ACROPOLIS LTD v. W&Q INVESTMENT LTD AND OTHERS

HCCW 218/2017

[2024] HKCFI 1645

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) PROCEEDINGS NO. 218 OF 2017

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BETWEEN

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DECISION

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1.  Leave to appeal is refused.

2.  The appeal has no prospect of success. The Former Provisional Liquidators are seeking to overturn findings of fact. There is nothing contradictory in the court’s findings of fact. The court’s conclusions follow from the findings of fact and fell squarely within the scope of the evidence adduced and the preliminary issues posed.

3.  On the incidence of costs, the Petitioner and 14^th Respondent should have the costs of the leave to appeal application.

4.  On quantum of costs, the Former Provisional Liquidators’ costs come to HK$74,498, while the costs of the Petitioner and 14^th Respondent come to HK$84,740. Both sides’ costs of the leave to appeal application should be roughly approximate. Nonetheless, although each side’s submissions should have entailed broadly similar amounts of work, the Former Provisional Liquidators as applicants will have incurred slightly more in costs in putting together the initial application for leave to appeal. It follows that the Petitioner and 14^th Respondent’s claimed costs are too high and should be reduced to $74,498. Given the slight disparity in amount of work just mentioned, the costs sought by the Petitioner and 14^th Respondent are further discounted to HK$70,000.

5.  The Former Provisional Liquidators are to bear $70,000 of the costs of the Petitioner and 14^th Respondent in respect of the leave to appeal application.

Mr Jeff Yau, instructed by Titus, for the Petitioner and the 14^th Respondent

Mr Patrick Siu, instructed by Chow, Griffiths & Chan, for the former provisional liquidators of the 14^th Respondent

HCCW 218/2017

[2024] HKCFI 1065

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) NO 218 OF 2017

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BETWEEN

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JUDGMENT

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I. INTRODUCTION

1.  The underlying facts were set out in section II of my Decision of 6 February 2024 in these proceedings. I will not repeat that background here. By my Decision, I ordered the following preliminary issues to be tried before me today:

(1) Whether the former provisional liquidators (namely, Mr Terry Kan Lap Yee and Ms Anita Hou Chung Man) had, between around 18 April and 14 May 2018, reached an agreement or (alternatively) a mutual understanding with the Petitioner (Acropolis) that, upon Mr Kan and Ms Hou being appointed as the joint provisional liquidators of the 14^th Respondent (Aeso Holding), they would cap the remuneration which they would be entitled to receive in respect of the said appointment at HK$800,000.

(2) If the answer to (1) is in the affirmative, whether the agreement or mutual understanding should be taken into account by the Court in determining Aeso Holding’s Application for Review of Taxation dated 17 February 2020.

2.  I directed, for the purposes of the preliminary issues trial, that the affidavit evidence already filed by the parties in these proceedings should stand as their respective deponents’ evidence-in-chief. In this way, counsel could proceed directly to cross-examination of each side’s witnesses. In this Judgment, I shall refer to Acropolis and Aeso Holdings collectively as “the Applicants”.

II. BACKGROUND

3.  The Applicants called evidence from Mr Chan Siu Chung (also known as Mr Jones Chan, a director of Aeso Holding), Mr Sherman Yan (a solicitor and partner of ONC Lawyers), Mr Samuel Ngo (a solicitor), and Mr Donald Chiu Fu Keung (Aeso Holding’s then Financial Controller). Ms Anita Hou and Mr Terry Kan (both of Shinewing Specialist Advisory Services Limited) gave evidence of what they believed to be the position on their fees as joint provisional liquidators. In this section, I will summarise the affidavits which the foregoing witnesses submitted before the preliminary issues hearing.

4.  Mr Chan founded Aeso Holding. He is Acropolis’ sole director and shareholder. Acropolis holds shares in Aeso Holding. Between June 2017 and April 2019, Aeso Holding went through a bitter dispute between two factions of shareholders, Acropolis on the one part and W&Q Investment Limited on the other. During that dispute, Acropolis petitioned to wind up Aeso Holding for unfair prejudice and on just and equitable grounds. Acropolis then applied for the appointment of provisional liquidators in respect of Aeso Holding.

5.  Mr Chan’s version of events as deposed in his affirmation evidence is summarised in [6] to [9] below. Quotations are of Mr Chan’s words.

6.  Being unfamiliar with provisional liquidation, Mr Chan asked Mr Yan to suggest whom to nominate as provisional liquidators. Mr Yan arranged meetings between Mr Chan and possible candidates. The candidates included Mr Kan. On 25 April 2018, Mr Chan and Mr Yan met Mr Kan to discuss fees. At the meeting, Mr Chan told Mr Kan that the sole purpose for the appointment of provisional liquidators was to preserve Aeso Holding’s assets. Mr Chan said that he did not expect the provisional liquidators to be actively involved in managing Aeso Holding. Mr Chan explained that Aeso Holding was neither sizeable nor profitable. So, the company could not afford expensive provisional liquidators. Mr Chan “explicitly asked for an accurate estimate of fees to be charged” if Mr Kan were appointed as provisional liquidator.

7.  Mr Kan replied that his fees would primarily be based on the time spent on the job and his scope of work would be dictated by the company’s circumstances since provisional liquidators owe a duty to the court. But, based on what Mr Kan understood about the Aeso Holding case, Mr Kan “anticipated that his work or involvement would be minimal”. Mr Kan told Mr Chan about a previous experience as provisional liquidator for a “cafe restaurant”. Mr Kan’s main responsibility then had been to "keep an eye" on the restaurant. Mr Kan had not been actively involved in its operations and the fee charged were only about HK$500,000. Later in the meeting, Mr Kan “orally provided ... a fee quotation in the range of HK$500,000 to HK$800,000 for acting as the provisional liquidators”. Relying on the fee quotation, on the following day Mr Chan caused Acropolis to apply for Mr Kan and his associate Ms Hou to be appointed as provisional liquidators of Aeso Holding.

8.  Mr Kan issued draft fee quotations on 7 and 8 May 2018 for Ms Hou and himself. He produced a finalised written fee quotation on 11 May 2018. This was the same as the oral fee quotation given on 25 April 2018. Mr Chan was later informed by his counsel (Mr Clifford Smith SC and Mr Kerby Lau) that the proposed fees were on the low side. Counsel’s concern was that the respondents might suggest that the proposed appointment was not genuine. On 14 May 2019 Mr Kan sent a revised fee quotation in the range of HK$1.5 to HK$2.5 million to Mr Chan through ONC Lawyers. Mr Chan understood that Mr Yan had spoken with Mr Kan over the telephone at about the same date. In that conversation, Mr Kan had confirmed to Mr Yan that the revised quote was “given upon our [that is, Mr Chan’s] request in order to satisfy the counsel team's concern” and Mr Kan would stick to the HK$500,000 to HK$800,000 that he had previously quoted.

9.  Both before and after their appointment as provisional liquidators, Mr Kan repeatedly reminded Mr Kan that Mr Kan “had to keep the fees within the Fee Quote [of HK$500,000 to HK$800,000]”. To help the provisional liquidators to achieve that, Mr Chan said that members of Aeso Holding’s senior management (Mr Chiu, the Chief Operation Manager (Julienne Cheng), and Mr Chan himself) were willing to assist them and share their workload. Mr Kan and Ms Hou accepted this arrangement. Mr Chan and his colleagues thus worked closely with the provisional liquidators to reduce their workload and minimise their fees.

10.  Mr Chan and Mr Yan have known each other for several years. They first met when Mr Yan acted as Mr Chan’s lawyer. Mr Yan submitted an affirmation in support of Mr Chan’s account. Mr Yan’s version of events is contained in [11] to [16] below. Quotations are of Mr Yan’s words.

11.  The reason for appointing provisional liquidators was to ensure that none of Aeso Holding’s directors would be able to exercise any of their powers, pending the resolution of the dispute between the two shareholder factions. In this way, Aeso Holding’s senior management could continue to bring in business for the company, without interference from one or other faction, while the dispute was being resolved. Once Acropolis gained control of Aeso Holding, the provisional liquidators could then resign with Aeso Holding’s assets having been preserved in the interim. Mr Yan thus understood that Mr Chan was looking for a provisional liquidator who would be “willing to play a rather passive role and charge a small fee”. Some candidates whom Mr Yan suggested to Mr Chan as potential liquidators, refused to take up the role as they were concerned that the fees would be too small. This was despite Mr Yan explaining that there “would not be any real liquidation work as the Company was not anticipating liquidation”.

12.  Mr Yan approached Mr Kan whom Mr Yan had known since about 2004. Mr Kan expressed interest. Therefore, Mr Yan arranged several meetings among Mr Chan, Mr Kan, and himself, including the meeting on 25 April 2018. At the latter meeting, Mr Chan and Mr Yan told Mr Kan “in the most unequivocal language about the objectives of Mr Chan, his budgetary constraints, and the bases upon which Acropolis would apply to appoint Mr Terry Kan and Ms Anita Hou as the provisional liquidators”. Mr Chan and Mr Yan observed that Aeso Holding was “still operating as an on-going concern” and the provisional liquidators were “not expected to embark on tasks like collecting assets for the Company or distributing them to the Company’s creditors and so on”. Mr Chan and Mr Yan stressed to Mr Kan that it was “crucial to have an accurate budget of fees to be charged” given Aeso Holding’s limited financial resources. It was observed that “the role and work of the provisional liquidators should be kept to a minimal as Mr Chan and his colleagues would continue to run the Company pending the resolution of the Shareholders’ Dispute”. This meant that the “provisional liquidators’ main responsibility was to keep an eye on the Company”.

13.  After asking more detail about Aeso Holding’s situation, Mr Kan said that he understood that “his work or involvement in the Company would be minimal”. At the end of the meeting, Mr Kan orally quoted a fee in the range of HK$500,000 to HK$800,000. Mr Kan “assured Mr Chan that the total costs for the entire period of provisional liquidation would be no more than HK$800,000”. There was no discussion of solicitors' fees “because none of us expected the matter would require the assistance of solicitors”. Mr Chan and Mr Yan took Mr Kan’s quotation to be for a fixed fee and they believed that Mr Kan had understood “where we were coming from”.

14.  Mr Yan noted that Mr Kan’s finalised fee quote of 11 May 2018 expressly stated that the quotation there was "based on limited information and ... would have to be adjusted depending on the actual circumstances”. But Mr Yan made “some more phone calls” to Mr Kan in May 2018 “to seek assurance that the Former Provisional Liquidators would strictly adhere to the Fee Quote notwithstanding the terms stated in the said written Fee Quotation”. Mr Kan “expressly assured [Mr Yan] (and asked [Mr Yan] to inform Mr Chan) that the contents were only standard terms of their company and they would stick to the Fee Quote notwithstanding the terms in the written fee quotations”. Mr Yan conveyed Mr Kan's reassurance to Mr Yan.

15.  Mr Kerby Lau later telephoned Mr Yan. Mr Lau understood from Mr Chan that the fee quote of 11 May 2018 had been agreed upon through Mr Yan’s involvement. Mr Lau said that he was worried that the fee quote was on the low side and the respondents might challenge the appointment of the provisional liquidators as a sham. Mr Lau “suggested, if possible, we [that is, Acropolis] better state a higher fee quote in the application for provisional liquidation”. Mr Yan told Mr Chan about this. Mr Chan “then agreed to increase the Fee Quote ‘on paper’ to address the counsel team's concerns on the condition that the Former Provisional Liquidators would nevertheless stick to the Fee Quote”.

16.  On 14 May 2018, Mr Yan telephoned Mr Kan to convey Mr Chan's message. Mr Kan confirmed that he understood counsel's concerns and agreed to revise the fee quote "on paper" whilst still sticking to the fee quote. Mr Yan reminded Mr Kan (and Mr Kan agreed) that “such revision was not intended to change the true agreement of both parties regarding the Fee Quote”. The revision was “only done to address the counsel team's concerns”. Mr Yan informed Mr Chan of Mr Kan’s response. After the telephone conversation with Mr Kan, the latter sent a revised fee quote in the range of HK$1.5 million to HK$2.5 million to Mr Chan through ONC Lawyers.

17.  Mr Kan denies that there ever was any agreement or understanding that his fees and those of Ms Hou would be capped to HK$800,000. He is adamant that he never gave an assurance that the total fees of the provisional liquidation would not exceed HK$800,000. The account in his affirmation evidence is summarised in [18] to [22] below. Quotations are from his affirmations.

18.  Prior to the meeting on 25 April 2018 to which Mr Chan refers, there was an initial meeting on 16 April 2018 among Ms Hou, Mr Chan, and Mr Ngo which discussed the appointment of provisional liquidators for Aeso Holding. Mr Chan and Mr Ngo told Ms Ngo that the provisional liquidators were not expected to play an active role in the running of the company. The provisional liquidators were instead only being appointed to prevent the dissipation of Aeso Holding’s assets and to maintain the status quo. No details of the disputes between the shareholders of Aeso Holding were disclosed to Ms Hou. Mr Chan pressed Ms Hou for a fee quote without providing a single piece of paper regarding the company’s affairs. Ms Hou made it clear during the meeting that any fee quote would be a wild guess as no document has been provided to her, and actual work done by the provisional liquidators would be subject to circumstances.

19.  The draft fee quotations which Mr Kan and Ms Hou sent to Mr Chan were based on what Mr Chan and his lawyers had told them and the very limited documents and information provided by Aeso Holding. The draft fee quotations were only fee estimates. The drafts made it clear that the fee quotations therein were based on limited information and would have to be adjusted depending on actual circumstances. The drafts stated that, subject to the court’s approval, the provisional liquidators’ remuneration would be charged on “a time-cost basis”. At the time of the first draft fee quotation, Mr Kan and Ms Hou had been informed by Mr Chan and Mr Yan that no active role would be required from the provisional liquidators to deal with the company’s shareholder disputes and their roles would be limited to preventing the dissipation of assets and maintaining the status quo.

20.  On 7 May 2018, there were further discussion on issues relating to Aeso Holding and the provisional liquidators’ role. Those discussions were among Acropolis, ONC, and the provisional liquidators. The scope of the provisional liquidators’ work was revised to take account of the powers proposed in Acropolis’ summons dated 26 April 2018 for the appointment of Mr Kan and Ms Hou as provisional liquidators. That resulted in a revised draft fee quote of 8 May 2018. Based on additional comments from ONC, the second draft fee quote was then finalised on 11 May 2018.

21.  Mr Kan recalls a conversation with Mr Yan on 14 May 2018. He says that Mr Yan relayed counsel’s concerns that Mr Kan and Ms Hou’s quoted fee was unrealistically low and “may create a wrong impression that the proposed ... Provisional Liquidators would take little active role in discharging their duties”. Mr Yan asked for an amendment and that request led to the revised fee quote of between HK$1.5 million and HK$2.5 million. But all fee quotes included the caveats mentioned in the foregoing paragraph to the effect that fees would be charged on a time-costs basis depending on actual work done, subject to taxation by the court. The fee quote of 14 May 2018 was “a fee estimate based on the information available” and was accepted as such by Aeso Holding.

22.  There were no further discussions on the proposed appointment until ONC informed Mr Kan and Ms Hou that their appointment had been granted by the court on 31 May 2018.The court’s order appointing Mr Kan and Ms Hou accurately reflected the position, namely, that "the remuneration would be “charged on a time-cost basis and upon the assessment by the Court ".

23.  Ms Hou’s affirmation evidence confirms Mr Kan’s recounting of what happened (see [18] above) when she met Mr Chan and Mr Ngo on 16 April 2018.

24.  In these proceedings, Mr Ngo (then a partner of K & L Gates) acted for Dragon Success Enterprises Limited, a creditor of Aeso Holding. Mr Ngo submitted two affirmations in support of Mr Chan’s account. Mr Ngo’s evidence is summarised in [25] to [27] below, with quotations being Mr Ngo’s words.

25.  At the 16 April 2018 meeting mentioned by Mr Kan and Ms Hou, Mr Ngo was in attendance along with a representative from Dragon Success. The meeting had been arranged on a “without prejudice” basis and was meant to discuss how the outstanding debt due to Dragon Success would be paid off. As the end of the meeting, the Dragon Success representative and Mr Ngo were asked to stay for a short while, as Mr Chan was to interview, shortlist and decide whom to nominate as provisional liquidators of Aeso Holding. Mr Chan hoped that this would give comfort to Dragon Success that Mr Chan was on the right course to resolving Aeso Holding’s issues and the loan due to Dragon Success would soon be settled.

26.  Ms Hou was interviewed. Mr Chan together and his lawyers outlined the potential role of the provisional liquidators and stated that they were “keen to secure a budget from Ms Hou”. Mr Chan expressed his key concerns that Aeso Holding’s operations were not substantial and could not possibly afford substantial provisional liquidators' fees. In response, Ms Hou explained that “their overall cost should not exceed HK$800,000 for such small operation company”.

27.  Mr Chiu also submitted an affirmation in support of Mr Chan’s version of events. Mr Chiu described a meeting in April 2018 in which Mr Chan, Ms Hou, Mr Yan, and he were present. Mr Chan informed Ms Hou of Aeso Holding’s financial situation and asked Ms Hou for a fee quotation if appointed as provisional liquidator. In reply, Ms Hou informed Mr Chan that Aeso Holding’s case was not complicated and was like a prior case in which she had acted as the provisional liquidator of a “cafe restaurant”. Ms Hou then told Mr Chan that Mr Kan and her fees for acting as Aeso Holding’s provisional liquidators would be in the range of HK$500,000 to HK$800,000, much as in the case of the “café restaurant”.

III. DISCUSSION

A. Preliminary issue (1): Whether agreement or understanding that remuneration would be capped at HK$800,000?

A.1 Matters arising from the oral evidence

28.  From the parties’ affidavit evidence, it will be seen that there is a large measure of agreement among the parties as to what outwardly transpired among them. The oral evidence at the preliminary issues trial added context to the matters deposed by the parties. I highlight six matters that emerged from the oral evidence.

29.  First, in addition to Titus who have been acting on the record as solicitors for Acropolis, Mr Yan has been advising Mr Chan behind the scenes. Mr Yan and Mr Kan knew each other professionally for at least a decade prior to April 2018. As a result of that acquaintance, ONC regularly worked with Shinewing (Mr Kan’s firm) in liquidations. Mr Yan recommended Mr Kan to Mr Chan as a possible provisional liquidator on the strength of ONC’s years of relationship with Shinewing. Prior to his appointment in these proceedings, Mr Kan had not actually worked with Mr Yan on a case.

30.  Second, it is unclear whether there was a connection between the meeting with Ms Hou on 16 April 2018 and the later meeting with Mr Kan on 25 April 2018. It is difficult to believe that that meetings were unrelated. On the balance of probability, a meeting had been set up for the 16 April 2018 among Mr Kan, Ms Hou, Mr Yan, and Mr Chan. But, at the last minute, for some reason or other, neither Mr Kan nor Mr Yan was able to attend. So, the meeting on 16 April 2018 proceeded without Mr Kan and Mr Yan. Mr Chiu recalls a meeting in April 2018 in which he insists that Mr Chan, Ms Hou, Mr Yan, and he were all present. But this is doubtful, as there does not seem to have been a meeting in April 2018 at which Ms Hou, Mr Kan, Mr Yan and Mr Chan all attended. It is more likely that Mr Chiu was referring to the meeting on 25 April 2018 which Mr Kan (but not Ms Hou) attended. I note, in this connection, that Mr Chiu left Aeso Holding about three years ago and is now self-employed.

31.  Third, at the meeting on 25 April 2018, Mr Chan went directly to the point. Having explained why Aeso Holding’s provisional liquidation would not involve much work, Mr Chan asked Mr Kan how much roughly Mr Kan would be charging for the same. It would have been apparent to Mr Kan that Mr Chan wished to keep the costs of provisional liquidation down to a minimum.

32.  Fourth, Mr Kan referred to his previous experience as provisional liquidators with a “café restaurant”. This was a reference to a third-floor restaurant in Kwun Tong. Mr Kan arrived at the figure of HK$800,000 mentioned to Mr Kan on 25 April 2018 on the basis that, if the provisional liquidation of Aeso Holding would not involve much work, then the matter would be like the provisional liquidation of the restaurant. Mr Kan was aware that Aeso Holding was a listed company since he was so informed by Mr Chan at the 25 April meeting. From his prior work with listed companies, Mr Kan knew that the provisional liquidation of Aeso Holding would involve compliance work. Taking the fee earned for the provisional liquidation of the restaurant (HK$500,000) and adding a generous margin (HK$300,000) on top of that to cover compliance work (among others), Mr Kan arrived at the estimate of HK$800,000 which he gave to Mr Chan at the 25 April meeting.

33.  Fifth, counsel having communicated their concern that HK$800,000 for Aeso Holding’s provisional liquidation might be regarded as too low, Mr Yan called Mr Kan to convey counsel’s view. Mr Yan suggested revising the fee quotation from a range of HK$500,000 to HK$800,000 to a range of HK$1.5 million to HK$2.5 million to address counsel’s concern. Mr Kan accepted Mr Yan’s suggestion then and there. Mr Kan did not ask for any time to do a re-calculation of his 11 May fee quotation.

34.  Sixth, during their cross-examination, it was pointed out to Mr Chan and Mr Chiu that there were several email exchanges between Aeso Holding and Shinewing in which the former simply asked the latter for more time to pay invoices for provisional liquidation fees. This was despite the fees sought exceeding HK$800,000. Nowhere in the correspondence mentioned does Aeso Holding deny that Shinewing was entitled to any fees above HK$800,000. In answer, Mr Chan stated that Aeso Holding was then adopting an “ostrich strategy”. The priority at the time was for Aeso Holding to be re-listed. That required Aeso Holding’s provisional liquidation to be ended and Mr Kan and Ms Hou to be released from acting as provisional liquidator as soon as possible. Mr Chan calculated that, if he were to insist on the fee cap arrangement at that juncture, there would inevitably be disagreements and disputes with the provisional liquidators. This would only delay the company’s release from provisional liquidation and defer its re-listing for an indefinite period. Therefore, until the company was re-listed, it was thought more prudent simply to delay payment on some pretext or other and for Aeso Holding, like an ostrich, to bury its head in the sand. Some payment was in fact made, but not more than the cap of HK$800,000. The company was re-listed on 31 July 2019.

A.2 Analysis

35.  I am not persuaded that Mr Kan and Ms Hou contractually agreed to cap their fees for the provisional liquidation of Aeso Holding at HK$800,000. In my view, however, there was an understanding among Mr Kan and Ms Hou on the one part and Mr Chan on the other that Mr Kan and Ms Hou would be keeping their fees at HK$800,000 as much as possible.

36.  First, there is no dispute that, at the meeting on 25 April 2018, Mr Chan met with Mr Kan to stress the importance of keeping the costs of the provisional liquidation low. Mr Chan stated that it would be possible to keep costs low, because all that was needed would be to “keep an eye” on the company. Senior management would essentially be running the day-to-day business of the company under the provisional liquidators’ oversight. Although Mr Kan did not have much more information to go by, Mr Chan insisted that he give a rough estimate of how much the provisional liquidation would cost. Mr Kan said that the provisional liquidation would be charged on a time-cost basis, but nonetheless gave a range of HK$500,000 to HK$800,000.

37.  In those premises, from an objective standpoint, the ordinary reasonable person would have understood that the estimated range given was a serious one. There would have been an understanding that the upper end of the range (HK$800,000) was to be adhered to as much as possible. Such understanding would not have ruled out the possibility of the provisional liquidators charging more than HK$800,000. But there would have to be compelling or extraordinary circumstances, justifying exceeding the limit of HK$800,000. Given the understanding, as a matter of common sense, the provisional liquidators should at the very least have (1) reverted to Mr Chan if they foresaw the possibility of exceeding the HK$800,000 limit and (2) explained why it was necessary to incur additional charges beyond HK$800,000. In this way, it would be possible to explore whether the additional charges envisaged could be mitigated or dispensed with completely. Given that Aeso Holding was a listed company, Mr Kan factored in what he regarded on 25 April 2018 as a generous estimate to cover compliance work. Consequently, the HK$800,000 would also have covered any standard compliance work which provisional liquidators would normally be expected to conduct in connection with a listed company.

38.  On the strength of that understanding, on the day after his meeting with Mr Kan, Mr Chan caused Mr Kan and Ms Hou to be put forward as provisional liquidators for Aeso Holding. Given Mr Chan’s concern over keeping costs down, if there had been no such understanding, it is difficult to explain why he acted as he did in that respect. In other words, while the provisional liquidators made it clear that they would be charging on a time-cost basis, that was not supposed to be the equivalent of a blank cheque.

39.  Second, the documentary evidence militates against the existence of an oral contract between Mr Chan and the provisional liquidators that fees would be capped at HK$800,000 with no room for adjustment, come what may.

40.  According to Mr Chan and Mr Yan, an oral agreement to charge no more than HK$800,000 was in place as from the meeting on 25 April 2018.

41.  However, on 5 May 2018 ONC emailed Shinewing: “As advised by Counsel, we have to submit a quotation for the services to be provided as provisional liquidators or receivers. We should be grateful if you could also let us have the same on Monday, 7 May 2018.” On 7 May 2018, Shinewing responded to ONC: “Please see the attached fee quote and proposed work scope for services to be provided by the PLs or Receivers, together with the hourly professional fees scale for Administrative Panel of Insolvency Practitioners for Court Winding-up (the Panel A Rates) for your consideration.” The attached fee quote put forward a fee range of between HK$500,000 and HK$800,000.

42.  Later that day, ONC emailed back:

“ We attach for your reference a copy of the Summons for the application for PLs [Provisional Liquidators] or Receivers with the scope of powers set out in Schedules 1 and 2 thereto respectively. The word file of Schedules 1 and 2 are also attached for your easy reference.

We should be grateful if you could amend the quotation based on Schedules 1 and 2 to the Summons. Thank you.”

43.  On the following day, Shinewing wrote back: “Please note that we are still working on the revised scope of work and fee quotation with reference to Schedules 1 & 2 of the Summons. Will send it to you as soon as possible. Thanks.” On the same day, ONC replied: “Since we have to file the affirmation tomorrow morning. We should be grateful if you could let us have the revised quotation before that.” Some six minutes later, Shinewing emailed: “Please note that our fee quote remains unchanged. Thanks.”

44.  If a fee cap had been contractually agreed on 25 April 2018, one asks rhetorically why ONC (Mr Yan’s firm) was asking whether Shinewing would be revising its fees in light of the more extensive scope of powers and work in Schedules 1 and 2 of the Summons? By similar token, if there had been a binding agreement, why would Shinewing have to consider whether the revised scope of powers and work necessitated a change in its fee quotation? The email exchange suggests instead that there was simply an understanding that Shinewing would be capping its fees to the range of HK$500,000 to HK$800,000. Shinewing having put in a fee quote on that basis on 7 May 2018, ONC was in effect asking by its emails whether the enhanced scope of the provisional liquidators’ powers and work in Schedules 1 & 2 of the Summons meant a corresponding increase in the fee range quoted by Shinewing. After consideration, Shinewing reverted that it would be sticking to the fee range originally quoted. It seems to me that Shinewing was thereby adhering to the understanding reached on 25 April 2018. I regard the foregoing email exchange as fortifying the inference of an understanding, as opposed to an iron-clad contract.

45.  Third, the circumstances underlying the later revision of the fee range to between HK$1.5 million and HK$2.5 million, strengthen the inference that there was an understanding. The evidence is that Mr Yan was in regular contact with Mr Kan prior to the appointment as provisional liquidator. That was for the purposes of emphasising the need to keep costs down and stick to the estimated range. When counsel expressed concerns about the range of HK$500,000 and HK$800,000 being too low, Mr Yan suggested to Mr Kan that the range be increased to improve the optics of the application for the provisional liquidation of Aeso Holding. Mr Kan straightaway agreed to Mr Yan’s proposed range. He did not ask for time to re-calculate Shinewing’s quotation of 11 May. This suggests that Mr Kan was simply accommodating counsel’s concerns as expressed to him by Mr Yan. The increased range was for external appearance (“on paper”) only. Internally, as far as Mr Kan was concerned, Shinewing’s original range of HK$500,000 to HK$800,000 remained the understanding. I shall more to say about this at the end of this Judgment.

46.  Fourth, I am unable to infer from the correspondence mentioned in [34] above, that no understanding had been reached between Mr Chan and Mr Kan on 25 April 2018. It seems to me entirely plausible that, given the importance of re-listing Aeso Holding as soon as possible, it decided to adopt an “ostrich” strategy, delaying any payment beyond HK$800,000 on some excuse or other as long as possible. I also accept that Mr Chan wanted further and better particulars of the provisional liquidators’ charges before making any payment above the cap of HK$800,000 and such details were slow in coming from Shinewing. When cross-examining Mr Chan and Mr Chiu, Mr Patrick Siu (appearing for the provisional liquidators) observed that the detailed grounds of objection which Aeso Holding initially submitted to the Taxing Master did not refer at all to an agreement or understanding that fees were to be capped at HK$800,000. Mr Siu suggested that the reason for this was because there was no such agreement or understanding. However, I do not think that I can infer the absence of an understanding from the failure to mention the same in the list of objections. Mr Chan responded (and I accept) that at the time Aeso Holding was pursuing a two-pronged approach. On the one hand it was querying the provisional liquidators’ bill item by item, while on the other it was pursuing the fee cap in correspondence with the provisional liquidators through Titus.

47.  In summary, for the foregoing reasons, I answer Preliminary Issue (1) as follows: Mr Kan and Ms Hou had on or about 25 April 2018 reached an understanding with Acropolis that, upon Mr Kan and Ms Hou being appointed as the joint provisional liquidators of Aeso Holding, they would cap the remuneration which they would be entitled to receive in respect of the said appointment at HK$800,000. Such understanding was along the lines set out in [37] above.

B. Preliminary Issue (2): If the answer to Preliminary Issue (1) is in the affirmative, whether the agreement or mutual understanding should be taken into account by the Court in determining Aeso Holding’s Application for Review of Taxation dated 17 February 2020?

48.  Provisional liquidators are officers of the court. Therefore, the fact that there was an understanding between the provisional liquidators and Mr Chan does not automatically mean that the court is bound by the understanding. The understanding cannot fetter the court’s discretion as to what would be a fair remuneration for the provisional liquidators as officers of the court. Nonetheless, the understanding will inevitably be a weighty factor to be considered in the court’s taxation of the provisional liquidators’ charges.

49.  As a general approach, when evaluating whether the fees charged by provisional liquidators are justified, the court asks itself the following questions (see Le Pichon J in Re Peregrine Investment Holdings Ltd [1998] 2 HKLRD 670, at 684G-J, applying the principles (sometimes referred to as “the Maxwell principles”) articulated by Ferris J in Mirror Group Newspapers Plc v Maxwell & others [1998] BCC 324):

(1) Have the provisional liquidators adduced sufficient evidence to explain the nature of each task undertaken and the considerations which led them to embark upon that task?

(2) Have the provisional liquidators linked the time spent to the explanation?

(3) Is the court satisfied that a reasonably prudent man faced with the same circumstances in relation to his or her own affairs, would have laid out or hazarded his or her own money in doing what the provisional liquidators have done?

(4) Have the provisional liquidators produced contemporaneous records of what they have done and why they did it?

(5) Have they produced contemporaneous records of all items of expenditure and of services rendered, how they were calculated and how they were justified?

(6) Should the fees for any item of work be disallowed as having been unnecessarily incurred?

(7) Should the fees for any item of work be disallowed as having been incurred in breach of duties?

50.  But the Maxwell principles are not an exhaustive list of the factors that a master can or should consider. As I pointed out at [24] in my Decision of 6 February 2024, Companies (Winding-Up) Rules (Cap 32H) Rule 28(3) states that a provisional liquidator is “entitled to be paid, out of the property of the company, all the costs, charges, and expenses properly incurred ... as provisional liquidator” (emphasis supplied). The Maxwell principles do not constrain what a court may examine when determining whether charges claimed by a provisional liquidator have been “properly incurred”. On the contrary, it would be odd if an officer of the court in the position of a provisional liquidator could simply disregard the understanding reached with Mr Chan and incur charges and expenses on a time cost basis, without reference to the estimated fee range provided. As a matter of principle, the master must be entitled to assess whether, given the understanding that their charges should to the extent possible be capped at HK$800,000, the provisional liquidators are properly claiming more than the cap.

51.  The provisional liquidators never approached Mr Chan to alert him to the possibility that their charges were likely significantly to exceed HK$800,000 and to explain why. No attempts were made (1) to discuss possible ways of minimising the ballooning of costs and (2) to scrutinise with Mr Chan which charges and expenses were truly necessary or unavoidable, and which could be mitigated in whole or part by taking particular measures. Thus, in taxing the provisional liquidators’ costs in light of the understanding, it seems to me that the master will have to assess the reasons for the cost overrun. More specifically, the master would have to determine whether the specific activities for which charges or fees are being claimed were truly necessary and the extent to which (if at all) such activities could have been mitigated or dispensed with altogether.

52.  In short, I would answer Preliminary Issue (2) as follows: The mutual understanding among the parties should be taken into account by the court in determining Aeso Holding’s Application for Review of Taxation. Taking account of the understanding would entail an evaluation along the lines sketched out in [37] and [51] above.

C. A matter of deep concern

53.  Before concluding, I express deep concern with the arrangement reached among Mr Chan, Mr Yan, and the provisional liquidators in relation to the revision of the liquidators’ fees to a range of HK$1,5 million to HK$2.5 million. This was done purely as window dressing. The fee quotation was “revised” to forestall any submissions by the opposing shareholders that (1) the original fee range was too low to be credible and (2) Acropolis was not intending for there to be a genuine provisional liquidation. Acropolis’ own senior and junior counsel were not told that, despite the apparent upward revision to the fee quotation, it remained Acropolis’ understanding that the provisional liquidators would not be charging more than the HK$800,000 upper limit that Acropolis’ counsel had queried. Certainly, the opposing shareholders were not told of the true position. More disturbingly, the understanding reached with the provisional liquidators was kept secret from the court itself.

54.  The court was thus misled, when appointing the provisional liquidators, into thinking that the latter were likely to cost more than the understanding reached with Acropolis. This lack of transparency is unacceptable. It should never have happened. In finding that there was an understanding and in holding that the master should take account of the same in taxation, I should not be taken to condone the misleading of the court. I have considered whether, since the court was misled, the understanding should be disregarded. But I have found the existence of the understanding to be a factual reality. I do not think that it can be ignored as a matter of law or discretion.

55.  Mr Jeff Yau (appearing before me for Acropolis and Aeso Holding) unreservedly accepted on behalf of his clients that the decision not to inform the court was entirely wrong. On instructions, Mr Yau only submitted by way of mitigation that, in acting as they did, Acropolis and Mr Chan were only thinking of the company’s best interests. But such consideration can never excuse a lack of frankness with the court. The court should have been informed of the real position from the outset. I hasten to add that Mr Yau was not himself involved in any way with the decision to conceal from the court the understanding between Acropolis and the provisional liquidators.

D. Costs

56.  The Applicants have essentially prevailed on the preliminary issues before me. They should in principle have the costs of the preliminary issues trial, including those of the hearing before me on 6 February 2024. The Applicants have incurred total legal costs of HK$343,279 in connection with the preliminary issues. That compares with total legal costs of HK$494,430 incurred by the provisional liquidators. The Applicants’ legal costs being approximately 70% of the provisional liquidators’ legal costs, I regard the Applicants’ legal costs as reasonable and proportionate. In those premises, there will be an order nisi that the provisional liquidators are to bear the Applicants’ costs of HK$343,279 in these proceedings.

IV. CONCLUSION

57.  I answer Preliminary Issue (1) as stated in [47] above and Preliminary Issue (2) as stated in [52] above. As to costs, there will be an order nisi as stated in [56] above.

Mr Jeff Yau, instructed by Titus, for the petitioner and the 14^th respondent

Mr Patrick Siu, instructed by Chow, Griffiths & Chan, for the former provisional liquidators of the 14^th respondent

HCCW 218/2017

[2024] HKCFI 482

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) PROCEEDINGS NO. 218 OF 2017

______________

______________

____________________

DECISION

____________________

I. INTRODUCTION

1.  There are three summonses before me: (1) a summons (Summons 1) to amend a List of Objections in a taxation review, (2) a summons (Summons 2) to join Acropolis as a party to the taxation review, and (3) a summons (Summons 3) for preliminary issues to be determined in conjunction with the taxation review.

II. Background

2.  In 2017, Acropolis petitioned for the winding up of the company Aeso Holding (the 14^th Respondent) on unfair prejudice and just and equitable grounds.  Provisional liquidators (Mr Terry Kan and Ms Anita Hou) were appointed by Deputy High Court Judge Le Pichon in May 2018.  Acropolis’ petition was dismissed in April 2019 by consent.  By that dismissal, the provisional liquidators were released from their duties and their remuneration was to be charged to Aeso Holding on a time-cost basis.  The order provided for such remuneration to be taxed by the court (along with the provisional liquidators’ disbursements) and then paid out of Aeso Holding’s assets. 

3.  The provisional liquidators submitted five bills for taxation.  On taxation, Master Hui allowed a total amount of HK$4,485,959.90, plus taxing fees of HK$112,527.  Aeso Holding having paid HK$689,772.76, a sum of HK$3,908,714.14 remained outstanding.  Since then, there have been court orders for Aeso Holding to pay some $2,872,838.50 to the provisional liquidators by way of interim payment.

4.  In February 2020, Aeso Holding applied for a review of the taxation by Master Hui.  For the purposes of such review, it submitted a List of Objections that it wished Master Hui to consider.

5.  There is a dispute between Acropolis and Aeso Holding on the one part and the provisional liquidators on the other as to whether, prior to the provisional liquidators’ appointment, they agreed with (or represented to) Acropolis that their remuneration would be capped at HK$800,000.

6.  In August 2022, Aeso Holding applied by Summons 1 to amend its List of Objections to include two “General Objections” to the effect that the provisional liquidators are:

(1)  bound by their fee quote of HK$800,000 given on or around 25 April 2018 to Mr Jones Chan of Acropolis, from asserting any claim for remuneration exceeding HK$800,000; and

(2)  barred from claiming items which are classified in the existing List of Objections as "internal administration" work, in light of an oral agreement reached with Acropolis on or around 25 April 2018 that the provisional liquidators were not expected to be actively or heavily involved in Aeso Holding’s management or operation following their appointment.

7.  At the same time, Acropolis applied by Summons 2 to be joined as party to the review before Master Hui.

8.  On 29 August 2022, by consent of the parties, Master Hui adjourned Summons 1 and 2 to a judge for directions.

9.  On 17 February 2023, Acropolis and Aeso Holding applied by Summons 3 for certain preliminary issues relating to the alleged fee cap to be determined in connection with the taxation review.  Summons 3 also asked for consequential relief against the provisional liquidators in light of the determination of the preliminary issues.

10.  On 2 May 2023 by consent, Harris J ordered Summons 3 to be heard substantively “not earlier than 19 July 2023”.  He also gave Acropolis and Aeso Holding leave to amend the proposed preliminary issues and consequential relief sought by Summons 3.

III.   Discussion

11.  Mr Patrick Siu for the provisional liquidators opposes all three summonses.  He submits as follows:

(1)  Only Master Hui has jurisdiction to determine the three summonses

(2)  Even if I have jurisdiction, the alleged Fee Cap Agreement has not yet been raised in the review proceedings, so there can be no preliminary issue regarding the Fee Cap Agreement. 

(3)  It is premature to order a trial of the preliminary issues, since Master Hui has not yet granted Aeso Holding leave to raise this argument and it is unlikely that Master Hui would give such leave because of the following matters:

(a)  The evidence “overwhelmingly” shows that there has never been any Fee Cap Agreement.

(b)  Even if there had been a Fee Cap Agreement, it has nothing to do with the Company and the Company cannot enforce it.

(4)  If the Company is to enforce the Fee Cap Agreement, it has to do so in a forum other than the review proceedings before Master Hui.

12.  I am unable to accept Mr Siu’s submissions.

13.  First, on jurisdiction, Mr Siu refers to Order 62, Rule 33(1).  That provides:

(1)  Any party to any taxation proceedings who is dissatisfied with the allowance or disallowance in whole or in part of any item by a taxing master, or with the amount allowed by a taxing master in respect of any item:

(a)  may apply to the taxing master to review his decision in respect of that item; and

(b)  may not apply to a judge for an order to review the decision until after its review by the taxing master.

14.  Mr Siu also draws my attention to Order 62, Rule 34(1) in the following terms:

(1)  A review under rule 33 shall be carried out by the taxing master to whom the taxation was originally assigned.

(2)  On reviewing any decision in respect of any item, a taxing master may receive further evidence and may exercise all the powers which he might exercise on an original taxation in respect of that item, including the power to award costs of and incidental to the proceedings before him; and any costs awarded by him to any party may be taxed by him and may be added to or deducted from any other sum payable to or by that party in respect of costs.

15.  Mr Siu argues that, in consequence of the two provisions, a party may not apply to a judge for an order to review a taxing master’s decision until after its review by the taxing master.  The review before Master Hui not having so far taken place, Mr Siu suggests that Aeso Holding can only raise the fee cap before Master Hui as part of the taxation review.  At that point Master Hui can decide whether to hear evidence on the fee cap and decide what procedure to adopt to resolve the dispute.

16.  My difficulty with Mr Siu’s argument is that neither Acropolis nor Aeso Holding are seeking to second guess the outcome of Master Hui’s review.  They are not suggesting that I carry out a taxation review in lieu of Master Hui.  They are simply proposing directions as to how Master Hui should conduct his forthcoming review.  More specifically, Acropolis and Aeso Holding are seeking:

(1)  by Summons 1, a direction that Master Hui take account certain matters when conducting the taxation review,

(2)  by Summons 2, a direction that Master Hui allow Acropolis to take part in the taxation review, and

(3)  by Summons 3, a direction that certain preliminary issues be determined in conjunction with the taxation review.

17.  It would be odd if I was precluded from making one or more of those directions when, at the behest and with the consent of Aeso Holding and the provisional liquidators, Master Hui adjourned Summons 1 and 2 to a judge (such as myself) for directions.  Summons 3 merely builds on Summons 1.  Logically, if certain matters (such as a fee cap agreement or representation) should be considered in the taxation, then at some point (ideally sooner rather than later) there should be a determination whether such matters actually took place.

18.  Second, Mr Siu notes that no leave has been granted to amend the List of Objections to date.  He contends that only Master Hui can decide whether to give such leave to Aeso Holding.  He suggests that it would be “premature” to consider whether to order preliminary issues since Master Hui may not even allow preliminary issues to be raised.  I do not believe that this argument is tenable for the reasons already articulated.  Master Hui adjourned Summons 1 to a judge for directions.  By determining at this stage whether the List of Objections should be revised, I would simply be giving the directions which Master Hui has requested.

19.  Third, I am unable to determine summarily that the evidence “overwhelmingly” militates against the existence of a fee cap agreement or an understanding that the provisional liquidators’ duties would only be light.  The existence or otherwise of a fee cap or understanding can only be determined at a trial, at which witness evidence from both factions is tested by cross-examination.  Some documents may on their face cast doubt on the existence of a fee cap arrangement.  But this by itself would not be a basis for concluding that there was no such arrangement.  I cannot rule out the possibility that, read in their proper context, the documents upon which Mr Siu relies have no bearing on the outcome of the preliminary issues.

20.  Fourth, the parties disagree on the extent (if at all) that Aeso Holding can rely on the fee cap arrangement, even if it existed.  Mr Siu’s argument is that any fee cap agreement or understanding would have been solely between Acropolis and the provisional liquidators.  Since the court has ordered that the provisional liquidators’ taxed fees are to be paid out of Aeso Holding’s assets, the existence of an agreement or understanding between Acropolis and the provisional liquidators would be an irrelevant consideration as between the provisional liquidators and Aeso.  To counter this, Acropolis and Aeso Holding rely on the Contracts (Rights of Third Parties) Ordinance (Cap 623) (the Ordinance).  Mr Siu says, however, that such reliance is misplaced.

21.  I do not think that I need to decide whether the Ordinance is applicable.  There is a simpler way (I suggest) of looking at the matter.  The provisional liquidators were discharging their duties as officers of the court.  If there was an agreement or understanding with Acropolis that they would limit their fees to HK$800,000 if appointed as provisional liquidators, it would be strange (whatever the niceties of privity of contract) if the court could not at the very least take such fact into consideration in the taxation of the provisional liquidators’ fees.  Otherwise, the court would arguably be facilitating unconscionable conduct by its officers, in allowing the provisional liquidators to resile from their agreement.  Thus, in deciding what to do with Summons 1 and the related Summons 3, the pertinent question is not whether Aeso Holding can enforce any arrangement or understanding between Acropolis and the provisional liquidators.  The crucial question is whether the existence of an arrangement or understanding should be a factor for the Master to take into account in the taxation review.

22.  Fifth, Mr Siu cites Companies (Winding-Up) Rules (Cap 32H) Section 28(3) which stipulates:

“ Subject to any order of the court, if no order for the winding up of the company is made upon the petition, or if an order for the winding up of the company on the petition is rescinded, or if all proceedings on the petition are stayed the provisional liquidator shall be entitled to be paid, out of the property of the company, all the costs, charges, and expenses properly incurred by him as provisional liquidator, including such sum as is or would be payable under the scale of fees in force for the time being where the Official Receiver is appointed provisional liquidator, and may retain out of such property the amounts of such costs, charges, expenses, and fees.”

23.  He comments that the provisional liquidators were not appointed pursuant to any contract with Acropolis or Aeso Holding, as opposed to under Section 28(3).  He posits that, normally, in assessing the remuneration due to provisional liquidators, the court will apply what are known as the Maxwell principles.  Under those principles, a court essentially asks itself whether reasonably prudent individuals, faced with similar circumstances in their affairs, would lay out their money in doing what the provisional liquidators have done.  Mr Siu suggests that Master Hui’s task in the review is simply to assess the reasonableness of the provisional liquidators’ costs by reference to the Maxwell principles.  He contends that Master Hui cannot deal with any contractual claim under the alleged Fee Cap Agreement. 

24.  My problem is that Section 28(3) refers to a provisional liquidator being “entitled to be paid, out of the property of the company, all the costs, charges, and expenses properly incurred ... as provisional liquidator” (emphasis supplied).  I do not see why in a taxation review a master cannot consider whether, given a fee cap agreement or understanding, a provisional liquidator is properly claiming more than the cap.  In the premises posited, I do not see how the Maxwell principles prohibit Master Hui from taking the agreement or understanding (is such exist) into account.  A reasonable person would arguably not continue incurring charges and expenses beyond amount X, if he or she has agreed to limit charges and expenses to amount X.

25.  In my view, it makes sense to order that there be a trial of preliminary issues along the lines suggested in Summons 3.  If there has been some sort of agreement or understanding, it is better to know that at the earliest opportunity, as it may have a bearing on the taxation review.  I will therefore make an order for preliminary issues under Summons 3.  But I have doubts whether the preliminary issues and consequential relief as currently drafted by Acropolis and Aeso Holding should be those which I order.  I will discuss with the parties in a moment: (1) whether the preliminary issues can be simplified and made more rigorous and precise, (2) what procedure should be followed for the determination of any preliminary issues ordered, and (3) what relief (if any) should be directed at this stage in consequence of any determination of the preliminary issues. 

26.  As already noted, Summons 1 and 3 are related.  Summons 1 will fall away if it is determined following the trial of the preliminary issues that there was no such agreement or understanding as Acropolis and Aeso Holding allege.  I will give an order along the lines of Summons 1.  But that would be on the understanding that, if Acropolis and Aeso Holding fail on the preliminary issues, the General Objection amendments to the List of Objections will fall away.  I say an order “along the lines” of Summons 1, because I am not satisfied with the wording of the current proposed amendments to the List of Objections.  I will also be discussing the wording of the proposed amendments with counsel shortly.

27.  On Summons 2, I do not think that there is a need for an order joining Acropolis to the taxation review.  The taxation review is part of (and bears the same case number as) the petition which Acropolis brought. Acropolis is thus already a party to the taxation review.  I would dismiss Summons 2.

28.  Following my discussions with counsel on the precise form of my order for preliminary issues and on the amendment to the List of Objections, I shall hear counsel on costs.

HCCW 218/2017 & HCA 1496/2017 (Heard Together)

[2018] HKCFI 510

HCCW 218/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 218 OF 2017

____________________

____________________

____________________

AND

HCA 1496/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1496 OF 2017

____________________

____________________

(By Original Action)

____________________

(By Counterclaim of 1st Defendant of Original Action)

____________________

(By Counterclaim of 5^th to 9^th Defendants of Original Action)

____________________

(HEARD TOGETHER)

____________________

D E C I S I O N

____________________

1.  On 18 September 2017 I directed that there be a case management conference (“CMC”) to address the future progress of a Petition issued by Acropolis Limited (“Acropolis”) and High Court Action no 1496 of 2017 (“theHCA”) also commenced by Acropolis seeking the same relief other than a winding-up order brought against W&Q Investment Limited (“WQ”). Both arise out of the listing on the GEM of The Stock Exchange of Hong Kong Limited (“Exchange”) of Aeso Holding Limited (“Company”). The CMC was intended to result in directions forboth the Petition and the HCA to proceed quickly to a joint trial. However, the Points of Defence in the HCA that were served on 4 January 2018 contain a counter-claim (“Counterclaim”) brought as a common law derivative action by WQ on behalf of Aeso against various parties associated with Acropolis arising, allegedly, out of events occurring after the matters, which are the subject of the claims in both the Petition and the HCA.

2.  On 26 January 2018 Acropolis issued a summons seeking to have paras 70 to 127 and prayers (1) to (18) of the Counterclaim stayed until after the resolution of the principal issue in both proceedings, which at risk of over-simplification is whether ornot the listing was fraudulent as the private placement by which it was achieved was manipulated by Liu Chang Kien in orderto give him control of the Company.  The Counterclaim concerns the propriety of a loan made by Dragon Success Enterprise Limited to the Company allegedly to assist in funding expenses, including the purchase of performance bonds, of the Company in connection with certain construction projects without, it is alleged, the approval by the board. The Counterclaim already forms a claim by the Company and WQ in HCA 1737 of 2017 and HCMP 1647 of 2017.  The Statement of Claim in those proceedings was filed on 3 January 2018.

3.  Although Mr Ronny Tong SC advanced various arguments on behalf of WQ and the 2^nd to 3^rd Respondents in the Petition proceedings as to why it would be wrong both as a matter of case management and in principle to stay the Counterclaim, it seems to me that the matter is in substance simply a case management matter particularly as the Company and WQ have already commenced proceedings, which they can progress if they want regardless of the Petition.  However, the determination of the claims in the Petition and the HCA may have a significant impact on the Counterclaim as WQ’s ability to prosecute a derivative action may cease as a consequence of orders made consequential on a finding that the placement was fraudulent.

4.  The parties’ views on the length of the trial vary. These estimates are necessarily rough given the preliminary stage of the proceedings. Acropolis thinks that seven weeks should be allowed excluding the Counterclaim it proposes is stayed.  As I understood Mr Tong, he is of the view that this would be sufficient to address the Counterclaim and it might be possible to conclude all issues in a shorter period. 

5.  It is desirable that the Petition is determined promptly in order that the Company’s status can be resolved, because it seems to me highly likely that if the listing was achieved through a fraudulent placement the Exchange will cancel it, if not I assume that the Company’s shares can recommence trading.  I note in passing that determining what is the appropriate relief if the court finds the placement was fraudulent will require some care and a consideration of the interests of innocent minority shareholders. It seems to me that the quickest and most efficient manner for the proceedings to continue will be for the Petition and the HCA to be tried together before the same judge, but that there be a split trial.  The issues other than the Counterclaim will be tried first and in respect of those issues there should be a speedy trial.  The Counterclaim will be tried subsequently.  The timetable for the Petition and the HCA should be synchronised.  There are already extensive directions in the HCA that were made by Chu J on 25 September 2017 and varied by Master Au-Yeung on 21 December 2017 dealing with all interlocutory stages up to and including witness statements and experts reports.  They did not, I assume, take into account the Counterclaim.  I will direct that a further CMC takes place to consider whether the directions already made need to be changed to reflect the introduction of the Counterclaim and my order that there be a split trial.

6.  I will make the following further directions largely directed to the Petition, which are substantially agreed by the parties:

(1)   The Plaintiffs in the HCA file their Reply and Defence to Counterclaim including the Counterclaim as defined above by 5pm on 28 February 2018.

(2)   The Petition do stand as Points of Claim.

(3)   The Respondents do file and serve Points of Defence by 5pm on 28 February 2018.

(4)   The Petitioner do file and serve Points of Reply by 5pm on 21 March 2018.

(5)   Costs of the CMC be in the cause of HCCW 218 of 2017 and HCA 1496 of 2017 respectively.

(6)   Acropolis’s summons to stay the Counterclaim be dismissed and the costs are the Plaintiff by Counterclaim’s costs in the Counterclaim.

  

  

HCCW 218/2017
[2018] HKCFI 37

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 218 OF 2017

________________

________________

________________

__________________

D E C I S I O N

__________________

1.  On 10 July 2017, the petitioner issued the present petition against the respondents seeking relief relating to the circumstances in which the 14^th respondent (“Company”) came to be listed on the GEM Board of the Stock Exchange of Hong Kong Ltd in January 2017 and in particular the placement of 50 million new shares by which the listing was achieved which constituted 25% of the enlarged capital of the Company.

2.  The petitioner alleges that a significant proportion of the placed shares were placed with persons associated with and acting in concert with Mr Liu Chang Kien and other persons named in the petition.  The reasons for so alleging are summarised in paras 19 to 21 of the petition:

“19. Further study shows that the distribution of the 50,000,000 shares was in fact highly concentrated.

(1) The distribution to the top 1, 5, 10, and 25 Placees was as follows.

	# of Shares	% in Company
Top Placee	6,400,000	3.20%
Top 5 Placees	27,685,000	13.84%
Top 10 Placees	41,635,000	20.82%
Top 25 Placees	49,160,000	24.58%

(2)   Of the 137 Placees, 83 were allotted only 1 board lot of shares each, i.e., 5,000 shares (at the placing price of $0.84 per share = $4,200); 17 were allotted 2 board lots, i.e., 100,000 shares (= $8,400).

(3)   Public information reveals that the 4 distributors had very unequal distributions.

	# of Shares	% in Company
Cinda	49,500,000	24.75%
Rifa	200,000	0.1%
Qianhai	200,000	0.1%
BMI	100,000	0.05%

20.   By any measure, the shareholdings were highly concentrated.  The top 7 shareholders (Acropolis, W&Q, and the top 5 Placees) already accounted for 88.84% of the total issued shares.  Moreover, immediately after the listing, 24.75% of the 25% of shares ostensibly in public hands were in fact under the watch of one securities firm, namely Cinda.

21.   Trading in the shares of the Company was illiquid and minimal.”

3.  On 13 July 2017, the petitioner issued a summons against Cinda International Securities Ltd (“Cinda”), a third party, who as can be seen from para 19(3) of the petition which I have quoted above, was one of the securities firms involved in the placement and, in particular, the placement of 49,500,000 shares.  The documents sought are identified in the schedule to the summons (“Schedule”) which I have appended as Schedule 1 to these reasons.  The petitioner is seeking documents, as can be seen from the Schedule, which identify the placees, and also would be likely to demonstrate whether or not the placees were taking the shares as part of their normal securities trading activities or whether they indicate that they may have been one‑off acquisitions which have been retained by persons who would act at the direction of Mr Liu or persons associated with him.

4.  The summons first came on before Mr Justice Anthony Chan on 19 September 2017 for a 15‑minute hearing.  By that time, Cinda had already agreed the terms of an order which is now contained in a letter that both parties have signed dated 2 January 2018, the material parts of which read as follows:

“(1) The Third Party (‘Cinda’), shall file and serve on the Petitioner an affirmation by one of its officers (the ‘Affirmation’) within 14 days stating whether it had and has in its possession, custody or power the documents and/or classes of documents as set out in Schedule 1 to the Summons (the ‘Documents’);

(2) For any Documents that Cinda has in its possession, custody or power, it shall through its solicitors, provide to the Petitioner’s solicitors copies of the same as soon as possible, but in any event within 21 days from the service of the Affirmation;

(3) For any Documents that Cinda had but no longer has in its possession, custody or power, it shall explain in the Affirmation how the Documents left its possession, custody or power;

(4) Any further or other consequential or incidental orders or directions be made as the Court considers appropriate;

(5) Costs of and incidental to this application and reasonable and necessary costs for complying with paragraphs (1) to (3) herein (including but not limited to the charges for retrieving and producing the Documents) be paid by the Petitioner to Cinda, to be taxed if not agreed.”

5.  At the hearing before Chan J, the 1^st to 4^th respondents were represented by counsel Mr Richard Yip, who informed the court that his clients’ position in respect of the application was neutral.  The 5^th to 16^th respondents were not represented, although they had been served with the summons and supporting affirmations. 

6.  At the hearing before me, the 5^th to 12^th respondents were represented by Mr Ian Chau, who opposed the application on broadly the following grounds:

(1) In the case of document categories 3, 6, 7 and 8 of the Schedule, the order was not necessary because the documents will be disclosed during the course of general discovery in a related High Court Action (“HCA”) in February 2018. 

(2) The application sought documents in respect of all placees, and the appropriate course was to first order the disclosure of documents which reveal their names and contact details in order that the placees could be informed of the application and given the opportunity to be heard if they so wished. 

A similar submission was made by Mr Yip.

7.  The relevant principles which govern applications for what is commonly referred to as Norwich Pharmacal relief is summariesd by Mr Justice Ma (as the Chief Justice then was) in paras 10 to 13 of his judgment in A Co v B Co:[1]

“10. Where innocent parties are caught up or have become involved in the tortious or wrongful activities of others, thus facilitating the perpetration (or continuation) of such activities, justice may require (and therefore the court may order) that such innocent persons come under a duty to assist the victim of the tort or wrongful activities, by the provision of full information even though such innocent persons cannot be shown to incur any personal liability at that stage. The foundation of the court’s jurisdiction here is its equitable jurisdiction. The court’s ability to make such orders was confirmed by the House of Lord’s decision in Norwich Pharmacal Co v Customs and Excise Commissioners [1974] AC 133: see in particular the speech of Lord Reid at pp.173F–175E. The principles and approach established by that decision have consistently been applied in Hong Kong.

11. The jurisdiction is a wide one. It is not restricted, as was at one time thought, to the disclosure of the names of wrongdoers only. In particular, where a plaintiff wishes to investigate the passage of monies in and out of bank accounts in aid of a tracing claim, discovery can be ordered of a bank’s books and documents: see Bankers Trust Co v Shapira [1980] 1 WLR 1274 at pp.1281F–1282F.

12. Though founded ultimately on notions of justice, nevertheless, it is important to emphasise the extraordinary nature of this relief because it is not a usual order and is not one that a court would lightly grant in the absence of powerful factors. I emphasise the following characteristics of this type of order:

(1) It is made against an innocent party whose only involvement is to become mixed up in the tortious or wrongful activities of others. There is, at that stage, no evidence of any wrongdoing on the part of the innocent party.

(2) Instead, whatever wrongdoing there is, exists only on the part of a person or persons against whom no relief may be sought at that stage and indeed against whom there is probably insufficient evidence to found an action. In other words, this person or these persons will most probably not be before the court and would not be able to answer what are often very serious allegations made against them.

(3) Usually, there will, moreover, exist a legal relationship between the innocent person against whom a discovery order is sought and the alleged wrongdoer and this relationship may involve strict duties to be observed on the innocent party’s part. The present case offers what is a common scenario: the innocent defendant is a bank and the alleged wrongdoers its customers. In this situation, any discovery to be made by the innocent party may well, apart from a court order, expose that innocent party to liability, both civil and possibly even criminal. At the very least, a breach of confidentiality is involved.

(4) The court, accordingly, in applications for Norwich Pharmacal relief must, in its discretion, balance the competing interests of the victim of the alleged wrongdoing and an innocent party caught up in the wrongdoing.

13. Given these characteristics as I have outlined, such orders are therefore not lightly made as I have said. In my view, it is essential for the court to bear the following in mind before a Norwich Pharmacal order is made:

(1) There must be cogent and compelling evidence to demonstrate that serious tortious or wrongful activities have taken place. And where fraud or similar serious allegations are made, the degree of proof must correspondingly be high: see Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 at p.586C–H. All the more so when the alleged wrongdoer is not and will not likely be before the court.

(2) It must also be clearly demonstrated that the order will or will very likely reap substantial and worthwhile benefits for the plaintiff. Where, as in the present case, the plaintiff is likely to make a tracing claim, there must be a serious possibility that the discovery sought must either allow the plaintiff to preserve what may well be his assets or realistically lead to the discovery of such assets: see Arab Monetary Fund v Hashim (No 5) [1992] 2 All ER 911 at pp.916D–E, 918J–919A.

(3) The discovery sought must not be unduly wide. There is no entitlement to general discovery (by general discovery is meant discovery in the Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co (1882–83) LR 11 QBD 55 sense): see Arab Monetary Fund v Hashim (No 5) [1992] 2 All ER 911 at pp.918D–E, 919H. It follows therefore that not only must any order be specific, it must also be restricted to those or those classes of documents that are necessary to enable the plaintiff to preserve or discover assets. This is not to say that discovery orders cannot be wide; what is important is that the discovery, whether wide or narrow, is necessary.”

8.  There is no dispute in the present case that the documents of which discovery is sought from the third party are relevant to the issues in the petition.  The issues arising from the submissions made by counsel for the respondents represented at the hearing focus on the way in which those documents should be obtained. 

9.  As I have already mentioned, in the case of the 5^th to 9^th respondents for which Mr Chau acts, and two other placees, it is suggested not all the documents need be disclosed by way of third‑party order because they will become available very shortly through general discovery in the related HCA.  As I understand the position of the 5^th to 9^th respondents having heard Mr Chau’s submission, there is no dispute that the documents in the four categories are relevant to the matters in dispute in the HCA, or currently any reason to think that the 5^th to 9^th respondents do not have either the originals or copies of those documents and will not be providing them in February to the petitioner.  This being the case, I accept that it is not necessary for those four categories of documents to be the subject of a third‑party order.

10.  The more difficult issue is whether the placees who are not respondents should be notified of this application because the documents that are sought may well contain information they consider confidential about their investments, and be given the opportunity to make submissions to the court if they see fit.

11.  Mr Chau took me to two authorities which he suggested demonstrated that the parties whose documents it is sought to obtain by applications of this sort are entitled to be notified of the application and be given the opportunity to be heard: Waddington Ltd v Chan Chun Hoo Thomas[2] and Bruce James Stinson v Gu Ming Gao.[3]

12.  I accept that there will be cases where it is appropriate to notify a person whose documents will be disclosed by a third-party order.  But it does not seem to me, as Mr Chau seemed to submit, that this is a hard-and-fast rule.  It will depend on the facts of each case, and involve balancing the interests of the interested party and the impact notifying the third party will have on the disclosure process in terms of time, efficiency, and costs. 

13.  In the present case this will involve, for example, balancing the interests of shareholders who only have one or two board lots of shares of small value against the cost and inconvenience not only to the petitioner and Cinda, but also the placees themselves of having to deal with invitations to agree disclosure of the documents that are sought.  It is certainly difficult to see the benefit of inviting placees who have one board lot, worth, I am told, approximately HK$10,000, as doing so is only likely to put the placees to inconvenience, expense, and possibly unnecessary anxiety for no material benefit.

14.  As Ma J explains in sub‑para 12(4) of his judgment quoted above, the court determining an application of this sort is exercising a discretion which necessitates balancing the competing interests of the victim of the alleged wrongdoing and an innocent party caught up in the wrongdoing. 

15.  In the present case the innocent party, I assume, is Cinda and quite possibly some of the placees who are genuine independent shareholders in the Company.  It seems to me that balancing the interests of the three interested groups, namely, the petitioner, Cinda, and the placees, the order that is sought is justified.  The documents subject to the application are, as I have already recorded, accepted as being relevant and indeed it can fairly be said central, to a resolution of the dispute.  The sooner they are produced and this petition and the related HCA can be brought to conclusion, and the affairs of the listed Company returned to normality (the Company’s shares are currently suspended), the better, and in the interests of the shareholders of the Company.

16.  It seems to me that disclosure of the documents, the use of which will be protected by the normal implied undertaking limiting their use by the petitioner, is in a case of this sort sufficient to protect the interests of the placees, and that nothing of materially greater benefit is likely to be achieved in terms of protecting those interests by introducing into this application an additional and possibly time‑consuming and expensive stage, namely, notifying the various placees of the application, explaining to them what it involves, and giving them the opportunity to address the court.

17.  As I understand it, subject to the qualification to which I have already referred, none of the parties object to the language of the order agreed by the petitioner and Cinda in the letter which I have quoted from.  I will therefore make an order in those terms subject to the insertion of a qualification into the Schedule excluding the four categories of documents to which I have referred in the case of the 5^th to 9^th respondents. 

18.  So far as the costs of the application are concerned, I will make a costs order nisi that the costs are costs in the cause.

Schedule 1: The Documents

In relation to the placing of shares (the “Shares”) in the 14^th Respondent (the “Company”) which took place on or around 12 January 2017 (the “Placing”):

Form D

(1)    The Form D (together with any annexures, attachments, enclosures, and supplements) which Cinda signed and lodged with the Stock Exchange of Hong Kong (“SEHK”) pursuant to Rule 10.12 of the Rules Governing the Listing of Securities on the Growth Enterprise Market (“GEM Listing Rules”).

List of Placees

(2)    The list settling [setting] out the names, addresses, and identity card or passport numbers (in the case of individuals) or registration numbers (in the case of companies) of all placees (the “Placees”), the names and addresses of the beneficial owners (in the case of nominee companies), and the amounts taken up by each such placee which Cinda supplied to SEHK pursuant to Rule 10.12 of the GEM Listing Rules and Note 7 to Form D.

Account Opening Documents of the Placees

(3)    Account opening documents for the accounts which the Placees had or have with Cinda (the “Placee Accounts”).

Marketing Communications for the Placing

(4)    Communications, including but not limited to emails, which Cinda made to its customers or some of its customers to inform them of the Placing and/or to solicit interest in subscription for Shares in the Placing. (For the avoidance of doubt, each communication and/or the description of it should show who sent it, to whom, and when it was sent.)

List of Interested Persons

(5)    A list setting out the names of persons who indicated an interest to Cinda to subscribe for Shares in the Placing (the “Interested Persons”) and the amount each person indicated to be interested in subscribing for.

Contract Notes for the Subscriptions

(6)    The contract notes relating to the Placees’ subscription of Shares in the Placing, as Cinda must prepare and provide to the Placees under Rule 5 of the Securities and Futures [(]Contract Notes, Statements of Account and Receipt[s]) Rules (Cap. 571Q) (the “Contract Notes Rules”).

Daily Statements if Margined Subscriptions

(7)    The daily statements of account for Placees who subscribed for Shares in the Placing by margined transactions, for the period from the Placing to date, as Cinda must prepare and provide to the Placees under Rule 8 of the Contract Notes Rules.

Monthly Statements of Account

(8)    The monthly statements of account for the Placees, for the period from December 2016 to June 2017, as Cinda must prepare and provide to the Placees under Rule 11 of the Contract Notes Rules.

Bank Statements

(9)    Bank statements for Cinda’s bank accounts showing deposits of funds into the accounts and the sources of the deposits for credit to the Placee Accounts during the period of December 2016 to January 2017.