RE ZHU KUAN (HONG KONG) CO LTD

HCMP 1286/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1286 OF 2007

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HCMP 1287/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1287 OF 2007

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HCCW 874/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 874 OF 2003

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HCCW 875/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 875 OF 2003

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(Heard together)

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REASONS  FOR  JUDGMENT

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40.  The Companies seek an order that conditional upon the schemes becoming effective, all further proceedings in the winding up of each company be permanently stayed.  Such an order is one of the conditions precedent that must be satisfied before closing can occur under the Restructuring Agreement.  This was a requirement of ZMG, primarily because the Companies will continue to retain both assets and liabilities after the closing of the Restructuring Agreement.  It has not been possible to transfer all the assets of the Companies to the Investor.

41.  The assets to be retained in the Companies include primarily land and property in the PRC which are not subject to any security, amounts due by companies ultimately controlled by ZMG, and interests in subsidiaries.  The liabilities due by the Companies which will not be discharged by the schemes include the amount due to GDB Macau (after deduction of the value of the security held by GDB Macau, ZKG does not owe anything to GDB Macau), the amount due to Banco Tai Fung (Banco Tai Fung has confirmed to the liquidators they will withdraw their proof of debt submitted in the winding up of ZKG), and the amounts due to entities ultimately controlled by ZMG (these are claims due to other PRC government entities that will be unable to accept a compromise or discharge of the relevant debts).

42.  In the negotiations with the liquidators, ZMG had taken the position that a permanent stay of the liquidations of the Companies must be a term of the Restructuring Agreement and this was not negotiable.  Without this term, there would not have been an agreement with ZMG, which agreement underpinned the restructuring arrangements.

43.  The liquidators recognised that it would be necessary to finalise their investigations into the affairs of the Companies in order to confirm if the unsecured creditors would realise greater value under the continuance of the liquidations or under the Restructuring Agreement.  The investigations they have conducted so far involved, inter alia, considering claims that might be available to the liquidators or the Companies to recover value for the creditors.  Potential claims included repayment of inter-company debts (all of which are against PRC entities controlled by ZMG) and claims to recover certain assets located in the PRC (all of which are against entities incorporated in the PRC or in other foreign jurisdictions such as the British Virgin Islands).

44.  The liquidators have also considered the conduct of the directors and officers in relation to the affairs of the Companies and in particular in relation to the disposal of assets and transactions entered into prior to the winding up.

45.  The liquidators have concluded that a restructuring would be preferable to a winding up and the pursuit of the available legal claims, as the claims would need to be brought in Zhuhai or Macau.  Such litigation would be expensive, protracted, difficult to prove, and even if ultimately successful, it would be difficult to enforce the judgments against persons and companies associated with ZMG.  Hence the liquidators have recommended to creditors that they accept a settlement with ZMG.  They seek a permanent stay of the winding-up proceedings, conditional upon the closing of the Restructuring Agreement.  They confirm that no further investigation would need to be carried out and there are no outstanding matters aside from the conditions which need to be satisfied following the sanction of the schemes.

46.  In considering whether to stay winding up proceedings permanently, the court has to take into account not only whether what is proposed is for the benefit of the creditors, but also whether the stay would be conducive or detrimental to commercial morality and to the interests of the public at large (In re Telescriptor Syndicate, Ltd. [1903] 2 Ch 174).  Even though the entire body of creditors would favour a stay because they can obtain positive benefits out of this, if the court is of the view that it is not in the public interest, it would not do so irrespective of the wishes of the creditors (Re Sharp Brave Co. Ltd. [1999] 4 HKC 79; Re Asean Interests Ltd. [2005] 4 HKLRD 665).  The court has to be satisfied that it is right to stay the winding-up proceedings and if there were matters on which the court has doubts it should not grant the stay (Re Lowston Ltd. [1991] BCLC 570).

47.  I am satisfied that the proposed stay of the winding-up proceedings would be for the benefit of the creditors.  They have consented to the terms of the schemes, which included a provision for the stay applications to be made to the court.

48.  Mr. Sheppard submitted on behalf of the liquidators that the court has been fully apprised at regular intervals of the history, background and progress of the negotiations, which took several years, and the eventual settlement embodied in the Restructuring Agreement.  He pointed out that there are no material matters which have not been fully disclosed to the court on behalf of all the parties interested in or involved in the Companies.  Cross-border issues, involving three jurisdictions, vast sums of money and many assets and a miscellany of interested parties, have complicated the negotiations leading to the schemes.  The schemes are the culmination of considerable endeavour and constitute not just a viable solution but also the optimum remedy of the matters in the best interests of the creditors.  The failure of the schemes, if a permanent stay of the winding-up proceedings were refused, could lead to the liquidations continuing for many years, with little likely recovery for the creditors, and protracted and expensive litigation in several jurisdictions.  This would hardly be in the public interest.

49.  Miss Chan for the petitioning creditor in the winding-up proceedings, SCBHK, supported the stay applications.

50.  The liquidators filed four interim returns of directors (Form D2) pursuant to section 3(3) of the Companies (Reports on Conduct of Directors) Regulations, Cap. 32J, the last of which was on 16 July 2007, in which they indicated that they would be in a position to file a final report on the conduct of the directors in December 2007.  On 29 October 2007, the liquidators filed a final return in Form D2 for each company, stating, inter alia, that as at the date of the return, they have not become aware of any matters which would require them to make a report on the conduct of directors under section 168I(3) of Cap. 32.

51.  The Official Receiver informed the court by letter on 29 October 2007 that he would have no objection to the stay applications, having considered the final Form D2.

52.  I consider it appropriate in all the circumstances to exercise my discretion to grant a stay of the winding-up proceedings for each company, conditional upon the schemes becoming effective to the satisfaction of the liquidators as the scheme administrators.  The draft orders submitted have been approved with amendments.  I have ordered the liquidators to be released upon the permanent stay taking effect.  The liquidators’ costs in this application are to be paid by the Companies in accordance with the provisions of the schemes and the petitioning creditor’s costs are to be paid by the company concerned.

HCCW 875/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 875 OF 2003

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Before: Hon. Kwan J. in Chambers (not open to public)

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D E C I S I O N

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1.  This is a summons issued on 7 July 2005 by the liquidators of Zhu Kuan (Hong Kong) Company Limited (“ZKHK”), under section 200 of the Companies Ordinance, Cap. 32.  The liquidators seek directions that they be at liberty to pay out of the assets of ZKHK the fees and expenses incurred, and the remuneration earned, regarding work undertaken by them, and by the provisional liquidators of ZKHK, in relation to the assets and affairs of Zhu Kuan Group Company Limited (“ZKG”) and Pioneer Investment Ventures Limited (“PIV”), more particularly described in the 11^th affidavit of Cosimo Borrelli sworn on 6 July 2005, on the grounds that:

(1)     such fees and expenses were properly incurred in preserving, realizing or getting in the assets of ZKHK; or

(2)     such remuneration was referable to work undertaken in relation to the winding-up, and for the benefit of, ZKHK.

2.  If it is appropriate to make the directions sought, the liquidators recognise that the directions should be qualified in 2 respects:

(1)     an exception should be made regarding any expenditure incurred solely referable to preserving, realizing or getting in specific assets of other companies in the Zhu Kuan Group (such as work undertaken in relation to the first meetings of creditors and the reporting undertaken for the Official Receiver’s office solely for ZKG), when it was not undertaken as part of the overall settlement strategy described below, as it would not be appropriate for such expenditure to be paid out of the assets of ZKHK; and

(2)     it should be further directed that ZKG should reimburse ZKHK, in the event recoveries are made for ZKG and it is in a position to repay any expenses from its own assets.

3.  In the alternative, the liquidators submit that if it is not appropriate to make the above directions, they urge the court to make a direction that ZKHK be permitted to fund the cost of work done that should be borne proportionately by ZKG and PIV by making advances to these entities on a “limited recourse loan” basis in that the loans are to be repaid in the eventandto the extent recoveries are made by ZKG and PIV.

4.  The liquidators acknowledge they have not found any reported authority directly in support of the proposed directions.

5.  The summons first came before me on 10 August 2005.  I adjourned it sine die with liberty to restore, for the liquidators to satisfy the court it is within my jurisdiction to make the directions, and suggested that the Official Receiver be informed.

6.  At the restored hearing, the Official Receiver appeared by Mr Bartlett of counsel to assist the court on matters of principle.  His position is:

(1)     a proper jurisdictional basis has not been made out by the liquidators and the directions sought would seem contrary to fundamental and established principles; and

(2)     there are significant concerns as to the consequences should such a precedent of the proposed directions be set.

7.  Before I deal with the arguments, I will relate the relevant facts.

8.  ZKG was established in Macau and ZKHK established in Hong Kong as “window companies” for the commercial activities of the Zhuhai Municipal Government (“ZMG”).

9.  ZKG is the ultimate holding company of ZKHK and at least 33 other companies and owns 100% of the share capital of ZKHK and of PIV.

10.  PIV was incorporated as a special purpose vehicle to receive a large quantity of shares in Zhu Kuan Development Company Limited (“ZKD”), which is a listed company in Hong Kong.  PIV has no assets other than the ZKD shares.  The ZKD shares were issued to PIV at the direction of ZKG as part of the consideration payable to ZKG by a subsidiary of ZKD for the acquisition of ZKG’s interests in two Zhuhai based shipping joint ventures controlled by ZMG.  The circumstances regarding this transaction and the subsequent entry into separate share charges by ZKG and PIV over ZKG’s shares in PIV and the ZKD shares are subject to proceedings in HCA No. 3502 of 2003 (“the Longway Proceedings”) between PIV, ZKG and Longway Services Group Limited (“Longway”).  PIV’s only creditor is ZKG, although Longway has asserted that it is a creditor of PIV in the Longway Proceedings.  This assertion is denied by the liquidators.

11.  By orders made on 13 August 2003, David Kennedy and Mr Borrelli were appointed provisional liquidators of ZKG and ZKHK.  By orders made on 4 October 2004, these two companies were wound up.  By orders dated 21 March 2005, Kelvin Flynn and Mr Borrelli were appointed liquidators of these companies.

12.  As for PIV, Mr Kennedy and Mr Borrelli were appointed provisional liquidators by an order made on 3 September 2003.  Whilst Mr Kennedy and Mr Borrelli were appointed provisional liquidators of PIV, all of the work undertaken has primarily been an extension of their work as provisional liquidators of ZKG.

13.  The present applications are limited to assets of and fees and disbursements incurred regarding the winding up of ZKHK, ZKG and PIV, and do not relate to the Hong Kong incorporated subsidiaries of ZKHK and ZKG which have been wound up and to which Mr Borrelli and Mr Flynn were also appointed liquidators.

14.  The liquidators have given a detailed account of the work conducted for ZKHK, ZKG and PIV and this may be summarized as follows:

(1)     pursuing legal proceedings under section 221 of Cap. 32, legal proceedings in the PRC and other work to recover the books and records;

(2)     investigating the affairs of these companies, establishing the entitlement of these companies to their assets, and pursuing compensation due to them as a result of the seizure and/or dissipation of these assets, primarily by ZMG and its officers;

(3)     completing procedures required to gain control and to investigate the affairs of these companies’ assets and subsidiaries in Hong Kong and the PRC and to ascertain creditors’ entitlement to any realizations from these assets and subsidiaries;

(4)     pursuing legal proceedings in respect of the land in Zhuhai owned by both ZKG and ZKHK and seized by ZMG;

(5)     bringing the financial and other affairs of ZKHK and ZKG and the conduct of ZMG to the attention of relevant authorities in Hong Kong, Macau, Guangdong and Beijing;

(6)     commencing legal proceedings in the PRC, Hong Kong and the British Virgin Islands and obtaining control of and over the identified assets of these companies and their subsidiaries; and

(7)     working with key officers of ZMG with a view to establishing a settlement or restructuring of the affairs of ZKHK and ZKG which may be able to provide a better return to creditors than would be the case if the winding up of the two companies were finalised.

15.  The liquidators have also undertaken work to identify the creditors of the three companies.  The creditors comprise primarily banks and financial institutions.  ZMG had used ZKHK to procure funds from financiers which ZKHK then loaned to ZKG on an unsecured basis for transactions and investments.  The total claims of creditors against ZKHK and ZKG are about HK$8 billion.  ZKHK is owed HK$644 million odd by ZKG, which is 8% of the total debts of ZKG; ZKHK is the second largest creditor of ZKG.  Creditors who are owed HK$3.3 billion are creditors of both ZKHK and ZKG, because of guarantees given by ZKG.

16.  The three companies and subsidiaries conducted business with little distinction between the different legal personalities of each company within the Group.  Much of the work performed by the provisional liquidators and subsequently the liquidators are conducted for the benefit of the creditors of these companies as a collective group, rather than as three separate bodies.

17.  The provisional liquidators and liquidators have attempted to apportion their costs and disbursements between the three companies, as fairly and evenly as possible.  The lawyers engaged by the provisional liquidators and liquidators have done the same exercise.  According to the letter of the liquidators to the committee of inspection dated 5 July 2005, total fees and disbursements including legal fees incurred up to that date were HK$43.4 million odd and were apportioned as follows: HK$25.3 million to ZKG, HK$15 million to ZKHK and HK$3 million to PIV.

18.  Nearly all of the realizations to date have been of the assets of ZKHK and its subsidiaries, totalling HK$83 million.  ZKG and PIV have realizable assets totalling approximately HK$3.23 million and HK$175 million respectively, but these assets are either not readily realizable or are subject to legal proceedings in the PRC, Macau and Hong Kong.  It is unlikely there would be any realizations of PIV’s assets until the Longway Proceedings have concluded.

19.  The liquidators have sought the views of the committee of inspections of ZKHK and ZKG on the present application, and received confirmation from the two members that they have no objection.  The liquidators have also written to all known creditors of the three companies in July 2005 outlining the application, it would appear that no objection has been received from any creditor.  On 15 August 2005, the liquidators held a creditors’ meeting of ZKHK and ZKG and the creditors were informed of the application, no objection was raised by any creditor then or since.

20.  The liquidators say that if the present application is not successful, the creditors of ZKHK would obtain a windfall for the substantial work done on behalf of ZKG and PIV, but for which they have received real and direct benefit and for which they will continue to obtain benefits.  It would also be unfair to the creditors of ZKG, because the nature of the work undertaken to date on behalf of the three companies has laid the foundation for the settlement discussions with ZMG, which if successful, would be of real, direct and immediate benefit to the creditors of ZKHK.

21.  The liquidators have adopted a strategy in relation to the Group as a whole that sought to bring ZMG back to the negotiating table.  They discovered areas in which ZMG was vulnerable to claims by one or more companies in the Group.  These claims against ZMG represent the most significant asset of ZKHK and other companies in the Group.  The best prospect of maximising recovery for the benefit of all creditors of each of the companies in the Group lay in realizing the various claims against and associated with ZMG.  Both ZKHK and ZKG have similar if not identical claims against ZMG.  Thus, expenses were incurred in trying to maximise the value of a group-wide settlement of claims against ZMG, for the benefit of the three companies.  Steps taken in the Longway Proceedings are part of the wider strategy to bring pressure to bear on ZMG.  This litigation also gave the provisional liquidators opportunity to seek discovery from Longway and production orders under section 221 from a number of professional advisers to entities associated with ZMG and from ZKD.  The liquidators have conducted a thorough review of their work done.  Virtually all of the work undertaken is part of the overall settlement strategy.

22.  With the benefit of substantial information, realizations from Hong Kong subsidiaries, and having committed to primarily successful litigation in Hong Kong, the PRC, Macau and the BVI, the liquidators re-commenced settlement negotiations with ZMG in the second half of 2004, which resulted in a memorandum of understanding signed on 25 January 2006.

23.  The liquidators will reimburse ZKHK for any payments made regarding fees, expenses and remuneration earned for the work undertaken by the provisional liquidators in respect of the assets and affairs of ZKG and PIV, upon the completion of the restructuring contemplated under the memorandum of understanding, or the recovery of assets pursuant to the litigation mentioned earlier.

24.  I am reasonably satisfied that the grounds on which directions are sought are made out, namely, that

(1)     a substantial part of the fees and expenses apportioned to ZKG and PIV was properly incurred in preserving, realizing or getting in the assets of ZKHK; and

(2)     such remuneration was referable to work undertaken in relation to the winding up, and for the benefit of, ZKHK.

25.  I now turn to the jurisdiction upon which directions are sought.

26.  It was initially submitted by Mr Carolan for the liquidators that jurisdiction is founded on rule 179 of the Companies (Winding-up) Rules, according to which the assets of the company are first to be applied in “payment of the fees and expenses properly incurred in preserving, realizing or getting in the assets …”.  In his reply submission, Mr Carolan has accepted the Official Receiver’s position that this provision does not, of and in itself, provide jurisdiction for the directions sought.  I think that must be right.  I agree with Mr Bartlett that this provision does not authorise or extend to the ordering of priorities in one liquidation for work conducted in another.

27.  Nor do I think that the other provision mentioned by Mr Carolan, namely section 265(5B) of Cap 32 (which allows for a creditor to be reimbursed in priority over others where he has indemnified the liquidator for the costs of recovering, protecting or preserving assets) is of assistance in conferring jurisdiction on the court.

28.  Here in Hong Kong, we simply do not have legislation in other countries as, for instance, in New Zealand, where a pooling order may be made, so where two or more related companies are in liquidation, the liquidations in respect of each are to proceed as if they were one company, to the extent the court so orders and subject to such terms and conditions as the court may impose.

29.  That leaves only inherent jurisdiction.  I must be satisfied that the inherent jurisdiction sought to be invoked is not inconsistent with or contrary to established principles.

30.  The liquidators meet with a difficulty here.  And that is the principle that each company in a group of companies is a separate legal entity possessed of separate legal rights and liabilities (Gore-Browne on Companies, 45^th ed., para 7[9A], citing Adams v Cape Industries plc [1990] Ch 433 at 532).  The Scottish decision of Taylor (Liquidator of Neil Middleton and Co Ltd), Petitioner (1976) SLT 82 is founded on this fundamental principle of distinct corporate identity.  A liquidator’s office is separate for each company and the funds of a liquidation are the separate funds of each company.  I have considered this decision in the context of an apparently solvent company in Re Boldwin Construction Co Ltd, HCCW No. 340 of 2002, 20 August 2003, at paras 17 to 25 and 28.  The relevant part of the decision in Taylor at 84 of the report reads as follows:

“The general principle which then has to be observed is that a limited company is a distinct legal person.  It may have close relations with other legal persons, but its separate identity remains.  In my opinion, this principle continues to apply in a company’s liquidation, and it implies that the liquidator’s office is held separately from any other such office, that the funds of a liquidation are the separate funds of the separate company in liquidation, and that the liquidator’s intromissions can only be with these separate funds.  In my opinion, it would be inconsistent with principle that there should be intromissions with the funds of one liquidation to provide remuneration for the liquidator acting in another liquidation”.

31.  Taylor has been cited with approval in various textbook authorities, for the proposition that it is not competent to charge the expense of one liquidation against the assets ingathered in another liquidation, even when the first liquidation was undertaken with a view to securing a benefit for the creditors in the second liquidation (Palmer’s Corporate Insolvency, 1996 ed, para 1.318.2; Corporate Insolvency: Law and Practice, by Milman & Durrant, 3^rd ed, para 2-53). See also Loose on Liquidators, 4^th ed, page 189.

32.  The principle established in Taylor seems to me to be a sound one.  Nor am I persuaded by Mr Carolan there is an adequate basis for distinguishing Taylor so that the principle established could be circumvented in some way.  Mr Carolan submitted that what was held to be impermissible in Taylor could be got around if two conditions are satisfied, firstly, there is creditors’ consent and secondly, it is done with the approval of the court.

33.  As to the second condition, I find this to be somewhat circular, as here I am concerned with the question whether the court does have power to give approval.

34.  On the first condition, creditors’ consent, I do not think that is sufficient to displace the principle of separate corporate identity.  The interest of creditors in the assets of a company in winding up is explained in this way by Professor Goode in Principles of Corporate Insolvency Law, 3^rd ed at para 3-08:

“The statutory trust upon which the company in winding up holds the assets and realisations is not of a kind which confers on the creditors beneficial co-ownership or, indeed, a proprietary interest of any kind.  Their rights are limited to invoking the protection of the court to ensure that the liquidator fulfils his statutory duties.  Their position is analogous to that of residuary legatees in an unadministered estate.  They have a right to compel performance of the executor’s duties but no interest in the assets comprising the estate until completion of the administration, during which time beneficial ownership of the assets is in suspense.  The company thus holds the assets for statutory purposes, not for persons.  Even the declaration of a dividend confers no right on the creditors to sue for the dividend; all they can do is to make an application to the court for an order requiring the liquidator to perform his duties.  These principles apply to preferential and ordinary creditors alike.”

35.  I agree with Mr Bartlett that whereas in the situation of a solvent company as in case of Boldwin, some mechanism was found by using shareholder democracy to deal with the fact that there are separate corporate identities involved, it is equally necessary in the situation of a winding up for a mechanism to be devised, whether by way of an appropriate scheme of arrangement (as considered in Taylor, Noter [1992] BCC 440) or by some other means, so as not to offend the principle of separate corporate identity.

36.  As stated in The Law of Receivers and Administrators of Companies, by Lightman and Moss, 2000 ed, para 2-047, the offices of liquidator and provisional liquidator are statutory and their powers derive solely from statute.  The liquidators must act in accordance with the relevant statutory scheme.

37.  I am not satisfied it is within the inherent jurisdiction of the court to make a direction that the liquidators of ZKHK be at liberty to pay out of the assets of ZKHK the fees and expenses incurred for the work undertaken in relation to the assets and affairs of ZKG and PIV, even though the expenditure incurred in the liquidations of the other two companies may properly be regarded as also having been incurred for the purpose of preserving, realizing or getting in the assets of ZKHK.

38.  The lack of jurisdiction is the stumbling block, so I do not get to consider if I ought to exercise my discretion in giving the direction sought.

39.  However, I should mention that I note the Official Receiver’s concern that if a direction of this kind be granted, there may be repercussions in that there may be an impact on the general principles of commerciality in assessing whether the fees and expenses of a liquidator are properly incurred, as this might have to be measured by reference to a group’s assets irrespective of the commerciality as regards the individual company’s position (see the principles in Mirror Group Newspapers plc v Maxwell [1998] BCC 324 and adopted in Re Peregrine Investment Holdings Limited [1998] 2 HKLRD 670).  The court should be vigilant in monitoring the expenditure of trust property in the administration of a company in liquidation, the Official Receiver is also concerned that such applications may be made too readily in future in a situation involving a group of companies where there is an intermingling of assets.

40.  This leaves the alternate direction sought by the liquidators, namely that ZKHK be permitted to fund that part of the cost of work done that should be borne proportionately by ZKG and PIV by making advances to these entities on a “limited recourse loan” basis, on the ground that such work is properly to be regarded as having been undertaken also for the purpose of the winding up of ZKHK.

41.  Mr Carolan submitted that ZKHK clearly has a genuine and substantial interest in the outcome of the actions taken in relation to the assets and affairs of ZKG and PIV.  ZKHK is a net creditor of ZKG and ZKG is, according to the liquidators, the sole creditor of PIV.  Mr Carolan cited Trendtex Trading Corporation v Credit Suisse [1982] AC 679 and Norglen Limited v Reed RainsPrudential Ltd [1996] 1 WLR 864 at 888B to C, in support of the proposition that it is permissible to fund the litigation and take an assignment of rights in an action.  In this instance, much of costs relate to various applications under section 221, where it is not possible to assign one company’s statutory right to another.

42.  I decline to give the direction sought on the available materials for these reasons.  Firstly, relatively little is known about the limited recourse loan.  Secondly, regard must be given to the fact that realisable assets of ZKG are estimated to be about HK$3 million odd, whereas the costs apportioned to it are in the region of HK$25.3 million.  Thirdly, it is not clear whether it is within the power of the liquidators to make such a limited recourse loan without the sanction of the court under sections 199(2)(d), (e) or (h).  Fourthly, it is not apparent the liquidators have secured unanimous creditors’ consent of ZKHK for the limited recourse loan, I do not regard the consent of members of the committee of inspection as sufficient.

43.  The liquidators would have to resort to other measures canvassed in the course of argument to provide for the payment of their fees and disbursements apportioned to ZKG and PIV.

44.  I order the Official Receiver’s costs and the costs of the liquidators in this application to be paid out of the assets of ZKHK.

Mr Paul Carolan, instructed by Messrs Lovells, for the Joint & Several Liquidators

Mr Jeremy Bartlett, for the Official Receiver

HCCW 875/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 875 OF 2003

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D E C I S I O N

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1. I have before me an application by the provisional liquidators of Zhu Kuan (Hong Kong) Company Limited seeking leave to sell certain assets of the Company. The assets in question consist of:-

(1)	two motor vehicles, both of which were first registered in 1994;
(2)	a property located in City Garden, North Point, which is subject to a mortgage, and in respect of which there is evidence that the mortgagee has indicated an intention to sell the property, and that the provisional liquidators have suggested that they should sell the property instead, in the expectation that they will be able to achieve a better price for it;
(3)	certain furniture and fixtures and other miscellaneous items of equipment which are listed in a schedule exhibited to the affidavit filed by the provisional liquidators in support of this application.

2. The first issue that arose at the hearing was whether or not the Company had locus to appear by counsel to resist the application. It seems to me that, in principle, there might well be cases in which the Company would have such locus. Although provisional liquidators may be appointed with various powers, the principal purpose of their appointment is usually the need to preserve the assets of the company. I recognise that there have, in recent years, been instances in which provisional liquidators had been appointed apparently for other purposes, such as the promotion of schemes of arrangement, but even in those cases, the underlying objective appears to have been to best preserve the value of the company for its creditors.

3. In a situation where it is not certain that a winding-up order will be made at the end of the day, it seems to me that it will usually be appropriate to allow the Company to be heard on application such as this. That being so, I consider that Mr Ng was entitled to be present today, and I heard submissions from him as to whether or not the order sought should be made.

4. Turning to the substantive question of whether or not the order sought should be made, it seems to me that it is necessary to have regard to the terms of the order appointing the provisional liquidators, and the circumstances in which they were appointed, with a view to ascertaining the purpose of their appointment.

5. As I have said, the principal purpose of such an appointment will usually be to preserve the assets of the Company. In this case, the provisional liquidators were given wide powers, including powers to investigate the affairs of the Company. It seems to me that those powers were given, in part at least, on the basis that such investigations would be necessary in order to ascertain what assets the Company might have and to ensure that those assets were either recovered or preserved. It seems to me that to the extent that such investigations are being carried on, it cannot necessarily be said that the provisional liquidators are not thereby seeking to preserve the assets of the Company.

6. The order by which the provisional liquidators were appointed in this case has not been appealed, and no objection has been taken to the powers which have been provided to the provisional liquidators. That being so, it seems to me to be appropriate to proceed on the basis that that order was properly made, so that I should consider this application on its merits, having regard to those powers and the circumstances of this application.

7. It seems to me that in this case, Mr Harris, who appears for the provisional liquidators, is justified in saying that the application is directed to the protection of the assets of the Company in a number of senses.

8. The first sense in which I think this can be said is that at the broadest level, looking at it in terms of the investigative powers of the provisional liquidators, those powers are at least in part, directed towards enabling them to preserve assets of the Company which may be either obscure or difficult to locate, and which may be difficult to take control of. The attempt to take control of such assets, whether in or out of Hong Kong, may well proved to be a time-consuming and costly exercise and it will be for the provisional liquidators to exercise their own judgment as to what steps should be taken in this regard. However, I would observe that the taking of preliminary investigatory steps would appear to be a matter which they could reasonably decide to pursue.

9. That being so, it seems to me that the funding of such investigations could well be a proper step to take, where those investigations may turn up other assets (whether in or out of Hong Kong) which the provisional liquidators are tasked to preserve.

10. In addition, it seems to me that in the case of the two motor vehicles, these are now some 9 years old and are likely to be wasting assets - they would seem likely to depreciate as time goes on and it may well be that, as Mr Harris suggested, the sale of the motor vehicles is the best way to preserve the value of those assets for the Company.

11. In relation to the property, it seems to me that in the light of the apparent intention of the mortgagee to sell the property, and the evidence placed before me that indicates that the provisional liquidators believe that they would be best placed to achieve a better price for the property than a mortgagee sale would raise, that the enhancement of the recovery to the Company, after payment of the mortgagee debt, is to be characterised also as preservation of the assets of the Company.

12. In these circumstances, it seems to me that the provisional liquidators, in seeking to sell the assets with which this application is concerned, are acting in a manner designed to preserve the assets of the Company, both in relation to the specific assets in question, and also in the sense of providing funding to enable other assets of the Company to be located and preserved so far as that may be possible.

13. I therefore do not see that this application involves any extension of the traditional function of the provisional liquidator in preserving and protecting the assets of the Company.

14. I also bear in mind that Mr Ng very fairly did not suggest that there was any particular value or purpose in the retention of these assets, in their current form, as assets of the Company. It seems to me that any such suggestion would have been hard to substantiate given the nature of the assets concerned.

15. In these circumstances, it seems to me that this is an appropriate case in which the provisional liquidators should be given authority to sell the assets in question and I give them that authority. I therefore propose to make an order in terms of the summons taken out by the provisional liquidators.

Representation:

Ms Kendall, of Messrs Baker & McKenzie, for the Petitioner

Mr Kenneth Ng, instructed by Messrs Koo & Partners, for the Company

Mr Jonathan Harris, instructed by Messrs White & Case, for the Provisional Liquidators

Ms P McKenna, for the Official Receiver