RE LEHMAN BROTHERS ASIA HOLDING LTD

HCCW 443/2008

[2022] HKCFI 178

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 443 OF 2008

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D E C I S I O N

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1.  On 23 July 2021 I delivered my judgment in respect of the Liquidator’s application for the court’s sanction of a payment out of the assets of the Company with the agreement of its sole creditor, of a payment of US$2.9 billion by way of a bonus for the reasons explained in the decision. I agreed to sanction the payment subject to the Liquidators providing clarification of the matters referred to in [16] of the decision. This has now been provided. The Official Receiver has no objection to the way in which the sum will be distributed (in short it will be paid to KPMG Hong Kong to be distributed in accordance with their normal procedures for use and distribution of fees) and I will, therefore, sanction the payment.

2.  The remaining matter is costs.  The material dispute is (a) whether or not the Official Receiver should pay a proportion (the Liquidators suggest 70%) of the Liquidator’s costs from 26 May 2020 and bears her own costs or (b) the Liquidators bear their own costs and the Official Receiver’s costs be paid out of the assets of the Company.

3.  The incidence of the Official Receiver’s costs is, like costs generally, a matter for the discretion of the court.  As a general rule in cases in which the Official Receiver comes to court in the exercise of her statutory function, but the court finds against the position advanced by the Official Receiver the court does not make an adverse costs order against the Official Receiver absent some impropriety and commonly her costs are ordered to be paid out of the assets of the Company[1]. However, this is only a general rule and a number of authorities demonstrate that if the court takes the view that the character of the application involves the Official Receiver taking a position that can properly be characterised as adversarial the normal approach, costs follow the event, can be adopted[2].  I do not find in the authorities criteria, which are of general application in determining where the dividing line between the first and the second situation lies in any particular case.  It seems to me, however, that certain relevant distinctions between the two situations can be identified.  Applications which concern components of the liquidation process, which have an administrative character, for example an application for a regulating order, I would expect to fall normally into the first situation.  An application for disqualification as a director or liquidator[3] would probably fall into the second situation.  The position of the respondent is also relevant.  I think it can be fairly readily appreciated that there is a difference between the position of an individual who is the subject of a costly and unsuccessful attempt to disqualify him and creditors, who dispute successfully the Official Receiver’s proposal that a liquidation be conducted in accordance with section 227A of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32.

4.  The present case falls somewhere in the middle.  The Liquidators needed to come to the court and their application is unusual.  I think it understandable that the Official Receiver was concerned to ensure that the correct principles were applied in determining it; indeed I expected the Official Receiver’s assistance in this regard.  On the other hand this was an application, which concerned the Liquidator’s remuneration and viewed from the Liquidator’s perspective the application concerned their personal financial interests rather than the general administration of the liquidation—if I had declined the application it would have made no difference to the collection in and distribution of the Company’s assets or the method by which the Liquidator’s remuneration was to be assessed, because the sole creditor had agreed a lump sum.  I was not concerned to determine whether or not what the sole creditor had apparently willingly agreed to pay was in some relevant sense reasonable or otherwise.  It seems to me that in the circumstances the appropriate course is for both parties to bear their own costs.  I order that there be no order as to the costs of the Liquidator’s application including the hearing on 6 January 2022.

HCCW 443/2008

[2021] HKCFI 2137

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 443 OF 2008

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D E C I S I O N

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1.  The sole remaining liquidator of Lehman Brothers Asia Holdings Limited has applied pursuant to s196(2)(b) and s200(3) of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance, Cap 32, for the following order:

“1. Sanction be granted to the Liquidator to retain US$2.9 million from the next interim dividend payment in this liquidation, such amount (‘Retained Amount’)  reflecting a payment from Lehman Brother Holdings Inc., the sole remaining creditor in this liquidation.”

2.  The application is opposed by the Official Receiver.  When the application came on before me I asked Mr Ho [1] what questions the application required to be considered as on the wording of the order it was unclear what the controversy is.  It is not suggested that the Liquidator, Patrick Cowley of KPMG, personally keep US$2.9 million and it is unclear from the summons whether the Court is being asked to determine a part of KPMG’s remuneration.  From the evidence that has been filed by Mr Cowley it is apparent that the payment it is intended be paid to KPMG is in the nature of a bonus agreed by the Company’s sole creditor Lehman Brothers Holdings Inc., because of what the creditor considers to be the Liquidators success in massively reducing various fees that would otherwise have had to be paid in connection with the liquidation to the Government.  The Court originally appointed three liquidators: Paul Jeremy Brough, Edward Simon Middleton and Patrick Cowley (“Liquidators”). Mr Brough and Mr Middleton retired in November 2011 and December 2019 respectively.  Mr Middleton, but not Mr Brough, was a liquidator at the time the events, which it is said justify the payment of a bonus took place.

3.  It is not in dispute that the Liquidators have already been paid in full for their professional services in accordance with the terms, which governed their appointment[2].  As I have already noted the additional payment is in the nature of a bonus to which the Company’s sole creditor agrees in recognition of the fact that the Liquidators managed to negotiate reductions in the ad valorem fee that was payable under the Companies (Fees and Percentages)  Order, Cap 32C (“CFPO”), the interest fee payable under s295(4) of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance, Cap 32 (“Ordinance”)  and the release fee payable under the CFPO.  The savings totalled HK$989,000,000.  The Official Receiver does not dispute that these savings were the result of the Liquidators’ efforts.  It is understandable in my view that the sole creditor may take the view that the Liquidators’ successful efforts to significantly reduce the amounts I have described and thus increase materially the amount payable to the creditor deserve some financial recognition.  I shall proceed to deal with the application on the basis that there is nothing improper in either the reason why the creditor has agreed to the payment of the bonus or the amount of US$2,900,000.

4.  Section 196(2) of the Ordinance provides that “where a person other than the Official Receiver is appointed liquidator, he shall receive such remuneration by way of percentage or otherwise as is determined … by the court”.  This reflects the common law position, namely, that the Court has “... a parallel inherent jurisdiction ... to fix the remuneration of a liquidator, being one of its officers”[3].

5.  Rule 147 of the Companies (Winding-Up)  Rules, Cap 32H, provides:

“Except as provided by the Ordinance or the rules, a liquidator shall not under any circumstances whatever, make any arrangement for, or accept from any solicitor, auctioneer, or any other person connected with the company of which he is liquidator, or who is employed in or in connexion with the winding up of the company, any gift, remuneration, or pecuniary or other consideration or benefit whatever beyond the remuneration to which under the Ordinance and the rules he is entitled as liquidator, nor shall he make any arrangement for giving up, or give up any part of such remuneration to any such solicitor, auctioneer, or other person” (emphasis added).

6.  On the face of this Rule it is clear that the Liquidators cannot agree to receive a payment in respect of their services beyond that which they are entitled to by virtue of the application of the provisions of the Ordinance or an order of the Court.  The original order appointing the Liquidators provided that “The remuneration of the Joint and Several Liquidators shall be determined by the Court pursuant to under [sic] section 196(2)  of the Companies Ordinance [sic [4]] and be paid out of the assets of the Company.”  It seems to me clear that the language of Rule 147 does not prevent the Liquidators returning to Court and asking the Court to change whatever arrangement has previously governed their remuneration they consider it appropriate or necessary to do so. Rule 147 simply states the consequences of a liquidator being a fiduciary, namely, that he cannot profit from his office unless permitted by statute or an order of the court.

7.  In summary, the Official Receiver objects to the application on the following grounds:

(1)  The bonus is not remuneration and Rule 147 prohibits the payment of any other kind to a liquidator.

(2)  If the bonus is regarded as an increase in remuneration, the Liquidators have to justify the payment by reference to the normal principles that govern the payment of liquidators and this they have not done.

8.  For the reasons that I have already explained in my view the bonus would be remuneration.  However, it is not in dispute that the Liquidators have been paid in full remuneration assessed in accordance with the process that was envisaged at the time the order I have referred to in [6] was made.  The Liquidators are seeking the court’s approval for payment of something additional.

9.  So far as the second objection is concerned the Liquidators argue as follows.  The proposed payment is properly understood as a payment to be made to a fiduciary with the approval of the person to whom he owes his fiduciary duty.  As Birss J explains in Re Portman Estate [5] “Under its inherent jurisdiction, the Court can modify trustee remuneration to ensure that the trust is properly administered for the benefit of the beneficiaries: Re Duke of Norfolk Settlement Trusts [1982] Ch 61.  This can either be done by varying existing powers of remuneration or by conferring a new power of remuneration where there was none previously.”  Therefore, there is nothing in principle objectionable to the Liquidators returning to Court to seek a variation of the original order providing for payment of their costs.

10.  There is also nothing objectionable in principle to a payment to a trustee, and by parity of reasoning a liquidator, if the beneficiary under the trust, and thus the creditors of a company, agree to it voluntarily.  As is explained in Snell’s Equity[6] “There is nothing to prevent trustee from contracting with his beneficiaries (assuming they are all sui juris)  for compensation for the performance of the duties of the trust, even if this compensation is over and above that expressly permitted in the trust instrument.”

11.  In my view this analysis is correct.  There is nothing in principle objectionable to the Court approving a further payment to the Liquidators to which the sole creditor of the Company agrees.  It would appear that the creditor takes the view that the Liquidators have carried out their duties very successfully and as a consequence the return to it has been materially higher than it might otherwise have been.  I can see no reason on the basis of the evidence before me not to conclude that this is a genuinely held view and one which a creditor might reasonably hold.  In these circumstances the question becomes is there any reason for the Court to withhold approval of what the creditor has agreed?

12.  Before turning to consider the Official Receiver’s objections I would make the following preliminary observation.  The facts of this case are unique and I think it unlikely that they would recur and certainly not recur frequently.  No case has been cited to me which deals with a comparable application for additional remuneration by a liquidator.

13.  First, the Official Receiver objects on the grounds that the determination of the Liquidators’ remuneration has to be assessed by reference to the Maxwell [7] principles and the Liquidators have not begun to satisfy them.  This is with respect an artificial analysis in the present context.  Self-evidently the Liquidators have not made an application for an additional payment on the basis of the amount of work they have carried out.  They make it on the basis that the creditor has agreed to the Liquidators being paid a bonus.  If the creditor had not agreed there would have been no basis for the application to be made.  Conversely if the creditor had agreed that the Liquidators be paid a lump sum rather than be required to go through a taxation I can see no reason in principle why the Court would not have agreed it.  Unless the Court had doubts about the genuineness of the agreement, but that is a different matter.  The Maxwell principles apply in cases in which the Court is being asked to assess remuneration.  In my view they do not apply if the Court is satisfied that a taxation is not required.  In the present case a further taxation is clearly not required; it would be a meaningless exercise.

14.  The other reasons go to the undesirability of permitting a liquidator to return to court and ask for an uplift in remuneration because he can credibly argue he has done a particularly good job.  As I have said this is a unique case.  I do not think it can sensibly be objected that by approving the application the Court might appear to condone excessive payments to liquidators or encourage similar applications in the future.  The prospects of a sufficient proportion of creditors in value or number agreeing to pay bonuses to liquidators in the future is so remote as to be fanciful in my view.  Neither can the Court approving a payment to which a company’s sole sophisticated creditor has agreed in my view sensibly be interpreted as approving overly generous remuneration of liquidators generally.  In my view the Official Receiver’s concerns do not justify the Court declining the application.

15.  There is, however, another concern to which in my view the application gives rise.  Mr Cowley says in his 11^th affirmation that the creditor has agreed to pay the bonus to the Liquidators because it is extremely pleased with their performance, particularly with regard to the release fee payable to the Government pursuant to Schedule 2(3) of CFPO, which resulted in a saving of HK$540 million.  The creditor’s confirmation of its agreement to the payment is contained in a short letter dated 18 February 2020, which I quote in full:

“I write in respect of our intended court application in Hong Kong seeking sanction to retain US$2.9 million from the next dividend payment that would otherwise be paid to Lehman Brothers Holdings Inc. (‘LBHI’), with a view to that sum being paid to KPMG as an additional fee for the Liquidators. I have been provided with and read a draft of your 11^th Affidavit (‘Affidavit’)  that is to be filed in support of the intended application.

I, as the CEO of LBHI, which is the sole remaining creditor of LBAH, and principal beneficiary of the efforts your have detailed in the Affidavit, hereby confirm LBHI’s support for the proposed fee, and the application being made in Hong Kong.”

16.  As I explained in [2] the payment will go to KPMG.  It is not clear how this substantial additional sum will be distributed.  The letter seems to envisage that Mr Middleton will be paid a proportion of the US$2.9 million, but I think it is reasonable to assume that this will not be the case.  Although I decline the Official Receiver’s invitation to dismiss the application I do not propose to approve it at present.  I will adjourn the summons to a case management conference in order that directions can be made for the filing of further evidence explaining how the bonus is to be distributed and what precisely the creditor has agreed to.  The Liquidator’s solicitors can write to my clerk to fix a date.

Mr Look Chan Ho, instructed by Tanner De Witt, for the liquidator

Mr William Wong SC and Mr Michael Ng, instructed by Official Receiver’s Office, for the Official Receiver

HCCW 437/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 437 OF 2008

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____________

AND

HCCW 438/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 438 OF 2008

____________

____________

AND

HCCW 441/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 441 OF 2008

____________

____________

AND

HCCW 442/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 442 OF 2008

____________

____________

AND

HCCW 443/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 443 OF 2008

____________

____________

AND

HCCW 452/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 452 OF 2008

____________

____________

AND

HCCW 463/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 463 OF 2008

____________

____________

AND

HCCW 464/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 464 OF 2008

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(Heard Together)

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REASONS   FOR   DECISION

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Introduction

1.  In September 2008, petitions were presented for the winding up of eight Hong Kong companies in the Lehman Brothers group of companies pursuant to section 179(1) of the Companies Ordinance (Cap. 32) (“the Ordinance”), namely Lehman Brothers Securities Asia Limited (“LBSA”), Lehman Brothers Futures Asia Limited (“LBFA”), Lehman Brothers Commercial Corporation Asia Limited (“LBCCA”), Lehman Brothers Asia Limited (“LBA”), Lehman Brothers Asia Holdings Limited (“LBAH”), Lehman Brothers Asia Capital Company (“LBACC”) LBQ Hong Kong Funding Limited (“LBQ”) and Lehman Brothers Nominees (H.K.) Limited (“LBN”). I shall refer to them collectively as “the Companies”. The petitions were presented either by the Companies themselves or by their parent companies as a result of the financial difficulties in which the Lehman Brothers group found itself as a result of the financial crisis that developed in the later part of 2008.

2.  When the petitions were presented, ex parte applications were also made for the appointment of provisional liquidators pursuant to section 193 of the Ordinance. Messrs Paul Brough, Edward Middleton and Patrick Cowley, partners of Messrs KPMG, Certified Public Accountants, were appointed joint and several provisional liquidators of each of the Companies, with the exception of LBQ and LBN, in respect of whom only Messrs Middleton and Cowley were appointed as joint and several provisional liquidators. I shall refer to them as “the Provisional Liquidators”.

3.  Paragraph 3(20)(a) of each of the orders by which they were appointed empowered the Provisional Liquidators to employ clerks, servants, employees, managers and agents including foreign agents for the purpose of exercising the powers conferred on them by such orders, to do so on such terms as to remuneration or otherwise as they thought fit. Paragraph 3(20)(b) of the orders authorised them to defray the costs of doing so out of the assets of whichever of the Companies was relevant. Paragraph 3(20)(d) permitted them to engage professionals, such as accountants, surveyors, attorneys, barristers, solicitors, financial advisers, stockbrokers or other agents as they thought necessary, whether in Hong Kong or elsewhere.

4.  So far as their own remuneration was concerned, paragraph 6 of the orders provided that “Subject to the approval of the court, [their] remuneration … be charged on a time-costs basis and be paid out of the assets of [the relevant company]”.

5.  In November 2008, winding up orders were made in respect of each of the Companies, and the Provisional Liquidators continued to act as provisional liquidators by virtue of section 194(1)(aa) of the Ordinance, pending the appointment of liquidators.

6.  During the course of February 2009, meetings of creditors and contributories of each of the Companies were held, at which the Provisional Liquidators were appointed liquidators, and committees of inspection were proposed to be appointed in respect of each of the Companies, apart from LBQ and LBN. Thereafter, during March 2009, orders were made by the court appointing the Provisional Liquidators as liquidators of each of the Companies.

These applications

7.  On 24 March 2009, the Provisional Liquidators issued a summons in each liquidation seeking directions in relation to their remuneration and disbursements (in particular the remuneration of agents appointed by them, such as their legal and other advisers). Directions were sought as to the manner in which such remuneration and disbursements should be assessed, for the actual assessment of such remuneration and disbursements, and for the payment out of such remuneration and disbursement from the estate of the relevant company. Directions were also sought as to the making of interim payments in respect of such remuneration and disbursements, pending their final assessment, and as to the costs of the applications.

The hearing of 27 March 2009

8.  On 27 March 2009, an initial directions hearing was held. It was directed that the applications should be dealt with in stages, with two further hearings fixed. The first such hearing was to be heard on 26 May 2009, and was to deal only with the application for an interim payment in respect of the Provisional Liquidators’ remuneration and their disbursements (principally the remuneration of their agents). The second, to be heard on 12 June 2009, would deal with questions of principle as to the basis on which such remuneration should be assessed, as the Provisional Liquidators and their legal advisers considered that there was some doubt as to the relevant approach to be adopted (in particular, whether the correct approach was that identified in cases such as Re Peregrine Investments Holdings Ltd (No. 1) [1999] 3 HKC 1, whereby the assessment was one to be done by the court in the exercise of its inherent jurisdiction, or whether such assessment was to take place pursuant to section 196(2) of the Ordinance and relevant provisions in the Winding Up Rules (Cap. 32H) (“the Rules”) and in accordance with the Procedural Guides for the Taxation of Bills of Provisional Liquidators and Liquidators by Masters and of Bills (other than Bills of Provisional Liquidators and Liquidators) before Taxing Officers (“the Procedural Guides”)), and would also give consideration to the manner in which such assessment should take place (whether by a judge or a master, and in either case whether with or without the assistance of an assessor).

This hearing

9.  This was the first of these hearings. At the end of the hearing, I ordered that:-

(1) An interim payment of 75 per cent of the fees of the Provisional Liquidators and of their agents (excluding such fees as were incurred in respect of this application itself and the fees of the Provisional Liquidators for critically scrutinising their own and their agents’ fees and preparing the evidence for these applications (which were defined as “the Billing Tasks”) for the period from the date of their appointment to the date of the order appointing them as Liquidators (“the Provisional Liquidation Period”) should be made to the Provisional Liquidators;

(2) An interim payment of 100 per cent of their other disbursements during the Provisional Liquidation Period (i.e. excluding the fees of their agents, which were dealt with by the order under paragraph (1) above) should be made to the Provisional Liquidators;

(3) Consideration of the recoverability of the fees of the Provisional Liquidators and their solicitors (Messrs O’Melveny & Myers) incurred in respect of the performance of the Billing Tasks should be adjourned to the next hearing;

(4) The Provisional Liquidators should be at liberty to apply for further interim payments;

(5) The Official Receiver should forthwith release the payments allowed under this order, which would be validated for the purposes of section 182 of the Ordinance.

10.  The order was made on the undertaking of the Provisional Liquidators to repay any amount of the interim payment allowed by the order (other than in respect of the fees of three firms of Hong Kong solicitors instructed by them) should such fees and disbursements ultimately be determined to be less than the amount of the interim payment received by them. In respect of the three firms of Hong Kong solicitors (namely O’Melveny & Myers, Linklaters and Mayer Brown JSM), a similar undertaking was given by the firms directly.

11.  When making the order, I gave brief oral reasons for doing so. However, I indicated that I would in due course hand down more detailed reasons in writing. These are those reasons.

These insolvencies and the remuneration claimed

12.  By way of background, I would say that there can be no doubt but that the provisional liquidations (and now liquidations) of the Companies are appropriately to be described in colloquial terms as “mega-insolvencies”. In very round terms, the Provisional Liquidators have been dealing with companies whose assets have a total book value of US$21.1 billion (about HK$164.3 billion) and whose liabilities total some US$23.9 billion (about HK$185.6 billion).

13.  The amount of the fees in respect of which an interim payment is sought total just over HK$291 million. Of this amount, some HK$174.2 million represents the remuneration of the Provisional Liquidators in respect of their work on the liquidations, HK$107 million relates to the remuneration of their agents and other disbursements, and HK$9.5 million represents the remuneration sought by the Provisional Liquidators and their solicitors in respect of the Billing Tasks. These are, without question, very large amounts. However, the Provisional Liquidators have filed very extensive evidence dealing with their remuneration, in which they provide a great deal of detail as to the work which they, their staff and their agents have carried out, explaining the work that was done, the persons by who it was done, the time taken in respect of it, and the reasons for doing it. This evidence was given by Mr Middleton, in an affidavit filed in the LBAH liquidation (HCCW 443/2008) which was referred to as “the Umbrella Affidavit” (so called because it dealt with matters that were of general application to the liquidations of all of the Companies), and in separate affirmations filed in each of the individual liquidations, in which he dealt with matters relating specifically to the provisional liquidation of the company concerned.

14.  The Umbrella Affidavit provided an overview of the scale and complexity of the provisional liquidations, the Provisional Liquidators’ approach to the provisional liquidations, the computation and scrutiny of their fees, their charge out rates, the scrutiny by them of their agents’ invoices, their agents’ charge out rates, the information technology systems costs that had to be apportioned between the Companies and the fees and expenses incurred by them in the scrutiny of their own and their agents’ fees, and the preparation of the invoices and these applications. The affidavits in the individual liquidations set out, in narrative form, a summary of the work done by the Provisional Liquidators and their staff in the provisional liquidation in question, and provided details of the fees and expenses which the Provisional Liquidators sought to recover in respect of that provisional liquidation.

15.  It is clear from this evidence that the provisional liquidations are of a scale and complexity, so far as Hong Kong is concerned, that has rarely been seen. They are part of insolvency proceedings around the world (in particular in the United States, the United Kingdom and Japan) in respect of the failure of the Lehman Brothers group, which was until then the fourth-largest investment bank in the United States.

16.  Mr Middleton says, and I accept, that these insolvencies present operational and technical challenges which surpass any that have previously been experienced by himself and his colleagues, having regard to the wide range of commercial activities undertaken by the Companies, the very large number of clients claiming proprietary interests in securities held by them, the wide range of financial instruments and products used by and dealt in by the Companies, the fact that the Lehman Brothers group operated as a global organisation with operations and systems that transcended legal entities, for example by use of a common information technology infrastructure, and because a single transaction might involve a variety of corporate entities in a number of different jurisdictions.

17.  In order to give a sense of the scale of the provisional liquidations, Mr Middleton mentioned the overall value of the assets and liabilities of the Companies (to which I have already referred), the fact that they employed some 928 staff with a net payroll of some HK$75 million odd per month, and the fact that they had operations throughout East, South-East and South Asia and Australasia.

18.  At the time that they suspended operations, the Companies had over 2,191 unsettled trades of listed securities on the Hong Kong Stock Exchange, held HK$8.3 billion worth of Hong Kong listed securities, some HK$867 million worth of overseas listed securities, some 11,000 unsettled futures positions, stock lending and borrowing arrangements involving over 15,000 transactions, and had in excess of 2,000 identified creditors.

19.  Mr Middleton also explained the need for the Provisional Liquidators to get to grips with the affairs of the Companies in very short order, referring to the Provisional Liquidators efforts in the early stages of their appointment to maximise the value of the businesses by negotiating for their disposal, so far as possible, as a single unit, and to the need to employ or retain staff to assist in dealing with the many different financial instruments and positions that had to be dealt with.

20.  I am quite satisfied from the evidence that has been put before me that the Provisional Liquidators have had to deal with a large number of matters or issues of considerable difficulty or complexity in a relatively compressed timeframe. In these circumstances, although the amounts of remuneration sought are, as I have said, extremely large, I do not think that they should be regarded as surprisingly so.

The interim payments sought

21.  In this application, the Provisional Liquidators asked for approval to be given for an interim payment of 80 per cent of the amount claimed.

22.  So far as the need for an interim payment was concerned, Mr Fok S.C., who appeared for the Provisional Liquidators, submitted that this was self evident, as it was unreasonable to expect professionals to provide their services over a period of time without any provision being made for payments on account of their remuneration and expenses to be effected from time to time. Given their ongoing recurrent expenses, the Provisional Liquidators and the professional agents employed by them needed to have their remuneration paid or provided for on a reasonably timeous basis. I accept that this is so, and all the more so where the amounts involved are very substantial, as is clearly the case here.

Jurisdiction to order an interim payment

23.  For the purposes of this application, the Official Receiver, whose attendance at this hearing was excused, made a number of observations in a letter to the court dated 25 May 2009. So far as the appropriateness of making an order for an interim payment was concerned, the Official Receiver drew my attention to the decision of Kwan J in Re Wing Fai Construction Company Limited [2003] 1 HKLRD 80, in which an application for interim payment before an application for taxation of the provisional liquidators’ fees and expenses had been made was rejected. Kwan J there indicated that there were means by which matters could be expedited, and that it was unacceptable for an application for interim payment to be made even before the provisional liquidators had submitted their bills for taxation.

24.  So far as this is concerned, it seems to me that there can be no doubt that the court has jurisdiction to order interim payments in respect of the remuneration and expenses of provisional liquidators in an appropriate case. Such orders have been made in a number of cases, such as Re Peregrine Investments Holdings Limited to which I have referred. It is also, I think, self-evident, for the reasons suggested by Mr Fok, that where the amounts of the fees involved are significant, and the process of their assessment is likely to take time, that it will be of importance to provisional liquidators that some arrangement for interim payments on account should be made. In my view, to fail to make some such arrangements in a case like the present would be to cause very real hardship to the Provisional Liquidators, and to those of their agents who have provided extensive services to them.

25.  Although the Provisional Liquidators in this case have not formally submitted their bills to the court for taxation, it must be borne in mind that it is their position there is doubt as to the correct procedure to adopt, and the present applications are, in effect, a request by the Provisional Liquidators to the court to have their proper remuneration assessed and paid. Moreover, in making this application, the Provisional Liquidators have put before the court their invoices (and those of their agents) and very extensive evidence as to the justification for the amounts sought to be charged. In these circumstances, the position here is clearly far removed from that which obtained in the Wing Fai case, and it seems to me that there is no impediment to the making of an order for interim payment here.

Amount of the interim payment to be ordered

26.  So far as the amount of the interim payments is concerned, as I have noted, the amount sought by the Provisional Liquidators was 80 per cent of the amounts claimed by them. The Provisional Liquidators based this on the decision of Ferris J in Re Independent Insurance Company Ltd (No. 2) [2003] BPIR 577.

27.  However, in that case, although Ferris J did authorise the making of interim payments at a level of 80 per cent of the amounts sought to be charged, he made it clear that this was exceptional. There, the joint provisional liquidators had previously been permitted to draw interim payments in the full amount claimed, a practice which Ferris J deprecated. He stated that as a general rule, interim payments should be of the order of two-thirds of the amount sought. In my view, this is an appropriate starting point.

28.  In Independent Insurance (No. 2) Ferris J exceptionally permitted interim payments to be made in the amount of 80 per cent of the amounts claimed. This was because, in his view, the joint provisional liquidators had established a track record that showed that their claims could be relied upon as being generally reasonable, as a number of previous interim payments had been made over a period of time from which this could be established.

29.  Mr Fok submitted that in the present case, there was similarly a clear track record on the part of the Provisional Liquidators, as was demonstrated by Mr Middleton’s evidence as to the rate at which they had succeeded in recovering their remuneration in other assignments in which their remuneration had been taxed or assessed by the court. This evidence was to the effect that in other substantial insolvencies in which the Provisional Liquidators had been involved, the amount taxed off was not more than 9 per cent. This, Mr Fok said, should provide considerable comfort to the court, and would justify it in allowing interim payments of 80 per cent.

30.  The Official Receiver submitted, however, that those cases, while substantial, were not of the scale of the present provisional liquidations, and given that the Provisional Liquidators had approached the present provisional liquidations on an apparently different basis (having regard to the special steps which they took in order to scrutinise and justify their own fees), the court should not rely on their track record in the other cases as adequate support for the accuracy of their bills in these provisional liquidations.

31.  In my view, the level at which the Provisional Liquidators’ fees in other insolvencies handled by them have been allowed is of limited relevance. It seems clear from the judgment of Ferris J in Independent Insurance (No. 2) that the track record that he considered to be of relevance was that established by the joint provisional liquidators in the case under consideration. While the general level of recovery in other cases provides a certain level of comfort, I do not think that it is of itself sufficient to justify interim payments of as high as 80 per cent of the remuneration claimed.

32.  That said, however, I do not think that the Official Receiver’s suggestion that the difference in approach that is shown in the Provisional Liquidator’s evidence in this case (as compared to the other cases in which they may have acted) is something that throws doubt on the accuracy or reliability of their billings here is well-founded. The level of checking and scrutiny by the Provisional Liquidators in the present case would appear to exceed that which they have employed in the past, and to that extent, would give additional comfort to the court in respect of the fees charged.

33.  Moreover, the extensive evidence that has been filed in support of these applications sets out in considerable detail the nature of the work that the Provisional Liquidators have done and the thinking behind their doing it, and provides justification for the steps taken by them. This is to be found not only in the narratives contained in each of the affidavits filed by Mr Middleton, but also in the voluminous supporting material in the exhibits thereto, which support and expand upon what is said in the affidavits. The material that has been put forward is, I think, of a high level of quality, has been subject to considerable scrutiny, and provides (on the basis of what is, at this stage, a brief initial review by the court) what appears to be a clear explanation of what has been done and the reasons for it, which would justify me in departing from the starting point of two-thirds, and making an order that sanctions an interim payment at a higher rate.

34.  That said, however, I do not think that it would be appropriate to order an interim payment of as much as 80 per cent in this case. I say this for a number of reasons:-

(1) I bear in mind the fact that notwithstanding the quality of the explanations that have been provided, and the amount of scrutiny carried out by the Provisional Liquidators, there remain a number of areas that will require consideration and assessment in due course.

(2) At present, the court has not had the benefit of the views of an assessor experienced in the assessment of levels of remuneration and the appropriateness of the work done by the Provisional Liquidators. Whether or not such an assessor is to be appointed is a matter that is to be determined at the next hearing. However, I am conscious of the fact that I personally have had little occasion to carry out such an assessment, which under the present practice of the court is generally done by a Master.

(3) Moreover, at this stage, no final decision has been reached as to the charging rates that are to be applied in respect of the work done by the Provisional Liquidators. Although paragraph 6 of the orders appointing them provides that their remuneration is to be charged on a time-costs basis, it is made clear (as would in any event be the case) that this is to be subject to the approval of the court. Such approval would, in my view, necessarily extend to the level of the rates applied, and to the reasonableness of the work done and time taken to do it. Here the Provisional Liquidators propose a rate (for themselves) of $7,200 per hour, with lower rates for less senior employees. By local standards, those appear to be high rates, although I do not suggest that they may not prove to be justifiable. However, it is possible (and I put it no higher than that) that, after fuller consideration (with, if so determined, the assistance of an assessor), some reduction to the charge out rates may be called for, or that not all of the work sought to be charged for will be recovered in full.

35.  Notwithstanding these points, having regard to the quality of the material that has been put forward to substantiate the work done, I am prepared to allow an interim payment of 75 per cent of the fees claimed in respect of the work done by the Provisional Liquidators and their agents, other than such work as was done in respect of the Billing Tasks, and in respect of their other disbursements.

36.  So far as the other disbursements (i.e. those apart from agents’ fees) are concerned, as it seems that most of such disbursements will already have been paid, and the amounts involved are relatively modest, I am prepared to allow the Provisional Liquidators full reimbursement in respect of them on an interim basis.

Leave to apply for further interim payments

37.  Given that the process of finalising the amount of remuneration to be allowed may take some time, the Provisional Liquidators have been given liberty to apply for further interim payments from time to time.

Need for undertakings and security

38.  The Official Receiver also suggested that if approval were to be given for an interim payment to be made, there should be appropriate safeguards in case the interim payment turned out to be excessive. It was for this reason that I sought and obtained an undertaking from the Provisional Liquidators and their three principal firms of solicitors that they would repay any excess amount of the interim payment allowed by the order (other than in respect of the fees of three firms of Hong Kong solicitors instructed by them) should such fees and disbursements ultimately be determined to be less than the amount of the interim payments received by them.

39.  The Official Receiver also raised a question as to whether some security, in the form of a bank guarantee or something similar, should be obtained in respect of such undertaking. However, I accepted the submission of the Provisional Liquidators that there was no need for such fortification of the undertaking in this case. The firm of which the Provisional Liquidators are partners, and their three principal firms of solicitors, are all well-known and substantial professional firms. I have little doubt that they would honour their undertaking to the court should it become necessary for them to do so. Moreover, having regard to the scale and complexity of the liquidation of the Companies, it seems to me that it will be some years before they will be concluded, during which time the Provisional Liquidators (in their present capacity as liquidators) and their main solicitors will continue to do work for which they will be entitled to remuneration, in amounts which should comfortably cover any excess that might arise in respect of the interim payments which I have ordered by this decision, so that any overpayment can be offset against future charges.

The position in relation to the Billing Tasks

40.  However, the remuneration claimed in respect of the Billing Tasks should, I think be excluded from the interim payment now being ordered. The Official Receiver has expressed doubt as to whether such remuneration is properly allowable at all, on the basis that it would appear to be a form of administrative activity or service rendered to enable the fee earner to provide and charge for the skills which he deploys, in much the same way as a solicitor or counsel (or other professional) would not be expected to charge his client for the time spent compiling, maintaining and reviewing his work and billing records, and for preparing a narrative bill in respect of the services he has rendered.

41.  While I can see some substance in these points, I would not rule out the possibility that something should be allowed in respect of these costs, particularly if the work that the Provisional Liquidators have done in these respects exceeded for good reason that which would normally have been done in preparation of bills for work done (for example, because this is required of them as a result of the application of the principles governing the recoverability of remuneration by them).

42.  However, it seems to me that this is an area that may well benefit from the input and expertise of an assessor, if one is eventually appointed, particularly from the perspective of the practice of the profession of insolvency practitioners in terms of work done in relation to billings. With this in mind, I am reluctant (at this stage) to express a concluded view as to the recoverability of remuneration in respect of the work done in relation to the Billing Tasks, whether as a matter of principle, or in terms of the extent of the work done which might be recoverable.

43.  For this reason, I am not prepared to allow any interim payment in respect of the Billing Tasks, or the ongoing Billing Tasks at this stage. Having regard to the fact that the total remuneration claimed in respect of the Billing Tasks represents some 3% of the total remuneration for which payment is sought, and having regard also to the size of the interim payment which has been authorised, I do not think that this will cause undue hardship to the Provisional Liquidators or their agents involved in such work.

Whether a validation order should be granted

44.  Finally, the Official Receiver expressed the view that a validation order under section 182 was not required where the court made an order for interim payment. Mr Fok indicated that the Provisional Liquidators would prefer, out of an abundance of caution, to have such a validation order in any event. While it may be that no such order is strictly necessary, I see no particular reason to refuse it, if having it would give comfort to the Provisional Liquidators. For these reasons, I granted the validation order sought.

Costs

45.  Finally, so far as the costs of this hearing were concerned, these have been reserved to await the further hearing of these applications.