern, Frankfurt, and Nordstern has become part of the AXA Group subsequently. The global insurance was arranged through the in-house insurance broker of the Bilfinger + Berger Group, known as Gesellschaft für Bau-Versicherungs ("GBV"), which is a wholly owned subsidiary of B+B Germany.

27. In consultation with its German head office, Kin Ching arranged for its Hong Kong insurance broker to obtain local third party liability cover of HK$5 million for Kin Ching and its subsidiaries, including the Company, to deal with claims under DM 1 million. Thus, according to a cover note issued by Union Des Assurance De Paris for the period of insurance from 1 January 1997 to 31 December 1997, insurance was provided to Kin Ching and its subsidiaries up to the limit of HK$4,965,000.00 (equivalent to DM 1 million) for any one occurrence unlimited for the period of insurance, subject to difference in limits cover under the global policy up to DM 50 million.

28. In November 1997, the Hong Kong insurance broker advised the Company that the global policy had been renewed for another year and that the renewal cover note and policies would be forwarded to the Company in due course.

29. The cover note for 1998 has not been obtained by HKHA but there was one for the period of 1 January 1999 to 31 December 1999 for the annual third party liability insurance, covering, inter alia, the Company to the limit of HK$5 million for any one occurrence with the number of occurrences unlimited during the period of insurance, and subject to difference in conditions and difference in limits cover under the global policy up to DM 50 million. The insurer was AXA Insurance Hong Kong Limited.

30. According to an internal memorandum of Kin Ching dated 8 February 1999 and distributed to, inter alia, the Company, it was stated that for the insurance for third party liability, such insurance was included into the "Bilfinger Berger Germany Global Program". For the limit of indemnity, it was HK$5 million for "Local Basic Coverage" and HK$250 million for difference in conditions and difference in limits coverage as part of the basic cover, and that the total coverage was HK$250 million per event in each case for bodily injury and property damage and/or financial loss. The insurers were stated to be AXA Hong Kong Limited for "Local Primary Cover" with "Co-insurance as arranged by BB Germany".

31. By a letter dated 19 February 1999 from the Hong Kong insurance broker to the German broker GBV, the latter was asked to confirm that if the deductibles for difference in limits and difference in conditions claims were applicable under the global policy as the Hong Kong broker had assumed that the local policy arranged for DM 1 million in Hong Kong "is the in-fill cover for the deductible applicable under the Global Policy". The Hong Kong broker also stated that the premium rate had been increased due to increase in indemnity from DM 50 million to DM 100 million (then equivalent to HK$500 million). A reply from GBV dated 4 March 1999 confirmed the matters raised in the letter of the Hong Kong broker. Further, McLaren Toplis was informed by the letter of the Hong Kong broker dated 22 March 1999 that it was appointed the loss adjuster for the global policy in the event that "the claim may hit the Global Policies in case the claim exceeds DM 1 million".

32. It is clear from the above that there was in place at the material time a local policy which provided a first tier indemnity of HK$5 million and a global policy which provided the second tier of indemnity up to the limit of HK$500 million for any one occurrence during the period of insurance, and that the indemnity would apparently cover the claim of HKHA against the Company.

33. It would also appear from the minutes of a meeting with the Hong Kong broker and the loss adjuster on 12 October 1999 that Kin Ching had reported that investigation was being carried out for the Project in respect of the piling measurement and uneven settlement and it was suggested that the potential claim should be reported to the third party liability insurers. That was done as appeared from a letter of the broker to the Company dated 21 November 2000. The broker had also stated in its letter to the solicitors for the liquidators dated 25 April 2001 that the potential claim had been notified to the interested global insurers.

The global insurance cover

34. HKHA has not been able to obtain a copy of the global policy from the liquidators, Kin Ching, the insurers that issued the local policy, the local insurance brokers or the loss adjuster. An application was made on 18 April 2002 by HKHA for letters of request to be issued to the proper judicial authorities of Germany for the examination in Mannheim of Mr Hubert Diederich, the managing director of GBV and in K?ln of Mr Frank Knipprath of AXA Versicherungs AG ("AXA Germany") in relation to the global policy. The application was granted on 25 April 2002.

35. The court in Mannheim arranged a hearing on 30 August 2002 and summoned Mr Diederich to appear. Mr Diederich applied for cancellation of the hearing on grounds that I need not go into. His application was granted by the court but on an application for review by HKHA, the higher district order set aside the order of cancellation on 22 January 2003. The letter of request was remitted to the Mannheim court and Mr Diederich was summoned to attend on 12 March 2003 and he was ordered to produce the global policies at the hearing. Although Mr Diederich did attend court on 12 March 2003, he did not produce the policies and he was fined 900 Euro dollars for disobeying the court order. It would appear from a letter of B+B Germany to GBV dated 13 February 2003 that the latter was requested to return copies of all policies of public liability insurance.

36. Mr Diederich was summoned to appear again before the Mannheim court on 26 March 2003 but the hearing was not held as he has filed a complaint seeking a review of the decision to fine him for not complying with the order to produce the policy.

37. As for the proceedings in K?ln, Mr Knipprath was summoned to attend on 22 October 2002 pursuant to the letters of request. He too applied for cancellation of the hearing. The matter was remitted to a higher court and on 16 December 2002, a decision was issued that there was no reason to object to the requested disclosure of the policies and the case was remitted back to the K?ln court which summoned Mr Knipprath to appear on 25 February 2003. Mr Knipprath attended court but refused to give evidence and produced a letter from his employers forbidding him to produce the policies to third parties and asking him to return such policies immediately. On 12 March 2003, the court gave a decision dismissing his plea that he is entitled to refuse to give testimony. He has been summoned to appear again on 8 April 2003.

38. I should mention that in the proceedings in Mannheim and K?ln, the liquidators have co-operated with HKHA in that they have written to HKHA's solicitors stating that the Company would have no objection to the global policies being disclosed for transmission to the Hong Kong court in connection with the present application. The letters were placed before the courts in Germany.

39. It is clear from the above that B+B Germany is concerned at all costs to prevent the witnesses from disclosing the global policy, perhaps because of the probable impact on premium if a claim should be made by the Company on the global policy.

40. Because of the intransigence of B+B Germany, a copy of the global policy is not made available. Although the exact terms of the global policy are not known, it must have covered the same risks as the local policy as it was meant to provide for the second tier of indemnity for any claim exceeding HK$5 million. Further, there is on the available evidence a document relating to the global policy prepared by GBV, from which it would appear that in respect of public liability, "the insurer's liability covers both the settlement of justified claims and defence against unjustified claims". I agree with Mr Bleach that it would be strange if the global policy, which provides for second tier indemnity, does not provide cover for legal costs unlike the local policy.

41. According to the decision of the K?ln court on 12 March 2003, there is a relationship of trust between AXA Germany and both the policy holder (i.e. B+B Germany) and the insured person (i.e. the Company). Under German law, an insured person who is not in possession of an insurance policy may dispose of its rights vis-à-vis the insurance company if the policy holder does not intend to pursue the claims under the insurance contract and, in particular, if there are no reasonable grounds for the policy holder's refusal. In this situation, the interest of the policy holder in ensuring confidentiality, which is detrimental to the insured person, is subordinated to the interest of the insured person.

The implication of the insurance cover

42. Mr Bleach submitted that as a matter of commercial reality, the first tier insurer would be unlikely to incur expenses towards legal fees that may exceed the limit of indemnity of HK$5 million, but would more likely than not pay over HK$5 million to settle the claim. Mr Harris submitted that even if HK$5 million were to be paid over, this would not have made a material difference to the recovery analysis of the Company, in view of the vast claims of the creditors to the tune of HK$2,500 million, and it would not be justifiable for substantial costs to be incurred in litigation which would be out of proportion with the amount that might be recovered by HKHA from the available assets of the Company.

43. I fail to see why the limited cover from the local insurance should be disregarded. The position ought to be looked at in the totality with the cover provided in the global policy.

44. As for the global policy, Mr Harris proposed that the court might wish to consider adjourning the present application for the liquidators to bring proceedings in Germany to obtain a copy of the policy, on the basis that the costs of such proceedings are to be underwritten by HKHA. This is not an alternative that would appeal to me, having regard to the proceedings that have already been taken by HKHA in Germany, which necessitated the adjournment of the present application for a year. I do not see any cogent reason for this application to be further delayed.

45. I am satisfied this is an appropriate case to exercise my discretion in granting leave to HKHA as sought to commence proceedings against the Company in the terms that I have set out in the earlier part of this decision. In respect of the hearing on 16 January 2002, I made no order for the costs of HKHA and for the hearing of 4 April 2003, the costs of HKHA are to be paid out of the assets of the Company. As for the costs of the liquidators, their costs of the hearings on 16 January 2002 and on 4 April 2003 are to be paid out of the assets of the Company.

Representation:

Mr John Bleach, SC, instructed by Messrs Johnson, Stokes & Master,for the Applicant.

Mr Jonathan Harris, instructed by Messrs Freshfields Bruckhaus Deringer, for the Respondent.

HCCW 114/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 114 OF 2001

____________

___________

____________________________________

REASONS FOR DECISION

____________________________________

1. This is an application under Section 186 of the Companies Ordinance for an order that notwithstanding the winding-up of B+B Construction Company Limited ("the Company"), the Applicant do have leave to proceed with proceedings in HC Action No. PI 960 of 2000 against the Company provided that no judgment or order obtained by the Applicant shall be enforced against the Company without the leave of the court.

2. Section 186 of the Companies Ordinance provides that when a winding-up order has been made or a provisional liquidator has been appointed, no action or proceedings shall be proceeded with against the Company except by leave of the Court and subject to such terms as the Court may impose.

3. The Applicant is a workman who was injured at work on a site where the Company was the principal contractor. In the personal injuries action, there are two other defendants being the Company's sub-contractor and sub-sub-contractor.

4. The accident occurred in 1997. In June 2000, by a consent order, judgment was entered against the Company and a sub-contractor in favour of the workman for HK$725,000 as employees' compensation. In those proceedings, the Company was represented by solicitors who had been appointed by Tugu Insurance Company, the Company's insurers. I am informed that that sum of HK$725,000 has since been paid by the Insurers.

5. In July 2000, the workman commenced the present personal injuries action. The Company together with the other two Defendants have been represented by the same insurers' solicitors. Pleadings have now been completed as well as discovery and witness statements have been exchanged.

6. In February 2001, however, a petition for the winding-up of the Company was presented and on 18 April 2001 a winding-up order was made. Therefore Section 186 operated to stay this personal injuries claim, unless the stay is lifted which is what the Applicant is seeking today.

7. The Applicant has submitted that he should get leave rather than have to prove as an unsecured creditor in the winding-up of the Company. It is submitted on his behalf that there are issues of fact, such as whether the workman was guilty of contributory negligence, which requires cross-examination of the relevant witnesses. There are also issues as to quantum which would require consideration of expert medical evidence for which directions have been given by the court and for which the court would be the most appropriate tribunal. The action has reached an advanced stage and therefore it is convenient for the proceedings to continue in the High Court action rather than have the Liquidators adjudicate upon this claim.

8. Further the claim is insured and the insurers have not disclaimed liability under the policy. There has been a series of correspondence between the Liquidators' solicitors and the insurers' solicitors which have culminated in a letter from the insurers' solicitors informing the Liquidators' solicitors that the insurers would

"provide policy coverage in respect of this claim subject to terms and conditions of the relevant insurance policy. We have no objection to the Plaintiff's application for lifting the stay of proceedings under the Companies Ordinance".

9. The solicitors for the Liquidators have, at least at one stage of the correspondence, accepted that personal injuries litigation should be treated as an exception to the general policy adopted by these Liquidators that all claims against the Company should be dealt with by way of adjudication of proofs of debt rather than by way of proceedings.

10. The Provisional Liquidators have however taken the view that the letter from the insurers' solicitors set out above is not sufficient and that a formal undertaking and indemnity from the insurers would be required.

11. In my view, given that that letter had been written at the end of a series of correspondence which had started with the insurers' solicitors asking for time to investigate policy liability, it is, in my view, sufficiently clear from the letter of 8 May 2001 that policy liability is no longer contested by the Insurers. Therefore it is probably not necessary for any further indemnity to be provided by the Insurers.

12. In any event, even if no formal indemnity is forthcoming, I take the view that it would not be fair and right, in these circumstances, for the claim to be adjudicated by the Liquidators only when, as has been accepted, it would be more convenient that liability and quantum should be determined in the courts.

13. Before me Mr Tollan for the Liquidators has submitted that the workman may join the insurers in the action thereby leaving the Company out of the matter. He refers to Section 2(1)(b) of the Third Parties (Rights against Insurers) Ordinance Chapter 273. However, it is clear from a reading of that section that what it does is simply to vest the insured's rights against an insurer under the policy on the workman where the insured has been wound-up. In this case, however, there is no indication that the insurer is repudiating liability under the policy, therefore, it is not a question of any rights against the insurer under the policy having to be vested.

14. I do not, therefore, see how that section shows that what the workman should do is to join the insurer as an additional defendant. The workman's rights which are the subject matter of the personal injuries action are rights against the Company.

15. What is of more concern to me is that if the Liquidators adjudicate upon this claim and admit the workman to proof, then that may well open the door to an argument from the insurers that the insured has admitted liability or has compromised a claim which may well lead to arguments by the insurer that it is not bound to pay under the policy.

16. Accordingly, I made an order that notwithstanding the winding-up of the Company, the Applicant should have leave to proceed with the personal injuries action against the Company provided that no judgment or order obtained by the Applicant in the action shall be enforced against the Company without the leave of the court. As far as costs were concerned, I ordered that the Applicant should have his costs in the course in the personal injuries action. As for the Liquidators' own costs, I accept that in any event an application would have to be made by the workman under Section 186 of the Companies Ordinance, and I am satisfied that the Liquidators' costs were incurred as part of the expenses of liquidation in seeking to reduce the Company's potential liabilities.

Representation:

Mr Lee Tung-ming, instructed by Desmond Wong, Angus Tse & Co., for the Applicant, Ip Yung Fei

Mr Richard Tollan, of JSM for the Provisional Liquidators

HCCW 114/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO. 114 OF 2001

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

Coram: Hon Yuen J in Chambers

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

DECISION

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

1. This is an application by Union Charm Development Ltd ("the Applicant") for an order under s.186 of the Companies Ordinance that it may have liberty to proceed with arbitration proceedings against B+B Construction Co Ltd ("the Company"), notwithstanding the fact that the Company is now in liquidation.

The Company

2. The petition for winding-up was presented on 2 February 2001 by the Company's holding company on the ground that the Company was insolvent. On the same day, provisional liquidators were appointed. On 18 April 2001, the Company was wound up. The first creditors' meeting is scheduled for 21 June 2001. Presumably the contributories' meeting will also be held near that time.

3. According to the provisional liquidators' preliminary estimates, total realizable assets are in the region of $20-30m. and total liabilities are in the region of $1,100m., disregarding the Applicant's claim.

The Applicant

4. The Company is a building construction company and the Applicant was its employer under a contract made in 1996. The Company had undertaken to carry out foundation works in respect of a substantial development. Works commenced in 1996 and were completed in 1997.

The Arbitration

5. Defects in the piling works undertaken by the Company were discovered in 1998. In October 1998, the Applicant commenced arbitration proceedings against the Company pursuant to the contract. The Applicant's claim is for approximately $1,100m., i.e. equal to the provisional liquidators' estimate of the Company's total liabilities.

6. Mr Anthony Houghton, a practicing barrister who is also a qualified quantity surveyor, was appointed sole arbitrator in November 1998.

7. Over the past 21/2 years, the arbitration has progressed to the stage that the substantive hearing was due to commence on 25 June 2001, with 4 weeks reserved for the hearing.

8. It is common ground that the arbitration involves technically complex civil engineering issues. It is not disputed that Mr Houghton, with his dual professional qualifications and experience in construction law and practice, would be the most suitable person to adjudicate on the Applicant's claim against the Company.

Effect of appointment of provisional liquidators and liquidation

9. It was against this background that the petition was presented and provisional liquidators appointed in February 2001. The effect of the appointment of provisional liquidators was that the arbitration was stayed under s.186 CO, which provides:-

"When a winding-up order has been made or a provisional liquidator has been appointed, no action or proceeding shall be proceeded with or commenced against the Company, except by leave of the court, and subject to such terms as the court may impose."

In March 2001, the Applicant made the present application for leave to proceed with the arbitration. A master adjourned the application for hearing before the Companies Court. The Company was wound-up in the interim.

Provisional liquidators' position

10. The provisional liquidators have objected to the application. They have taken a "policy" decision that it would only be in exceptional circumstances that they would agree to a claim against the Company being dealt with by way of judicial (or in respect of an arbitration, a quasi-judicial) determination, rather than by way of proof of debt. Counsel for the provisional liquidators informed the Court that there are 12 other sets of legal proceedings against the Company (although presumably each would be in a different stage of progress).

11. Section 263 CO provides :-

"In every winding up (subject in the case of insolvent companies to the application in accordance with the provisions of this Ordinance of the law of bankruptcy) all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency or sound only in damages, or for some other reason do not bear a certain value".

12. The Applicant's claim, although only sounding in damages only, would therefore be admissible to proof against the Company. If the Applicant were to put in a proof, the liquidators would then have to make a "just estimate, so far as possible" of the value of the claim.

13. The provisional liquidators here say that as liquidators, they would be able to make a creditable determination of the value of the Applicant's claim. Although they would have to take expert advice, they estimate that this would cost less than the expenses of the arbitration, a matter which is dealt with below.

Principles governing exercise of Court's discretion

14. The issue on the application is whether the Applicant should be given leave under s.186 to proceed with the arbitration or whether it must proceed by way of proof of debt. It is well-established that such applications for leave are not restricted to applicants who claim to be secured creditors. In all cases, the Court has to try to do what is "right and fair". In the exercise of its discretion, the Court should see if the statutory scheme would serve the purpose of deciding the matter conveniently, with savings in time and cost (Re Exchange Securities & Commodities Ltd [1983] BCLC 186, 195). Understandable though it may be for liquidators to wish to have a hard and fast rule that may be applied in every case, the Court must perform a balancing exercise according to the discrete facts of each case.

15. No doubt in most cases, the statutory scheme would be a more convenient, more cost-effective and less time-consuming way of dealing with claims against a wound-up company. Liquidators have access to the company's books and documents, and would be able to call upon legal assistance (if required) in assessing the merits and quantum of a claim of a general nature.

16. There ought not to be any apprehension on the part of a claimant that liquidators would not act fairly in the adjudication of proofs of debt. Liquidators have a duty to distribute the assets in their hands or under their control amongst the persons truly entitled, and have been said to act in a "quasi-judicial" capacity (Tanning Research Laboratories Inc v O'Brien [1989-90] 169 CLR 332, 338-9).

17. Further, if a claimant is dissatisfied with the adjudication, he may appeal to the Companies Court under Rule 95 of the Winding-Up Rules, and the Court may reverse or vary the decision.

18. Therefore, one would expect in the usual run of things, that a liquidator should be left to adjudicate upon proofs of debt.

Circumstances of this case

19. However, one of the considerations of the Court in an application for leave under s.186 is the nature of the claim. It is recognized that the Applicant's claim in the present case is technically complex, and in the absence of professional expertise in building construction, the liquidators cannot be expected to speedily and relatively inexpensively perform a "just estimate, so far as possible" of the value of the claim by themselves. They would have to call upon expert advisors and in effect, the liquidators' estimate would be their technical and legal advisors' estimate.

20. Consequently, the costs of an adjudication in the present case would be significant. The provisional liquidators' solicitors have estimated those costs at $5m., although no grounds have been given in Mr Tollan's affidavit for this estimate.

21. More significantly, however, that might not be the end of the matter. If the Applicant is dissatisfied with the adjudication, there is an unrestricted right of appeal to the Court under Rule 95, and by the very nature of the claim, the Court would not be able to decide the appeal except after costly litigation which would be likely to be time-consuming. The pleadings in the Arbitration have run to more than 150 pages excluding appendices.

22. In other words, the estimated costs of an adjudication would be $5m. minimum.

23. This is to be contrasted with the Arbitration which has been in progress for 2 1/2 years now and has reached a mature stage. Importantly, as far as the costs of continuing with the arbitration are concerned, the parties have recently agreed that if the Arbitration is to proceed, it would be a "reduced" arbitration, conducted by way of documents only, without a hearing. Mr Houghton has obviously considered that to be feasible as he has on 22 May 2001 made an order of directions along those lines. He has estimated that he would be able to determine the matter and write an award within 28 days of commencement of the task.

24. Given that the hearing of the arbitration was anticipated to last 4 weeks, there would obviously be a substantial reduction in the saving of fees for the attendance at the hearing of leading and junior counsel, solicitors and experts. Without a hearing, the arbitrator's fees (based on a daily rate of $26,000 for the 28 days needed for the determination and writing of the award) would be less than $0.73m.

25. Of course the Company would still have to incur costs to prepare its case to be laid before the arbitrator. In September 2000, a cost estimate covering future fees was prepared by Baker & McKenzie (solicitors for the Company in the Arbitration) representing their "best guesses based on previous experience" of the cost of a full arbitration. That estimate came to a total of about $15m. (being the sum of nearly $11m and ￡400,000). They have since estimated the expenses of continuing with the full arbitration at $9.3m and ￡350,000 (a total sum of approximately $13m.). Unfortunately, a fresh estimate based on a reduced arbitration has not been obtained from them.

26. The Applicant through its counsel says that if the fees already spent and the fees for the hearing are eliminated from that cost estimate, the remaining costs would be reduced by $5m and ￡300,000, so that the reduced arbitration would cost about $5m. (to which there should of course be added the Company's contribution to the arbitrator's fees). On the other hand, the solicitors for the provisional liquidators, performing the same exercise, have estimated that even on the basis of a "reduced" arbitration, the costs would still be $7.5m.

27. Such differences are bound to arise because the cost estimate was not prepared for the present purpose, and it is by no means clear what work was intended to be covered by general work descriptions such as "work on hearing bundle".

28. However what is compelling is that the arbitrator's award would probably be the end of the matter. The award would not be judicially reviewable except on a question of law only, and then, only if the determination of the question of law concerned could substantially affect the rights of one or both parties to the arbitration (s.23 Arbitration Ordinance cap. 341). So, the estimated costs of a reduced arbitration would be $5m.- $7.5m (virtually) maximum.

29. Compared with the estimated costs of adjudication at $5m. minimum, I consider in the exercise of my discretion, that it would benefit both the Applicant and the general body of unsecured creditors to give leave to proceed with the reduced arbitration. The benefit of the near-final nature of the arbitrator's award would in this case outweigh any benefits of the adjudication process and the savings in costs of between $0 to $2.5m. (depending on whose estimate proves to be correct).

Order

30. Consequently I would order that the Applicant have liberty to proceed with the arbitration proceedings commenced by Notice of Arbitration dated 16 October 1998 on the basis of the conduct of the arbitration referred to in paragraph 2 of the document entitled "Order for Directions No. 7" dated 22 May 2001. Since no costs order was sought on the summons, I will not make any order nisi regarding costs but would give liberty to both parties to restore the summons should any directions or orders be sought.

Representation:

Mr P. Carolan instr'd by Kwok & Chu for Applicant

Mr J. Harris instr'd by Johnson Stokes & Master for Provisional Liquidators