RE MF GLOBAL HONG KONG LTD

HCCW 356/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) PROCEEDINGS NO 356 OF 2011

______________________

	IN THE MATTER OF THE COMPANIES ORDINANCE (CAP 32)
	and
	IN THE MATTER OF MF GLOBAL HONG KONG LIMITED

______________________

Before: Hon Harris J in Chambers

Dates of Hearing: 27 – 28 August 2014

Date of Judgment: 11 June 2015

________________

JUDGMENT

________________

Introduction

1.  The MF Global Group was, until it became insolvent in late October 2011, a substantial international financial derivatives and commodities brokerage firm based in New York. Amongst its subsidiaries was MF Global Hong Kong Limited (MF HK) which by an order made by me in November 2011 was put into provisional liquidation in Hong Kong on the application of the company itself. MF HK provided execution and clearing services for exchange traded futures and options and over-the-counter derivative products, and for non-derivative foreign exchange products and equities in the cash market (which for ease of reference I shall refer to generically as “securities”). Many of the counterparties to transactions entered into by MF HK on behalf of its clients were also part of the MF Global Group and MF HK's directors recognised that as a result of the Group's collapse it was not possible for the company to continue to carry on business.  MF HK was wound up on 11 January 2012.

2.  MF HK’s business consisted of regulated activities for which it was required to be licensed by the Securities and Futures Commission.  In order to meet the applicable regulatory requirements MF HK set up segregated bank accounts in which it deposited clients’ money (Client Money).  The sums in the segregated accounts represent an estate of assets and liabilities which is readily identifiable and which MF HK holds on trust for its clients (Qualifying Clients). In this decision I shall refer to these assets as the “Trust Estate” and MF HK’s own assets and liabilities as the “General Estate”.

3.  The liquidation is well advanced.  I have to date made 4 orders permitting the Liquidators to make interim payments to clients of Client Money on a pari passu basis.  Each of the orders provided that the costs and expenses of the Provisional Liquidators or the Liquidators, depending on when the order was made, in administering, collecting in and dealing with the Client Money, including the costs of the applications and the costs and expenses associated with effecting the interim payment be paid out of the Client Money prior to the final distribution, be borne on a pari passu basis by the clients.  I delivered reasons for so ordering on 15 December 2011, 15 May 2012 and 6 March 2014. 

4.  MF HK now seeks the following orders:

“1.   The entire amount of the costs and expenses of the Liquidators in administering, collecting in and dealing with the monies held by the Company on behalf of its clients in segregated accounts established under the Securities and Futures (Client Money) Rules (Cap 571I) (“the Trust Costs” and the “Client Money” respectively), be borne on a pari passu basis by clients of the Company with a proprietary interest in the Client Money (the “Qualifying Clients”), and the Trust Costs be paid out of the Client Money pool prior to any final distribution to the Qualifying Clients.

2.   To the extent that a Qualifying Client suffers a shortfall in recovering the entire amount of that part of the Client Money as relates to him (as determined by the Liquidators in accordance with paragraph 2 of the Order dated 6 March 2014) due to the pari passu deduction of the Trust Costs pursuant to paragraph 1 above, the Qualifying Client will:

(a)   Have an unsecured claim for that shortfall which is admissible to proof against the Company; or alternatively

(b)   Not have a claim in respect of that shortfall against the Company.

3.   To the extent that a Qualifying Client suffers a shortfall in recovering the entire amount of that part of the Client Money as relates to him (as determined by the Liquidators in accordance with paragraph 2 of the Order dated 6 March 2014) due to a deficiency of assets in the Client Money pool, the Qualifying Client will:

(a)   Have an unsecured claim for that shortfall which is admissible to proof against the Company; or alternatively

(b)   Not have a claim in respect of that shortfall against the Company.

….

5.   Costs of this application be borne equally by the Qualifying Clients (and as between those Qualifying Clients on a pari passu basis) and the general estate of the Company as costs and expenses incurred in the winding up of the Company.”

5.  Two other companies, both in liquidation, which were part of the MF Global Group have appeared before me on this application: MF Global Holdings Limited (MF Holdings) and MF Global UK Limited (MF UK).  MF  Holdings has no objection to orders 1 and 4.  MF UK, which is a Qualifying Client, agrees with MF HK, although it has advanced an additional reason for concluding that any shortfall due to the deduction of Trust Costs or a deficiency in the Trust Estate should be provable against the General Estate of MF HK. 

Berkley Applegate orders

6.  For the reasons explained in my earlier decisions I will make an order in the terms of paragraph 1, namely, a Berkley Applegate order.  What requires consideration is the right of Qualifying Clients to prove for any shortfall in their recovery in the liquidation of MF HK.

Deficiency in the Trust Estate and its impact

7.  As I have mentioned the liquidation of MF HK is well advanced. The Liquidators have not yet formally called for proofs of debt. They anticipate, however, that MF HK is solvent and that there will be a surplus of assets of approximately $53.4 million. The Liquidators are now able to estimate fairly accurately the likely total costs of dealing with the General Estate (General Costs) and also the costs incurred in dealing with the Trust Estate (Trust Costs), which are likely to be in the order of $40 million.  Understandably it has not always possible to draw a precise dividing line between work carried out in connection with the General Estate and the Trust Estate.  The liquidators approach has been to allocate “grey area” costs to the General Estate and have otherwise allocated the entirety of the costs of administering the Trust Estate to the Trust Estate. There is no dispute between the Liquidators of MF HK, MF Holdings and MF UK that the Liquidators MF HK’s approach to allocating costs has been consistent with the Berkley Applegate principles and is also fair on the facts of this particular liquidation.

8.  It will be readily appreciated that as a result of the payment of the Trust Costs there is a shortfall in the amount available to Qualifying Clients.  The second order the Liquidators seek would allow a Qualifying Client to prove for his portion of the shortfall.  The third order addresses a possible shortfall, which is estimated to be approximately $0.67 million, arising from a deficiency in the Client Money Pool itself and would give Qualifying Clients in this circumstance a right to prove for any resulting shortfall.

9.  The admissibility of proofs of either of these shortfall claims, together with the relevant post liquidation interest, would have a significant impact upon any potential distribution to MF HK's sole shareholder, MF Holdings; although MF Holdings is also a creditor and a Qualifying Client.  Conversely MF UK, which is Qualifying Client for present purposes, will benefit.  It is for these reasons that the Liquidators of the 3 companies come to take the positions that they do and enable competing arguments to be advanced before me.

The Parties Positions

10.  Reduced to its essentials MF HK’s argument is as follows.  MF HK held the Trust Estate as trustee for the Qualifying Clients.  MF HK’s duties necessarily included returning the assets comprising the Trust Estate when lawfully required to do so.  As one would expect MF HK also entered into agreements with Qualifying Clients recording the terms upon which assets were to be held.  This included a client agreement, which was revised on 1 September 2011, and which has been referred to accordingly before me as the “RCA”.  MF HK says that on the proper construction of the RCA it also contains a requirement that the Trust Estate be distributed to the Qualifying Clients when MF HK was lawfully requested to do so.  Necessarily, says MF HK, these obligations have been breached and it is the loss caused by those breaches that it suggests Qualifying Clients should be able to prove for in its liquidation.

11.  MF Holdings accepts that contractual and fiduciary relationships may exist between the same parties. However, it argues, where the parties have entered into an agreement to define their relationship that agreement will regulate, exclusively, their rights and obligations including any obligations one of them may have as a fiduciary.  Accordingly, in the present case it is the RCA that one looks at to identify whether or not obligations have been breached by MF HK and give rise to a claim which can be proved in its liquidation. MF Holdings submits that on a careful analysis of the RCA it becomes apparent that the risk of liquidation of MF HK resulting from the liquidation of the MF Global Group as a whole was born by the Qualifying Clients.  Further MF Holdings suggests that upon the proper application of the principles upon which Berkley Applegate orders were devised the orders sought are not appropriate. MF Holdings points out that nearly all the Trust Assets have been realised. The shortfall, which gives rise to the third order sought, is minimal. The majority of the shortfall is attributable to the Trust Costs. The Trust Costs do not represent a sum wrongfully withheld by MF HK. They represent deductions on account of the Liquidators’ costs and expenses which were incurred in their capacity as trustees.  The Qualifying Clients did not object to these deductions.  For present purposes they must be assumed to have agreed to them.

12.  MF UK support MF HK’s application.  It agrees with MF HK’s arguments, but suggests that there is an alternative route to reaching the same conclusion, namely, that parallel to the proprietary claim against the Trust Estate there is available to it a personal claim against the General Estate arising from the contractual right to claim repayment of an equivalent sum of the funds deposited with MF HK.

The Revised Clients Agreement

13.  Clause 35.1.5 of the RCA provides that all monies, securities and other property received by MF HK from Qualifying Clients or any other person for the account of the Qualifying Client shall be held by MF HK as trustee and segregated from MF HK's own assets. The clause goes on to provide expressly that assets so held by MF HK would not form part of its assets for insolvency or winding up purposes and should be returned to Qualifying Client promptly upon the appointment of a provisional liquidator or liquidator.  Similarly clause 10.1 provides that securities purchased on behalf of a Qualifying Client should be deposited in a segregated account designated as a trust or client account.

14.  The RCA only deals obliquely with a Qualifying Client’s right to payment of monies in his account or the delivery of securities purchased on his behalf.  For example, clause 10.8 recognises MF HK’s obligation to deliver securities, but is focused on the mechanics and specifies that it does not have to deliver the precise securities purchased.  It is sufficient if it delivers securities of the same class, denomination and nominal amount and which rank parri passu with those purchased.  Of course, there is no dispute that Qualifying Clients were entitled to payment of monies or delivery of securities standing to their credit in their accounts.

15.  As one would expect the RCA contains provisions intended to protect MF HK and restrict Qualifying Clients’ rights against the company in the event of its staff making a mistake of some sort.

Clause 21.2

The Client undertakes to indemnify and keep indemnified MF HK in respect of any costs, claims, demands, damages and expenses whatsoever which may be reasonably and properly suffered or incurred by MFG HK directly or indirectly arising out of or in connection with any transaction entered into by MFG HK as agent on behalf of the Client or otherwise whatsoever or howsoever arising out of anything done or omitted to be done by MFG HK in accordance with the terms of this Agreement or pursuant to any Client’s instruction or communication. The Client also agrees to pay promptly to MF HK, on demand, all damages, costs and expenses (including legal expenses on a full indemnity basis) reasonably and properly incurred by MF HK in the enforcement of any of the provisions of this Agreement.

Clause 27.1

27.1 MFG HK shall not be responsible or liable for:

27.1.7 for taking or not taking any action in connection with or arising out of this Agreement or any Transaction to which the terms of this Agreement apply unless the Client shows that MF HK acted negligently or in bad faith.

16.  No clause other than clause 35.1.5 makes express reference to liquidation of MF HK, although clause 37 deals with amalgamation.  For example clause 27, which deals with “breakdowns, force majeure and liability” does not refer to liquidation of MF HK and regulate the parties’ rights in the event that it were to occur.  This seems to me to be relevant because it is part of MF Holding’s argument that the terms of the RCA govern the obligations of MF HK not only as a party to the various agreements it signed with Qualifying Clients but also as trustee.

MF Holdings’s arguments

17.  MF Holdings advances three reasons why it says that the orders sought in paragraph 2 and 3 of the summons should not be granted.  Only the first two apply to the shortfall in assets.  In summary they are:

(1)   There has been no breach by MF HK of the RCA, which defines its obligations as trustee as well as contractually;

(2)   The RCA excludes liability for the loss arising from MF HK going into liquidation and being unable to return the assets comprising the Trust Estate; and

(3)   Allowing the Qualifying Clients to prove in the liquidation would be inconsistent with the Berkeley Applegate principle.

Has there been a breach of the RCA?

18.  There is no dispute that a contractual and fiduciary relationship can exist at the same time and commonly the fiduciary relationship arises because the parties have entered into an agreement[1]. Securities agreements which result in monies and securities in segregated trust accounts are an obvious illustration.  MF Holdings argues that MF HK’s obligations in respect of the property it held on trust for the Qualifying Clients is defined by the RCA and defined exclusively by its terms in the sense that no additional obligations are imposed by the general law of trusts.  MF Holdings says that this is apparent from various statements of principle to be found in the authorities.  In Hospital Products Ltd, ibid, Sir Anthony Mason explains at paragraph 70 that “The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.” Similarly, in Henderson v Merrett Syndicates Ltd[2] Lord Browne-Wilkinson says “The existence of a contract does not exclude the co‑existence of concurrent fiduciary duties (indeed, the contract may well be their source); but the contract can and does modify the extent and nature of the general duty that would otherwise arise.”  Jacobson J in ASIC v Citigroup Global Markets Australia Pty Ltd (No 4)^[3] is to similar effect “280  It may be that a fiduciary cannot exclude liability for fraud or deliberate dereliction of duty but beyond that there appears to be no restriction in the law to prevent a fiduciary from contracting out of, or modifying, his or her fiduciary duties, particularly where no prior fiduciary relationship existed and the contract defines the rights and duties of the parties: [citation omitted]. 281  The effect of the Australian and English authorities referred to above is that where a fiduciary relationship is said to be founded upon a contract, the ordinary rules of construction of contracts apply. Thus, whether a party is subject to fiduciary obligations, and the scope of any fiduciary duties, is to be determined by construing the contract as a whole in the light of the surrounding circumstances known to the parties and the purpose and object of the transaction:[citation omitted]. The same approach applies to exclusion clauses: [citation omitted”

19.  It follows, says MF Holdings that in the first instance one must look to the RCA to ascertain whether or not there has been a breach of duty that has caused loss in the form of the shortfall, for which MF HK contends Qualifying Clients should be allowed to prove in the liquidation.  MF Holdings says not for a number of reasons.

20.  The first is that the Qualifying Clients have consented to the deductions from the Trust Estate in the form of payments of the Liquidators’ costs and expenses.  It is correct as a statement of fact that none of the Qualifying Clients objected to the making of Berkley Applegate orders.  However, it seems to me to be entirely artificial to suggest that this constituted an authorised transfer of Qualifying Clients’ money to a third party.  By the time any of the orders were made MF HK was already in breach of duty by virtue of failing to return money and securities.  The orders were a means of ensuring that those entrusted with sorting out the problems caused by MF HK’s inability to honour its obligations under the RCA were paid.  By the end of the liquidation Qualifying Clients will have been paid a significant proportion of the Trust Estate.  There will, however, be a shortfall.  As a result prima facie MF HK will be in breach of the RCA.

Does the RCA exclude liability for breach of duty?

21.  MF Holdings argues that if the Court were to conclude, as I do, that there has been a breach of duty that has caused the loss, such loss is irrecoverable by virtue of the limitation clauses I have referred to earlier.  It says that it is permissible for a trustee to reduce by agreement the scope of what would otherwise be his liabilities as demonstrated by Armitage v Nurse[4] in which Millett LJ, as he then was, said this:

“[Can] a trustee exemption clause validly exclude liability for gross negligence? It is a bold submission that a clause taken from one standard precedent book and to the same effect as a clause found in another, included in a settlement drawn by Chancery counsel and approved by counsel acting for an infant settler and by the court on her behalf, should be so repugnant to the trusts or contrary to public policy that it is liable to be set aside at her suit. But the submission has been made and we must consider it. In my judgment it is without foundation. There can be no question of the clause being repugnant to the trust. In Wilkins v Hogg (1861) 31 L.J.Ch. 41, 42 Lord Westbury LC challenged counsel to cite a case where an indemnity clause protecting the trustee from his ordinary duty had been held so repugnant as to be rejected. Counsel was unable to do so. No such case has occurred in England or Scotland since.”

22.  This I accept.  However, the clauses relied on by MF Holdings, namely, clauses 21.2 and 27.1.7 do not, as I have already observed, expressly refer to liquidation of MF HK.  Clause 21.2 provides that “Neither MFG HK nor any of its directors …….. shall have any liability whatsoever (whether in negligence or otherwise) for any loss, expense or damage suffered by the Client as a result of :  any condition or circumstances which are beyond the reasonable control or anticipation of MFG HK ….”. This is very broad wording.  Does it exclude a claim by Qualifying Clients arising from MF HK’S failure to return monies and securities?  In my view it does not.  It seems to me that this clause addresses loss caused by events beyond MF HK’s control that prevent it complying with obligations in respect of the trading of securities on behalf of Qualifying Clients as illustrated by the remainder of the clause which states “ including but not limited to any delays in the transmission of orders due to disruption, breakdown, failure or malfunction of transmission of communication facilities, failure of electronic or mechanical equipment, telephone or other interconnection problems, prevailing fast market conditions, governmental agency or exchange actions, theft, or war (whether declared or not), severe weather, earthquakes and strikes”..It does not seem to me that the fact that the clause’s introductory language refers to “any condition or circumstance” alters that clear import of the clause read in the context of the agreement as a whole, with its express provision that Qualifying Clients’ money and securities are to be held on trust, namely, that the exclusions cover loss howsoever arising caused during the normal course of MF HK’s business and not a failure as fundamentally inconsistent with the substance of the RCA as failing to return money and securities held on trust by MF HK. 

23.  Similarly in my view clause 27.1.7 does not extend to a failure to return to Qualifying Clients trust assets.  It is directed to a failure to take action in the course of operating the account which causes loss, such as not executing orders, unless it can be shown that it arose from negligence.  In my view the terms of the RCA do not exclude the Qualifying Clients’ right to claim for any loss caused by MF HK’S failure to return the assets comprising the Trust Estate to them when requested.

24.  This is sufficient to dispose of MF Holdings’s objection to paragraph 3 of the summons, which is limited to the small shortfall in respect of the assets.  MF Holdings advances a third objection in respect of the shortfall arising from the deduction of the Liquidators’ costs and expenses.

Would allowing the Qualifying Clients to prove in the liquidation be inconsistent with the Berkeley Applegate principle?

25.  The third objection goes to the rationale for the Berkley Applegate principle.  MF Holdings argues that the contentious orders would undermine the underlying Berkeley Applegate principle that persons who are beneficially interested in property should be required to bear the costs of administering that property. 

26.  It may be, argues MF Holdings, that a Berkeley Applegate order, at least one made under insolvency legislation, itself is inherently ‘temporary’ in nature, ie simply a ‘liquidator’s direction’ [5] providing comfort to the liquidator, and that the real issue as to what the trust estate and general estate respectively are to bear is to be litigated later: as was the case Berkeley Applegate (No. 3) [6] and Re Cresvale Far East Nominees Ltd.[7]  However, it says that does not mean there is anything ‘temporary’ about the underlying reasoning.  The reasoning in Berkeley Applegate relies on general equitable principles and is not dependent on considerations from the law of insolvency:

“The authorities establish, in my judgment, a general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property.”[8]

This is also reflected, says MF Holdings, in how the Court gives effect to Liquidators/trustee’s entitlement:

“The allowance which the Court gives in the exercise of this jurisdiction does not result in the creation of a personal claim against the beneficiary of the trust property. The jurisdiction operates by way of subjecting his beneficial interest to an obligation to pay the remuneration and costs allowed by the court. This is clear from the way in which the jurisdiction was expressed in the passages quoted above from Berkeley Applegate itself and Sports Betting Media. … It follows that the exercise of the discretion results in the creation of a proprietary interest in priority to that of the beneficiary whose equitable interest is to be enforced. If the trust property were insufficient, there could be no suggestion of the beneficiary being personally liable to pay any shortfall. Nor can the beneficiary be entitled to delivery of the property, leaving the fiduciary to enforce a personal claim against him for the remuneration and costs allowed to him by the court.”[9]

27.  MF Holdings says that were the costs claims to succeed, that would undermine that principle, and defeat the Court’s reasons for granting the Berkeley Applegate order in the first place.  It is clear from the reasoning within Berkeley Applegate (No. 2) that the Courts’ concern in granting such orders is not merely to confer protection on the Liquidators (against criticism and on fees), but also to see that costs are borne by the appropriate persons to bear them, bearing the interest of all stakeholders in mind.  I do not think this fairly characterises the Court’s concern.

28.  The issue arises in the context of a consideration of how a liquidator should be paid.  Berkley Applegate explains why it is appropriate that a liquidator’s costs are paid out of trust assets which he is required to identify and administer.  It does not follow in my opinion that having decided that it is equitable for those costs to be recovered from the trust assets that the resulting loss caused by the diminution of the trust assets cannot be claimed from the company.  MF HK failed to honour its obligations to return Trust Assets about the time it went into liquidation and it is that breach of duty that has led to the diminution in the Trust Assets.  It is artificial to approach the matter on the basis, as MF Holdings’s argument does, that the cause of the loss is the Court orders.

29.  MF Holdings says that where trustees act upon a ‘final’ determination of the Court in its equitable jurisdiction that the trust assets are to bear certain costs associated with those assets, there can be no question of the trustees being in breach of trust or contact.  This in my view is to misunderstand the issue. 

30.  This part of MF Holdings’s argument assumes that the Liquidators hold the Trust Assets on trust for the Qualified Clients.  It is, however, incorrect to characterise a liquidator as a trustee in the full and literal sense of the term.  A winding-up order does not affect the legal title in a company’s assets, which remains vested in the company.  As was explained by Lord Diplock in Ayerst v C & K (Construction) Limited[10]on the making of a winding-up order the company holds assets over which it has legal title on a statutory trust arising by virtue of insolvency legislation on trust for its creditors.  It is uncommon because it is rarely necessary for a liquidator to apply to have title transferred into his name and, as far as I am aware, that has not happened in respect of any part of the Trust Estate.  A liquidator’s status is more properly characterised as that of an agent of the company over whom he is appointed to carry out a statutory task and on being so appointed he assumes a fiduciary position[11].  It follows in my view that it is inapposite to approach the matter as if the liquidators have merely replaced the directors of the company and that acts they initiate are to be treated as those of the trustee of the Trust Estate.  The Berkley Applegate principle is concerned with the right of the fiduciary appointed pursuant to the statutory insolvency regime to recover his costs from the estate over which he had been appointed.  It is in my view wrong, therefore, to suggest that what the Court is being asked to do is to enforce the Qualifying Clients’ right to the Trust Assets full and free of any deduction.  The Court is being asked to confirm that the current and final shortfall can be claimed against MF HK by way of proving in its liquidation.  This is entirely different and in many liquidations allowing this would probably result in minimal additional recovery.

31.  MF Holdings’s arguments involve a mischaracterisation of the problem the Berkley Applegate principle addresses and resolves.  Berkeley Applegate recognises that it is equitable for fiduciaries tasked with collecting in and administering trust property held by the company which they supervise, to recover their costs of so doing out of the trust assets.  It is inherent in this reasoning that there is at the material time no practical nor fair alternative.  It does not follow that the beneficiaries cannot look to the trustee (in this case MF HK), which has breached its duty and caused the problem the fiduciaries have been appointed to resolve, for reimbursement of the amounts deducted from trust assets if it is worth while pursing such claims.  This was recognised by Peter Gibson J in Berkley Applegate No. 3 supra at page 805H.  In my view allowing the Qualifying Clients to prove for the shortfall caused by the deduction of the Liquidators costs and expenses is consistent with the Berkley Applegate principle.

Conclusion

32.  I will, therefore, make orders in the terms of the summons.

	(Jonathan Harris)
	Judge of the Court of First Instance
	High Court

Mr Jeremy Bartlett, instructed by Linklaters, for the Provisional Liquidators of MF Global Hong Kong Limited

Mr Victor Dawes, instructed by Deacons, for the MF Global UK Limited

Mr Edward Alder, instructed by Tanner De Witt, for MF Global Holdings Limited

HCCW 356/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) PROCEEDINGS NO 356 OF 2011

______________________

	IN THE MATTER OF THE COMPANIES ORDINANCE (CAP 32)
	and
	IN THE MATTER OF MF GLOBAL HONG KONG LIMITED

______________________

Before: Hon Harris J in Chambers

Date of Hearing: 6 March 2014

Date of Ruling: 6 March 2014

___________

R U L I N G

____________

 

1.  I have before me an application by the liquidators of MF Global Hong Kong Limited (“company”) pursuant to sections 199, 251 and 256 of the Companies Ordinance, and section 56 of the Trustees Ordinance for sanction of various agreements that the liquidators wish the company to enter into which will allow further distributions to be made to clients.

2.  The background to the application has been set out in previous decisions, and it is not necessary for me to repeat it here. 

3.  The court has made previous orders on 15 December 2011, 15 May 2012, and 25 April 2013 approving interim distributions resulting in a total distribution to clients of HK$1,026,600,000.  The liquidators have completed reconciliations with affiliated companies in the MF Global Group and brokers overseas, as a result notional client monies are now estimated to be HK$1,208,100,000, and qualifying clients’ claims are estimated to be HK$1,207,900,000. 

4.  There may be slight adjustments to these figures as a result of exchange rate fluctuations, or pricing information. 

5.  I am told that the return to clients is likely to be in the order of 99 cents in the dollar. 

6.  The liquidators have reached agreement with overseas affiliates and one independent broker concerning the balance of the accounts between the company and those affiliates and the broker.

7.  The liquidators seek the court’s sanction to those agreements and to resolve certain inconsistencies between the agreements and the court’s previous orders, the precise details do not need to be recited. 

8.  In my view, the agreements and the order that is sought are uncontroversial and largely deal with matters of accounting and administration.  I will, therefore, make the order sought which is as follows:

(1) Pursuant to Sections 199 and 251 of the Companies Ordinance (Cap 32) and/or Section 56 of the Trustees Ordinance (Cap 29):

1.1 the compromise agreements entered into, or proposed to be entered into, between the Company and MF Australia, MF UK, MF Singapore and MF Holdings (the “Affiliate Agreements”), as exhibited to the Fourth Affidavit of Patrick Cowley, be approved and the Liquidators be authorised to the extent necessary to give effect to and perform these Affiliate Agreements according to the terms of the Affiliate Agreements, notwithstanding any provisions to the contrary in the Orders of this court made on 15 December 2011, 15 May 2012, 25 April 2013 and this present Order; and

1.2 the Liquidators be authorised to enter into a compromise agreement with Polaris (the "Polaris Agreement") on terms which, in their reasonable opinion, are materially no less favourable to the Company than those contained in the Affiliate Agreements and be authorised to give effect to and perform the Polaris Agreement according to the terms of the Polaris Agreement, notwithstanding any provisions to the contrary in the Orders of this court made on 15 December 2011, 15 May 2012, 25 April 2013 and this present order.

(2) The claim of each Qualifying Client to monies held by the Company on behalf of its clients in segregated accounts established under the Securities and Futures (Client Money) Rules (Cap 571I) (the "Client Money") shall be determined by the Liquidators in accordance with section 5 of the Fourth Cowley Affidavit and, unless otherwise ordered by this Court, such determination shall be final and conclusive as regards a Qualifying Client's entitlement in respect of the Client Money pool.

(3) The unallocated balances and expenses which are referred to at section 6 of the Fourth Cowley Affidavit be allocated to the Client Money pool.

(4) Pursuant to Section 256 of the Companies Ordinance (Cap 32), the Liquidators be authorised to transfer and distribute from the Client Money pool a further amount not exceeding HK$110 million (the "Fourth Interim Distribution") to those persons identified by the Liquidators as clients of the Company with a proprietary interest in the Client Money (the "Qualifying Clients") on the terms set out in paragraphs 1.1 - 1.4 of the Order dated 15 December 2011, save that:

4.1 in relation to paragraph 1.2 of the Order dated 15 December 2011, the amounts to be paid to a Qualifying Client shall be calculated by reference to the prevailing foreign exchange rates as at 15 December 2011;

4.2 the term "affiliate", as referred to at paragraphs 1.3 and 1.4 of the Order dated 15 December 2011, shall mean 'in relation to one party, an individual, corporation, partnership or any other form of entity directly or indirectly controlling, controlled by or under the common control with such party or any such entities, directors, officers and employees";

4.3 in relation to paragraph 1.4 of the Order dated 15 December 2011, the term "Provisional Liquidators" used therein shall be read as "Liquidators";

4.4 the term "any other MF Global Group entity", as used at paragraphs 1.3 and 1.4 of the Order dated 15 December 2011, shall be taken to read, "any of its affiliates";

4.5 paragraphs 1.3 and 1.4 of the Order dated 15 December 2011 shall not apply to MF Global Australia Limited ("MF Australia"), MF Global UK ("MF UK"), MF Global Singapore Pte Limited ("MF Singapore"). MF Global Holdings HK Limited ("MF Holdings") or Polaris MF Global Futures Co. Ltd ("Polaris") (together, the "Affiliates and Brokers"); and

4.6 prior to receiving payment, and as a condition for the same, a Qualifying Client (excluding the Affiliates and Brokers) shall, unless it has previously already done so:

4.6.1 complete and return a claim form in a form acceptable to the Liquidators which states the amount, and  explains the basis of the calculation, of the Qualifying Client's claim to the Client Money; and

4.6.2 sign and return a statement prepared by the Liquidators informing the Qualifying Client of its expected total claim to the Client Money.

(5) For the purposes of facilitating the Fourth Interim Distribution and any other future distributions out of the Client Money, the Liquidators are authorised to convert all Client Money that is held in a foreign currency into Hong Kong dollars at the prevailing foreign exchange spot rate as soon as practicable after the date of this Order.

(6) The Liquidators are authorised to execute, deliver, implement and fully perform any and all obligations, instruments, documents and papers and to take any and all actions reasonably necessary or incidental to make the Fourth Interim Distribution.

(7) For the purposes of facilitating any interim distribution payments made by the Liquidators pursuant to the Order dated 15 December 2011, the Order dated 15 May 2012, the Order dated 25 April 2013, the Fourth Interim Distribution and any other future distributions out of the Client Money, the Liquidators are authorised to pool the Client Money and make interim distribution payments on a pari passu basis.

(8) Pursuant to the Order dated 15 May 2012, the costs and expenses of the Liquidators in administering, collecting in and dealing with the Client Money, including the costs of this application and the costs and expenses associated with effecting the Fourth Interim Distribution, be paid out of Client Money prior to any final distribution, and be borne on a pari passu basis by the Qualifying Clients.

(9) Paragraphs 4.1 - 4.71 and exhibits "PC-18", "PC-19", "PC-20", "PC‑21" and "PC‑22" of the Fourth Cowley Affidavit filed in support of this application be redacted or marked 'confidential'.

(10) All transfers and payments made pursuant to this Order shall be validandnotvoidby virtueofs.182oftheCompaniesOrdinance(Cap 32).

(11) There be liberty to apply generally.

	(Jonathan Harris) Judge of the Court of First Instance
	High Court

 

Mr Jose Maurellet, instructed by Linklaters, for the Provisional Liquidators of MF Global Hong Kong Limited

HCCW 356/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 356 OF 2011

____________

	IN THE MATTER OF THE COMPANIES ORDINANCE (CAP 32)
	and
	IN THE MATTER OF MF GLOBAL HONG KONG LIMITED

____________

AND

HCCW 357/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 357 OF 2011

____________

IN THE MATTER OF THE COMPANIES ORDINANCE (CAP 32) and
IN THE MATTER OF MF GLOBAL HOLDINGS HK LIMITED
____________
	(Heard Together)

Before: Hon Harris J in Chambers

Date of Hearing: 11 September 2012

Date of Decision: 4 October 2012

_____________

D E C I S I O N

_____________

 

1.  On 2 November 2011 I appointed Patrick Cowley, Fergal Power and Lui Yee Man, all of KPMG, joint and several provisional liquidators (“Provisional Liquidators”) over MF Global Hong Kong Ltd (“MFHK”) MF Global Holdings HK Ltd (“MFHoldings”). On 11 January 2012 Master Ko made orders winding up both companies. The background to the proceedings is rehearsed in earlier judgments and is generally well known; both companies were part of the MF Global Group of commodity and security trading companies, which became insolvent in well publicised circumstances in the USA in the final quarter of 2011.

2.  On 4 May 2012 summonses were issued in both liquidations by a creditor for orders that:

(1) The winding up of the Companies shall be conducted as a creditors’ voluntary winding up pursuant to section 209A of the Companies Ordinance.

(2) The present Provisional Liquidators (who continued in office pursuant to section 194(1)(aa) of the Ordinance) of both Companies be appointed as joint and several liquidators.

(3) Committees of Inspection be appointed in respect of both Companies.

(4) Determining whether the Provisional Liquidators are required to pay realisations into the Companies Liquidation Account and, in a related question, whether ad valorem fees are deductable on any sums paid into such account.

3.  The Official Receiver was represented at the hearing of the summonses.  The first three applications are uncontroversial.  The reason conversions are sought is with a view to reducing court involvement in the liquidation with attendant reduction in time and costs and also to reduce the scale fees that would otherwise have to be paid to the Official Receiver under the Companies (Fees and Percentages) Order, Cap 32C.  Saving costs with a view to maximising the amount available to creditors is a legitimate reason to seek a conversion: Re Peregrine Fixed Income Ltd [1999] 2 HKLRD 653 per Le Pichon J at 654I-J and 657A-C. The power to order a conversion is discretionary.  The factors to which the court has regard are discussed in Le Pichon J’s judgment.  They focus on whether or not there is a reason why it is desirable that the liquidation remains under court supervision and have regard to considerations such as evidence of wrong‑doing by those in charge of a company.  I am satisfied that there is no reason why, in the present case, the liquidations should not be converted into a creditors’ voluntary winding up.  In particular I have regard to the following factors:

(1) The unanimous consent of the creditors and contributories.

(2) Based on the provisional liquidators’ investigations to date there is no evidence of fraud or breach of duty in relation to the affairs of the Companies.

(3) There is significant progress in the liquidations, with realisations in MFHK of $171,500,000 and MFHoldings of $32,000,000.  Clients assets to the value of $32 billion have be realised.

(4) Section 191 reports were filed with the court on 6 March and 29 February 2012 respectively.

(5) The cooperation of directors.

(6) None of the directors was a director of a company which has gone into liquidation in the last 5 years.

(7) The insolvency of the Companies is not a matter of public concern.  The number of clients who are owed money is limited.

4.  I will, therefore, make an order for the conversion of the two liquidations into a creditors’ voluntary winding up.  The creditors and contributories agree that the Provisional Liquidators should be appointed under section 194(1)(c) as joint and several liquidators.  This is a matter within the court’s discretion, which is exercised with regard to the wishes of creditors and contributories and in particular creditors, who have the primary interest in the conduct of the liquidation of an insolvent company: Re Luen Yick Water & DrainageWorks Ltd (unrep) HCCW 209/2002 9 January 2003 per Kwan J at para 18 and Re Akai Holdings Ltd [2001] 2 HKLRD 411 per Yuen J at 417J.  Given the unanimous views of the creditors and contributories I will make an order appointing the Provisional Liquidators as joint and several liquidators of the respective Companies.

5.  So far as the appointment of committees of inspection are concerned, there is no dispute that committees should be appointed.  The only issue concerns their composition and the issue is a small one of no controversy.  In respect of MFHoldings a committee is sought composing of seven members proposed by the contributories and creditors.  There is no dispute about the identity of members.  Seven members have previously been ordered and seven members has generally been considered the maximum number of members: Re Guangnan (KK) Supermarket Ltd [2002] 1 HKLRD 348 per Yuen J at 351 para 9.  However, this is a matter of practice based on assumptions about what is the optimum size for a manageable committee.  In the case of MFHK it is suggested that the appropriate number is 9, and again the identity of the members is agreed by the interested parties, as this will provide for a balanced representation of different interests and cater for the fact that there are multi-jurisdictional aspects to the liquidations, which will be assisted if MF Global UK Ltd and MF Global Holdings Ltd have representatives on the committee.  I am satisfied that in the circumstances of this particular case a committee consisting of 9 members is justified.  I will, therefore, make orders that committees of inspection are established consisting of the members that have been proposed and agreed by the creditors and contributories.

6.  The controversial application concerns whether or not section 202(1) of the Companies Ordinance applies to the Provisional Liquidators.  Section 202(1) provides:

“Every liquidator other than the Official Receiver of a company which is being wound up by the court shall, in such manner and at such times as the Official Receiver directs, pay the money received by him to the Companies Liquidation Account at the bank where such account is kept, and when the Official Receiver is the liquidator of such company he shall pay all moneys received by him in such capacity into the Companies Liquidation Account:

Provided that the Official Receiver may, on the application of the liquidator, authorize the liquidator to make his payments into and out of any other bank specified by the liquidator in such application, and thereupon those payments shall be made in the prescribed manner.”

7.  A practical consequence of the application of this sub-section is the payment of ad valorem fees pursuant to paragraph 7(2) of the Companies (Fees and Percentages) Order, cap 32C (“Order”), which is made pursuant to section 296 of the Ordinance.  Paragraph 7(2) provides:

“The percentages prescribed in number 1 of Table B of Schedule 3 shall be paid by a liquidator upon submission of his accounts to the Official Receiver under section 203, or where the Official Receiver is acting as liquidator, before he is released under section 205.”

8.  Number 1 of Table B of Schedule 3 in turn provides:

“On the aggregate amount of assets realized and brought to credit by a liquidator (including the Official Receiver when he is acting as liquidator), after deducting any sums paid to secured creditors, other than holders of floating charges in respect of their securities and any sums spent out of money received in carrying on the business of the company, a fee according to the following scale…”

9.  Liquidator is defined in section 2(1) of the Ordinance: “includes a provisional liquidator holding such office by virtue of section 194”.  If the Provisional Liquidators come within this definition section 201(1) applies to them and the Order applies to the aggregate amount of assets realised by Provisional Liquidators.  The Provisional Liquidators argument is a simple one.  A provisional liquidator appointed under section 193 does not fall within the definition in section 2(1), section 201(1) does not apply to him and the Order does not apply to any realisations made by him.  I do not understand there to be any dispute about this.  They argue further that a provisional liquidator who remains in office after a winding-up order is made by virtue of section 194(1)(aa) also does not come within the definition with the same consequences.  The basis for the Provisional Liquidators so arguing is the judgment of Barma J in Lehman Brothers Securities Asia Ltd (No 2) [2010] 1 HKLRD 58 in which he held that a provisional liquidator holding office by virtue of section 194(1)(aa) is not a “liquidator” within the meaning ascribed by section 2(1).  Although this decision was reached in a different context Mr Maurellet, who appeared for the Provisional Liquidators, argued that the definition could not sensibly, and accordance with the normal principles of statutory construction, be interpreted as having one meaning in one context and another meaning in another context.  Section 201(1) clearly refers to ‘liquidator’ and, so argued Mr Maurellet, this can only be read as a reference to ‘liquidator’ as defined in section 2(1).  Accordingly, the section does not apply to the Provisional Liquidators.  Generally, I accept that a consistent meaning is to be accorded to a defined term, although as explained in the passage quoted from Barma J’s judgment in the next paragraph this is not always so.

10.  It is useful set-out Barma J’s reasoning in Lehman Brothers (No 2), which is to be found in the following paragraphs of his judgment:

“29. It seems to me that both of these interpretations are possible interpretations of the definition of “liquidator”.  There is therefore, in my view, an element of ambiguity in relation to the definition, for the purpose of resolving which it is legitimate to have regard to the intention of the legislature, as disclosed by the Explanatory Memorandum.  That document makes it clear that the introduction of the new definition (and indeed all the other relevant amendments effected by the Bill) were intended to be purely consequential upon the introduction of section 194(1A).  There is nothing in the Explanatory Memorandum or other legislative materials to suggest that it was intended to make any amendment to the previous law relating to the source of the court’s ability to assess the remuneration of provisional liquidators appointed under section 193 and continuing in office under section 194(1)(aa), which Le Pichon J had only the year before held to be governed by the court’s inherent jurisdiction, and not by section 196.

30. Indeed, it seems to me that the terms of paragraph 21 of the Explanatory Memorandum puts the matter beyond doubt, in terms of the intention behind the amendment, as it refers to the definition including “a provisional liquidator holding such office by virtue of section 194 as amended” (my emphasis).  The only amendment to section 194 made on this occasion was the introduction of section 194(1A). Section 194(1)(aa) was already present in the unamended version of the Ordinance, and therefore, the definition clearly was not directed at a provisional liquidator continuing in office pursuant to it.

31. I am therefore of the view that where a provisional liquidator has been appointed under section 193, his remuneration falls to be assessed by the court pursuant to its inherent jurisdiction both before and after the making of the winding up order, until a liquidator has been appointed.

32. In any event, having regard to the legislative history, it seems to me to be quite clear that the definition section should be read so as to limit the reference therein to “provisional liquidator” to a provisional liquidator holding office by virtue of section 194(1A). Although this involves reading into the definition a limitation that is not expressed in its terms, the situation here appears to me to fall clearly within the ambit of the court’s power to construe legislation so as to correct what is, in my view, an obvious drafting error.  That the court has power to do so is made clear by the decision of the House of Lords in Inco Europe Limited v First Choice Distribution [2000] 1 WLR 586, where Lord Nicholls said (at p 592C-G):-

‘It has long been established that the role of the courts in construing legislation is not confined to resolving ambiguities in statutory language. The court must be able to correct obvious drafting errors. In suitable cases, in discharging its interpretative function the court will add words, or omit words or substitute words. … This power is confined to plain cases of drafting mistakes. … Before interpreting a statute in this way the court must be abundantly sure of three matters: (1) the intended purpose of the statute or provision in question; (2) that by inadvertence the draftsman and [the legislature] failed to give effect to that purpose in the provision in question; and (3) the substance of the provision [the legislature] would have made, although not necessarily the precise words [it] would have used’.”

11.  As is apparent from paragraph 29, Barma J was of the view that the definition was intended to apply to provisional liquidators appointed under section 194(1A), namely, provisional liquidators appointed by the Official Receiver at a time at which by virtue of section 194(1)(a) he is provisional liquidator; a view with which I agree. This is important because it demonstrates that the introduction of the definition cannot have been intended to alter the way in which other sections in the Ordinance dealing with liquidators was intended to operate.  It is, therefore, fallacious to assume that because ‘liquidator’ in section 2(1) does not include a provisional liquidator under section 194(1)(aa), as I accept it does not, that such a provisional liquidator is necessarily not a liquidator for the purposes of section 202(1).  The pertinent question is whether a provisional liquidator in office under section 194(1)(aa), which came into force in 1997, was a ‘liquidator’ as the term is used in section 202(1) prior to the introduction of the definition in section 2(1) in 2000?  If he was, the introduction of the definition did not alter the position.

12.  The Official Receiver, who was represented by Mr Jenkin Suen, argues that section 202(1) has been understood since 1997 to apply to section 194(1)(aa) provisional liquidators and that it would be absurd if it did not.  He submitted that if section 202(1) applies to the Official Receiver during the period when he is acting as provisional liquidator under section 194(1)(a) and any person appointed by him under section 194(1A) it would make no sense for it not to apply to a provisional liquidator under section 194(1)(aa).  I can see the logic of this argument, although I note that it is not clear that section 202(1) does apply to the Official Receiver during the period he is acting as provisional liquidator as section 202(1) states that it applies ‘when the Official Receiver’ is liquidator, although I accept that it would appear to be anomalous if the Official Receiver did not have to comply with section 202(1) at a time when a provisional liquidator appointed by him did so.  It seems to me that in order to understand whether section 202(1) should be interpreted as applying to provisional liquidators in office under section 194(1)(aa) it is first necessary to understand its legislative history and also how the office and function of provisional liquidators were understood until fairly recently.

13.  Section 193 empowers the court to appoint a liquidator at any time after the presentation of a petition and before a winding-up order is made.  Provisional liquidators are appointed under section 193 to protect the assets of a company pending the determination of the petition, although in more recent years the concept of protection has been interpreted liberally and has allowed provisional liquidators to be appointed at the instigation of creditors to employ techniques, designed to maximise the value of a company’s assets for the benefit of its creditors, which are more effectively implemented through provisional liquidation then after a winding-up order has been made^[1].  Once a winding-up order is made there is no longer a need to appoint a person to protect the assets as the Official Receiver becomes the provisional liquidator and this has been the case since the Ordinance came into force in 1932.  In 1997 section 194(1)(aa) was introduced, which provided for the first time that a provisional liquidator appointed under section 193 continue as provisional liquidator after a winding-up order has been made pending either he or another person becoming liquidator.  It follows that prior to 1997 the question of a provisional liquidator appointed under section 193 realising assets and making payment into the Companies Liquidation Account did not arise.  As I have already noted given the language used it appears that section 202(1) did not apply to the Official Receiver during the period in which he was provisional liquidator.  I do not consider this to be a surprising position if one has regard to the role which, at the time section 194(1) and section 202(1) were introduced, a provisional liquidator was generally intended to play^[2].  A provisional liquidator was not expected to realise assets but protect them pending the hearing of a winding‑up petition.  In the case of the Official Receiver holding office as provisional liquidator following a winding-up order he would in practice probably not have been expected to make much progress, if any, in liquidating assets prior to calling a meeting of creditors and contributories of a company under section 194(1) (and its predecessors) to decide whether an application should be made to the court for the appointment of another person as liquidator.  At the time the provisions were first in force it was not common for an independent person to be appointed liquidator for the practical reason that there was commonly no assets available out of which to pay his fees.  I note in this regard that section 180(4) of the 1932 Ordinance expressly provides that where a liquidator is not appointed by the court the official receiver shall be the liquidator, a provision now deleted from the section and probably reflecting the original prevailing practice, which has now changed. The relevance of this is that in my view it is not clear that section 202(1) was intended as, Mr Suen argued, to apply to provisional liquidators. 

14.  Mr Suen argued that the decision in Lehman Brothers (No 2) was not relevant as it was limited to the narrow issue of whether the remuneration of provisional liquidators was a matter for the court under its inherent jurisdiction and whether the position was changed by the introduction of the definition of ‘liquidator’ in section 2(1).  I agree to the extent that Barma J’s own reasoning explains that the introduction of the definition was intended to have a narrow ambit and that it would be artificial, on the basis of the judgment, to read the introduction of the definition as being intended to have a far wider reaching effect.  However, this leaves the question of why section 202(1) uses ‘liquidator’ rather than ‘liquidator or provisional liquidator’ when a clear distinction is made between the two in section 194 and its precursors.  As I have explained above I do not accept that it is clear that section 202(1) must have been intended to apply to realisations by the Official Receiver at the time he was acting as provisional liquidator appointed pursuant to section 194(1)(a). It seems to me that the better view is that it was probably not so intended for the reasons I have given. 

15.  Mr Suen submitted that the Companies Ordinance and its subsidiary legislation are extensive and must be read in context.  He drew my attention to Australian cases which establish that it is necessary to consider each provision of the Australian corporations legislation in context to determine whether or not the term “liquidator” includes “provisional liquidators”: Newmont Pty Ltd v Laverton Nickel NL [1978] 2 NSWLR 325; Capita Financial Group Ltd v Rothwells Ltd (1989) 18 NSWLR 306.  I accept this and the analysis undertaken above is consistent with this approach.  The problem, viewed from the perspective of the Official Receiver, and his understandable wish to have all realisations paid into the Companies Liquidation Account and attract ad valorem fees, is that when section 194(1)(aa) was introduced the definition of “liquidators” was not introduced that was subsequently enacted in 2000 and, if Barma J is correct, which in my view he is, it follows that section 2(1) did not alter the interpretation of section 202(1), which for the reasons that I have explained does not operate as the Official Receiver has assumed it does.

16.  In conclusion, in my view a provisional liquidator in office under section 194(1)(aa) is not a “liquidator” for the purposes of section 202(1).  In so far as this is considered to be produce an anomalous result it needs to be dealt with by legislation.

(Jonathan Harris) Judge of the Court of First Instance High Court

Mr Jose Maurellet, instructed by Tanner De Witt, for the Joint & Several Provisional Liquidators (in both cases)

Mr Jenkin Suen, instructed by the Official Receiver

Ms Doris Wu of the Official Receiver’s Office

HCCW 356/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 356 OF 2011

____________________

	IN THE MATTER OF MF GLOBAL HONG KONG LIMITED
	and
	IN THE MATTER of the Companies Ordinance (Cap. 32)
______________________

Before: Hon Harris J, in Chambers

Date of Hearing: 4 and 15 May 2012

Date of Decision: 15 May 2012

______________

D E C I S I O N

______________

 

1.  On 15 December 2011, I made an order on the application of the then joint and several provisional liquidators of MF Global Hong Kong Limited for the court’s sanction to make an interim distribution of an amount not exceeding $500 million from moneys held by the company on behalf of its clients in its segregated bank accounts to clients that have a proprietary interest in such funds. My reasons for making that order are set out in my decision of 15 December.

2.  On 20 March 2012, the provisional liquidators issued a second summons seeking the court’s sanction to make a second interim distribution for an amount not exceeding HK$400 million.  The order that was sought was the same as that which I had made on 15 December 2011, save that a new paragraph was proposed to be inserted in the following terms.  “For the purposes of facilitating any interim distribution, payments made by the provisional liquidators pursuant to the order dated 15 December 2011, the second interim distribution and any other future distributions out of the client money, the provisional liquidators are authorised to pool the client money and make interim distribution payments on a pari passu basis.” 

3.  The summons was listed for hearing on 4 May 2012.  The application came to the attention of the provisional liquidators of MF Global Singapore Pte Limited (“MF Singapore”).  Apparently, they only became aware of the application through MF Global Hong Kong’s website on 27 April 2012.

4.  The proposed addition of the paragraph that I just quoted above apparently caused them some concern and they attended at the hearing on 4 May 2012.  At the hearing, they queried, through counsel, whether or not the way in which clients’ money was to be dealt with was appropriate as they had suggested, as I understand the position, that in the case of at least some of the clients of MF Singapore, it might be possible to trace with precision the assets in which they had a proprietary interest.

5.  The concerns that MF Singapore raised could not be fully aired at the 4 May 2012 hearing and I adjourned the summons until today in order that the liquidators of the respective companies in Hong Kong and Singapore, all of whom are from KPMG, could discuss the matter further and see whether either they could come up with an order that was acceptable to all parties or, if a substantial issue could be identified that needed to be resolved by the court, agree appropriate directions for the matter going forward.

6.  As matters have transpired, I understand from Mr O’Hare who appeared for the provisional liquidators of MF Singapore today, they no longer wish to object to the application and therefore I will make the order that the liquidators of the company seek, which is the same as the order made on 15 December with the addition of the paragraph I have referred to above. 

7.  Mr O’Hare sought his client’s costs of appearing before me.  Although the way in which the provisional liquidators of MF Singapore have come to make representations in relation to the present application has not been entirely satisfactory, I accept that it is not unreasonable for the provisional liquidators of MF Singapore, as representatives of the creditors in Singapore who clearly do have some proprietary claims, to attend court and to raise the type of concerns that were raised at the hearing on 4 May 2012.

8.  I therefore will make an order that the costs of the provisional liquidators of MF Global Singapore Pte Limited of the hearing on 4 May 2012 be taxed and paid out of the client money prior to any final distribution and be borne on a pari passu basis by the qualifying clients.

(Jonathan Harris) Judge of the Court of First Instance High Court

Mr Melvin Sng of Linklaters, for the provisional Liquidators of MF Global Hong Kong Limited (on 4/5/2012)

Ms Jocelyn Williams, of Linklaters, for the provisional liquidators of MF Global Hong Kong Limited (on15/5/2012)

Mr Donglas Lam instructed by Hogan Lovells, for the provisional Liquidators of MF Global Singapore Pte Limited (on 4/5/2012)

Mr Bryan O’Hare, of Hogan Lovells, for the Provisional liquidators of MF Global Singapore Pte Limited (on 15/5/2012)

Attendance of the Offical Receiver was excused

HCCW 356/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 356 OF 2011

____________

	IN THE MATTER OF THE COMPANIES ORDINANCE (CAP 32)
	and
	IN THE MATTER OF MF GLOBAL HONG KONG LIMITED

____________

AND

HCCW 357/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 357 OF 2011

____________

IN THE MATTER OF THE COMPANIES ORDINANCE (CAP 32) and IN THE MATTER OF MF GLOBAL HOLDINGS HK LIMITED

____________

Before: Hon Harris J in Chambers

Date of Hearing: 22 March 2012

Date of Decision: 22March 2012

Date of Handing Down Reasons for Decision: 7 May 2012

________________________

REASONS FOR DECISION

________________________

 

1.  On 2 November 2011 I appointed provisional liquidators over MF Global Hong Kong Ltd and MF Global Holdings HK Ltd. I wound up these 2 companies on 11 January 2012. The provisional liquidators continue in office by virtue of section 194(1)(aa) of the Companies Ordinance.

2.  By a summons issued on 20 January 2012 the provisional liquidators seek orders relating to payment of their fees and expenses.  In broad terms they seek the court’s approval for payment of each of the following:

(1) Fees incurred by the companies prior to 2 November in (a) instructing accountants (KPMG) whose staff subsequently became provisional liquidators and (b) instructing solicitors who have subsequently been instructed by the provisional liquidators (Linklaters).

(2) An interim payment in respect of the provisional liquidators’ fees and their expenses incurred in collecting in and dealing with the companies’ clients money.  This payment to be payable out of the clients’ money collected.

(3) An interim payment in respect of the fees and expenses of the provisional liquidators incurred in carrying out their duties (other than those incurred in connection with the collection of clients’ money) as provisional liquidators since 2 November 2011.

3.  The principles that apply to each of these categories are well established.  In the first case what is sought is approval under section 182 of the Companies Ordinance in order to avoid payments made after presentation of the petition being void. The court will grant such approval if it is satisfied that such costs have been incurred in the bona fide interests of the creditors of the company as a whole: Re Legend International Resorts Ltd [2007] 3 HKC 456 – see §§12-13; Re S A & D Wright Ltd, Denney v John Hudson & Co Ltd [1992] BCC 503 – see 504G-505F, 506D; Re  Luen Cheong Tai [2004] 1 HKLRD 735 (per A Cheung J as the Chief Judge then was).

4.  I am satisfied on the evidence before me that it was prudent of the companies’ directors to instruct KPMG and Linklaters when they became aware of their parent company’s problems and that the fees were incurred in the best interest of creditors.  I therefore sanction their payment.

5.  The second payment sought is an interim payment for fees incurred by the provisional liquidators and their agents in dealing with client money, in other words trust money held by MFHK on behalf of its clients in segregated accounts.  The court has the inherent jurisdiction to order that fees incurred in connection with the administration of trust property be paid out of the trust assets: Re TS Wong (Investment & Finance) Co Ltd [2008] 5 HKLRD 469 – see §§14-15, applying Re Berkeley Applegate [1989] Ch 32 – see 51; and Re CA Pacific Finance Limited (No 2) [1999] 2 HKLRD 102 – see §10.  Such an order may include the provisional liquidators’ legal costs and disbursements: Re TS Wong (Investment & Finance) Co Ltd, supra, para 15 and schedule para 2.5(iv).  Consistent with this principle I ordered in my judgment of 15 December 2011 that client money costs be paid out of the client money prior to any final distribution.

6.  The provisional liquidators seek an interim payment of 75% of their fees and disbursements pending their taxation against an undertaking by them and Linklaters to pay back any excess in the event that their respective fees are reduced by more than 30% after taxation.  The reason for seeking an interim payment is that the amount of work undertaken to date had been considerable and that provisional liquidators and Linklaters cannot reasonably be expected to provide their services without at least a sizable payment on account of their fees.  I accept that this is reasonable.  Quite clearly it is unrealistic to expect professionals to carry out significant work without payment within a reasonable time period.  The fact of the matter is that the taxation process does take some time and if the provisional liquidators have to wait for it be completed before they are paid and are able to pay Linklaters this would result in the professionals having to provide de facto financing for the process of collecting in and distributing client money.  This is not their function and it would be unreasonable to impose it on them.  I am satisfied that it is appropriate to order an interim payment of the fees that have been incurred of 70%.

7.  The final category of payment is the fees and disbursements of the provisional liquidators other than those incurred in connection with the collection in and distribution of client money.  The provisional liquidators seek an interim payment of their fees and disbursements, primarily Linklaters fees, pending taxation.  The justification is the same as in the case of the application for an interim payment for work carried out in connection with client money.

8.  There has been, in my experience, large provisional liquidations in which the Companies Court has made orders for interim payment of provisional liquidators’ fees.  However, there was no reported decision approving and explaining the practice until the judgment of Barma J in Lehman Brothers Securities Asia (No. 1) [2010] 1 HKLRD 43.  I would make 2 observations in relation to this practice.  First, that it applies to large provisional liquidations in which provisional liquidators and other professionals are required to undertake a considerable amount of work in a short period of time, alternatively to provisional liquidations, which last for extended periods, because, say a restructuring of debt is to be carried out through provisional liquidation.  Although I have recently had an application for an interim payment in a provisional liquidation, which it seemed to me was not out of the ordinary and which I rejected, generally in my experience it is only in obvious cases that provisional liquidators make such applications.  Secondly, in the normal case I would expect that the provisional liquidators will either have submitted a bill for taxation or be able to confirm to the court that they will shortly do so.  In Re Wing Fai Construction Co Ltd [2003] 1 HKLRD 80, Kwan J rejected an application for an interim payment on the grounds that a bill had not been submitted for taxation.  As will be apparent from my earlier comments I do not think that a failure to submit a bill for taxation is an absolute bar to an interim payment, but the court will generally need to be satisfied that the taxation process is being properly operated.  I would, for example, be reluctant to make an order for a 2^nd interim payment in cases in which a bill had not been submitted for taxation in respect of fees covered by an earlier interim payment.

9.  In the present case I am satisfied that an interim payment of 70% of the fees incurred is justified.

10.  Another point arose in relation to the application for an interim payment in the provisional liquidation and that concerned the taxation of agent’s fees, for example, those of solicitors retained by the provisional liquidators appointed under section 193 of the Companies Ordinance or continuing in office by virtue of section 194(1)(aa) following the making of a winding-up order.

11.  The legislative regime for the taxation of the bills of costs or charges of persons employed by a liquidator, including a solicitor (rules 169-179 of the Companies (Winding-up) Rules (Cap 32H)) does not apply to the costs or charges of persons employed by a provisional liquidator appointed under section 193 or continuing in office by virtue of section 194(1)(aa) following the making of a winding-up order.  Such legislative regime (rules 169-179 of the Companies (Winding-up) Rules) only applies to the bill of costs or charges of persons employed by the Official Receiver or a provisional liquidator appointed by him under s 194(1A): Re Lehman Brothers Securities Asia Ltd (No 2) [2010] 1 HKLRD 58 – see §§38-44 and 47.

12.  Instead of being a matter of statute or subsidiary legislation, the determination of the fees and disbursements of a solicitor or other professional agent employed by a provisional liquidator appointed under section 193 or continuing in office by virtue of section 194(1)(aa) following the making of a winding-up order is governed by common law principles, which in summary are as follows:

(1) an agent has a contractual relationship with a provisional liquidator and the latter is personally bound to pay for the work done unless the contract provides otherwise: Re Peregrine Investment Holdings Ltd & Ors (No 1) [1998] 3 HKC 1 – see 13E-14F; and Re Lehman Brothers Securities Asia Ltd (No 2) (supra) – see §§39 and 44;

(2) creditors or the Official Receiver have a prima facie right to challenge the provisional liquidator’s decisions on the passing of the accounts: Re Independent Insurance Co Ltd (supra) – see 930D-E; Re Peregrine Investment Holdings Ltd & Ors (No 1) (supra) – see 13I; and Re Lehman Brothers Securities Asia Ltd(No 2) (supra) – see §§39, 44 and 47;

(3) the power of the Court in an appropriate case and if the need arises to examine all aspects of the expenses in a provisional liquidation: Re UIC Insurance Company Ltd (In Provisional Liquidation) (No 1) [2007] 2 BCLC 446; and

(4) to the extent that a provisional liquidator is not satisfied with the bills rendered by his agent for whatever reason, a provisional liquidator has the option of either negotiating further with his agent or submitting the bill to taxation pursuant to section 67 of the Legal Practitioners Ordinance (Cap 159): Re Peregrine Investment Holdings Ltd & Ors (No 1) (supra) – see 14C.  Any taxation must be conducted on the basis of the Maxwell Principles: see Lehman Brothers Securities Asia Ltd (No 2) (supra) – see §47.

13.  Mr Maurellet submitted that the position in respect of the determination of the fees and disbursements of agents is, therefore, that provided the Court is satisfied that the provisional liquidator is aware of his duties and obligations to scrutinise the bills of costs or charges of persons employed by him and has taken steps to discharge those duties and obligations, the Court would normally permit a provisional liquidator to determine the agents’ fees himself and to make payment in respect of the same out of the estate without further involvement of the Court save in the circumstances mentioned above.  He points to Barma J’s decision in Lehman Brothers Securities Asia Ltd (No 2) (supra) as demonstrating that this is the correct approach.  In that case, an assessor appointed by the Court under section 53 of the High Court Ordinance (Cap 4) concluded in his interim report dated 22 July 2009, that the decision of the provisional liquidators to appoint agents was reasonable and that they more than adequately scrutinised their agents’ fees.  Taking that interim report into account, the Court allowed the agents to recover (by way of a further interim payment made by an order dated 27 August 2009) the balance of the fees payable to the agents as had been determined by the provisional liquidators themselves without the involvement of the Court.  Such  payment was considered to be a further “interim payment” as opposed to a final payment as the fees were still subject to revision until such time as the provisional liquidators had passed their accounts.

14.  It seems to me that this is to misunderstand the relationship between a provisional liquidator and his agent and the arrangement that the court approved in Lehman Brothers Securities Asia Limited (No. 2).  The court is not concerned with the personal liability of a provisional liquidator to pay an agent, who he engages.  The court is, however, concerned with the payment of costs and expenses out of the assets of an insolvent company.  This is why it was necessary for applications to be made in Lehman Brothers Securities Asia Limited (No. 2) for interim payment of solicitor’s fees out of the assets of the company, and, presumably, why it was thought necessary to do so in the present case.  Although Rules 169‑179 of the Companies (Winding-up) Rules may have no application in the case of a provisional liquidator appointed under section 193 and continuing in office by virtue of 194(1)(aa), the reason for there being such rules applies in the case of provisional liquidators in office by virtue of such sections 193 and 194(1)(aa) and I can see no reason why the court should not require taxation (or possibly some other approval process as was the case in Lehman Brothers Securities Asia Limited (No. 2)) of such expenses.

15.  I am told that the Taxing Masters have read Barma J’s decision as no longer requiring them to tax the fees of agents of provisional liquidators appointed under section 193 or continuing in office by virtue of section 194(1)(aa).  This is incorrect and in future such costs and expenses should be taxed.

(Jonathan Harris) Judge of the Court of First Instance High Court

Mr Jose Maurellet, instructed by Linklaters, for the Provisional Liquidators (in both cases)

Attendance of the Official Receiver was excused

HCCW356/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 356 OF 2011

____________________

	IN THE MATTER OF MF GLOBAL HONG KONG LIMITED
	And

IN THE MATTER of the Companies Ordinance (Cap. 32)

____________________

Before: Hon Harris J, in Chambers

Date of Hearing: 15 December 2011

Date of Decision: 15 December 2011

_____________________

D E C I S I O N

_____________________

 

1.  I have before me an application by the Joint and Several Provisional Liquidators of the Company appointed by me on 2 November 2011 and by a subsequent order made on 9 November 2011 extending that appointment.

2.  The application is made by a summons dated 13 December 2011 in which the Provisional Liquidators seek (1) the sanction of the court to make an interim distribution of an amount not exceeding HK$500 million from moneys that are held by the Company on behalf of its clients (“client money”) in its segregated bank accounts to clients that have a proprietary interest in such funds (“qualifying clients”) and (2) an order that the costs and expenses of the Provisional Liquidators in collecting in and dealing with such client money, including the cost of the application, the interim distribution and any final distribution of the client money be paid out of those assets prior to any final distribution and be borne on a pari passu basis by the qualifying clients.

3.  The Company is a licensed broker providing execution and clearing services for exchange traded futures and options, over the counter derivative products, as well as non-derivative foreign exchange products and equities in the cash market.

4.  The Company is also a trading participant of the Hong Kong Futures Exchange Limited and the Stock Exchange of Hong Kong Limited and a clearing participant of the Hong Kong Securities Clearing Company Limited, the HKFE Clearing Corporation Limited and the SEHK Options Clearing House Limited. 

5.  As a regulated entity in Hong Kong the Company is required to comply with, amongst other securities regulations, the Securities and Futures (Client Money) Rules.  Section 5 of those rules requires that client money remain in segregated accounts until their payment either to the client on whose behalf the moneys are held in accordance with written directions or standing authorities given by such client, or to meet the client’s trading and settlement obligations.  Clause 35.1.5 of the client agreements entered into between the company and its futures and options clients reflect this position.

6.  The clients’ money with which the Provisional Liquidators’ application is concerned relates to the Company’s clients that traded futures and options.  The reason why the Provisional Liquidators have made this application can be summarised as follows. 

7.  The combined pool of client money held for futures and options clients is approximately HK$1.2 billion, including money held by HKCC affiliates and overseas brokers.  This corresponds to the cash balances that ought to be held by the Company for such clients as at 28 October 2011, provided that the Company receives in full the sums payable by its overseas affiliates and overseas brokers. 

8.  The Provisional Liquidators currently have the equivalent of approximately HK$1 billion under their control in Hong Kong in respect of such client money.  Since the Company was placed into provisional liquidation there has been a freeze on any payments out, including payment of any client money.  This has had a significant adverse effect on those clients with funds comprised in the client money. 

9.  These are described in some detail by Mr Cowley in his affidavit in support of this application and many of the clients for whom this problem has significant commercial ramifications are professional clients.

10.  The trustee of the Company’s US affiliate, MF Global, Inc., has obtained court orders approving the return of approximately two-thirds or more of US segregated customer assets by value on a pro-rata basis.  The fact that such sums have been released in the US has heightened the frustration experienced by the Company’s clients in Hong Kong whose funds are held by the Company.

11.  This application has therefore been brought in the interests of relieving the severe liquidity distress caused to the affected clients.  The application is supported by the Securities and Futures Commission who have been served with the papers constituting the application and I am told have a representative in court today. 

12.  I have also been sent a fax by the Official Receiver, dated 14 December 2011.  The Official Receiver has also been served with the application.  The Official Receiver has no objection in principle to the application.

13.  The client money that is held by the Company in segregated bank accounts for its futures and options clients represents realised profits and margin of each client’s trading position.  The Company has more than 50 such segregated accounts with nine different banks.  Some of those accounts are in a single currency, others are in multiple currencies.

14.  The Provisional Liquidators have undertaken an analysis of the Company’s trading records and bank statements to determine whether a precise reconciliation or tracing of each client’s entitlement to the client money is possible. 

15.  As a consequence of how the Company conducted its futures and options business, in particular how margin requirements were managed collectively, the Provisional Liquidators believe that such a tracing exercise would be extremely difficult to undertake.  It would involve substantial work over a fairly lengthy period of time, be prohibitively expensive and there would be no guarantee that it would result in precise figures.

16.  There is one exception I am told: moneys held with JP Morgan Securities Company Limited which relate to trades effected on the Korean markets for MF Global UK where no money was held in the Company’s segregated bank accounts for this affiliate.  These can be matched and traced specifically.

17.  The practical difficulties in undertaking a tracing of each client’s precise entitlement to client money as a result of how the Company conducted its futures and options business are summarised by the Provisional Liquidators as follows.

18.  The first group of difficulties relates to the margin practice of the Company.  The margin that a client may be required to deposit with a company is calculated based on that client’s aggregate futures and options position across the different markets and exchanges traded by that client.  Margin calls were therefore made on the basis of whether there was free equity across the client’s portfolio or a client’s margin position was in deficit. 

19.  The practice also applied in respect of the omnibus accounts maintained by the Company with its overseas affiliates and overseas brokers through which futures and options transactions on the relevant overseas exchange were executed on behalf of the Company’s clients.

20.  With certain exceptions clients were generally allowed to meet margin obligations in a currency different to that of the relevant futures and options position traded and client moneys deposited into the Company’s segregated bank accounts were treated as a single pool. However, the money so deposited would be preserved in the remitting and deposited currency and where that currency is different from that of the underlying transaction giving rise to the margin call the Company would use funds of the relevant currency from the segregated bank account to meet that obligation, even though that client may not have deposited the funds in that currency.

21.  The same process in reverse applied where a client wished to close out a position on an overseas exchange and withdraw profits and margins which had been posted in respect of that position.

22.  The second groups of difficulties relates to the reconciliation of client money.  Reconciliation of segregated bank balances, broker receivables and clients’ payable balances were performed on daily bases, including on a currency basis pursuant to which the Company would ensure the aggregate funds in its segregated bank accounts matched it clients’ payable balances collectively without specific tracing to each individual client’s position.

23.  For these reasons the money of one client in the Company’s segregated bank accounts cannot specifically be distinguished from that of another client in that account.  To trace each individual client’s interest in the client money Provisional Liquidators would have to recreate fund flows for each client, an exercise that would not only be time consuming and prohibitively expensive, but also be unlikely to yield a precise result and may not ultimately be possible based on the analysis undertaken to date by the Provisional Liquidators.

24.  The constraints and considerations in determining whether it would be pragmatic or appropriate for provisional liquidators to undertake the kind of forensic tracing exercise of each client’s entitlement to the client money has been considered, albeit in the context of securities themselves, in a number of decisions by the courts of Hong Kong, in particular Re Chark Fung Securities Company Limited (HCCW 362/1998, 13 November 2002, Kwan, J (unrep)) and Re Law Siu Kong, Christopher trading as Lawsons Securities Company (HCMP 2477/2002, 24 February 2006, Kwan, J (unrep)).

25.  Mr Melvin Sng who appeared on behalf of the Provisional Liquidators submitted that it would not be in the best interests of those clients beneficially entitled in the client money for the Provisional Liquidators to attempt a forensic tracing of their respective entitlements for three reasons. 

26.  Firstly, this would result in substantial cost and expense being incurred resulting in the depletion of assets that are otherwise payable to them.

27.  Two, the exercise would require a lengthy period of time to complete and would aggravate the financial distress already being experienced by those clients as a result of being unable to recover their moneys. 

28.  Thirdly, there is uncertainty whether such a forensic tracing exercise would be possible and/or yield a precise result.

29.  I accept that the evidence filed by Mr Cowley demonstrates that all these three points are valid.

30.  Mr Sng also submitted, relying on a number of authorities, in particular that of the Ontario Court of Appeal in Re Ontario Securities Commission [1985] DLR 30, that where practical considerations do not favour a forensic tracing of each client’s entitlement, a pari passu ex post facto approach to the distribution of trust funds is appropriate.  I accept that that is the case in the present situation. 

31.  Having considered carefully the fact that the Company does not yet have confirmation from its overseas affiliates and overseas brokers regarding the actual close out amount for the relevant client positions and the risk that the Company may not receive in full moneys payable by its overseas affiliates and brokers, the Provisional Liquidators have formed the view that it is possible and appropriate to effect an interim distribution of an amount not exceeding 500 million from the client money to clients that are entitled to it.

32.  Mr Cowley in his supporting affidavit summarises the intended approach to the proposed interim dividend as follows. Firstly, only qualifying clients with a demonstrable entitlement to client money will be entitled to receive payment.

33.  Secondly, qualifying clients must settle any amount owed to the company or any of its affiliates prior to receiving an interim distribution.

34.  Thirdly, the interim distribution will be made on a pari passu basis.

35.  Fourthly, qualifying clients will be required to sign an agreement acknowledging that the interim distribution remains subject to final adjustment, represent that the qualifying clients has no liabilities to any MF Global entity and undertake to repay on demand any amount overpaid.

36.  Finally, the distribution will take into account a qualifying client’s net position where it has multiple accounts and will be converted into Hong Kong dollars.

37.  The proposed terms of the interim distribution have been communicated to non-affiliate qualifying clients of the Company by a letter dated 2 December 2011.  The affiliate qualifying clients were also informed of the proposed interim distribution on 12 December.

38.  To date the Provisional Liquidators have received 51 responses from qualifying clients representing 99 per cent of the non-affiliate qualifying clients in terms of total free equity as at 28 October 2011, which support the proposed interim distribution.

39.  The Provisional Liquidators seek an order that their costs and expenses in administering, collecting in and dealing with the client money, including the costs of this application and the costs and expenses associated with effecting the interim distribution, be paid out of the client money prior to any final distribution and be borne on a pari passu basis by the qualifying clients.

40.  I am satisfied, having been take to the relevant authorities by Mr Sng, namely, Re Berkeley Applegate [1989] Ch 32 and C A Pacific Finance Limited (in Liquidation) (2) [1999] 2 HKC 652, that this is the appropriate approach in a case such as the present.

41.  I have therefore made an order in the terms of the summons dated 13 December 2011.

(J Harris) Judge of the Court of First Instance High Court

Mr Melvin Sng, of Messrs Linklaters, for the Provisional Liquidators

The Official Receiver, attendance excused

HCCW 356/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 356 OF 2011

____________

	IN THE MATTER of MF GLOBAL HONG KONG LIMITED
	and
	IN THE MATTER of the Companies Ordinance (Cap. 32)

_____________

AND

HCCW 357/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 357 OF 2011

____________

IN THE MATTER of MF GLOBAL HOLDINGS HK LIMITED   and
IN THE MATTER of the Companies Ordinance (Cap. 32)
_____________
	(Heard Together)

Before: Hon Harris J in Chambers

Date of Hearing: 9 November 2011

Date of Ruling: 9 November 2011

Date of Reasons for Ruling: 29 November 2011

__________

R U L I N G

__________

 

1.  On 2 November 2011 I appointed provisional liquidators over MF Global Holdings HK Limited and MF Global Hong Kong Limited on the application of the boards of directors of their respective companies. On 9 November 2011 I confirmed the provisional liquidators’ appointment until further order. The applications were not opposed. The grounds of the applications were, in short, that although solvent on a balance sheet test, as a result of the much publicised collapse of the MF Global Group the Hong Kong companies were unable to pay their debts as they fell due.

2.  In this ruling I address one technical point that arose in relation to the application on 2 November 2011.  The application was heard by me at 8.00 am. This was before the court registry opened and as a result before the petitions had been issued.

3.  Section 193(1) of the Companies Ordinance, Cap. 32, provides that the court may appoint a liquidator provisionally at any time after the presentation of a winding-up petition.  Companies (Winding-up) Rules, Cap. 32H, (“Rules”) rule 23 provides that a petition shall be presented at the office of the Registrar, who shall appoint the time and place at which the petition is to be heard.  As a consequence of rule 23 it is generally understood that an application for the appointment of a provisional liquidator can only be made after a petition has been filed at the High Court Registry.

4.  On 2 November I took the view that there was no impediment to me treating presentation to me of the petition as satisfying section 193(1) as the Rules give the court an overriding power to tailor the Rules to the needs of a particular case.  Rule 1(1) provides that the Rules are “subject to any general or special order of the court”.  Rule 209(1) provides that any proceedings shall not be invalidated by reason of any formal defect or irregularity unless the court is of the view that substantial injustice has been caused by it.

5.  I asked, however, for the petitioners and the Official Receiver, who did not object to this approach, to consider this issue further and address me on it at the hearing of the inter partes summons and, in particular, bring to my attention any relevant authorities.

6.  At the hearing of the inter partes summons on 9 November I was told that neither the petitioners nor the Official Receiver had found any relevant authorities.

7.  I am aware of one previous occasion on which Suffiad J appointed provisional liquidators before the petition had been issued in circumstances in which the application was urgent, but written reasons were not provided.

8.  In summary my view is this.  Where it is reasonably possible for a petition to be issued before an application to appoint provisional liquidators is made rule 23 should be complied with.  If this is not possible and the court is satisfied that the case is sufficiently urgent the court may treat presentation of the petition to the judge hearing the application, along with an undertaking to file the petition as soon as the Registry is open, as satisfying section 193.

(J. Harris) Judge of the Court of First Instance High Court

Mr. Melvin Sng of Messrs Linklaters, for the Petitioners (in both cases)

Mr. Alan Fong, for the Official Receiver