Re Patrick Cowley And Lui Yee Man, Joint And Several Liquidators Of The Company

HCMP 373/2020

[2020] HKCFI 922

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANOUS PROCEEDINGS NO 373 OF 2020

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REASONS FOR DECISION

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1. On 27 April 2020 the liquidators of what, for reasons of confidentiality, I shall refer to simply as the Company, which is in voluntary liquidation, applied to the Court for a direction pursuant to s255 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”), or the following order:

“It is appropriate for the Applicant to enter into the agreement ….and that such agreement be approved.”

2. The agreement to which the summons refers is a funding agreement. It is because the liquidators wish, in my view properly, for its existence and details to remain confidential that in this decision I will not describe the liquidation and the background to the application. In any event, it is not material to the principal issues to which the application gives rise. They are:

(1) Whether it is necessary for the liquidators to obtain the court’s approval before entering the agreement; and

(2) If it is not necessary, in what circumstances can liquidators seek the court’s direction as to whether or not they may enter a funding agreement.

3. The liquidators have not made this application out of a concern as to the lawfulness of the terms of the agreement. They have been advised that it is necessary in the light of certain statements that appear in two cases concerning the need for court’s approval of a funding agreement. The first is a decision of Peter Ng J in Osman Mohammed Arab & Anor v Chu Chi Ho Ian [1]. This concerned an application to remove a trustee in bankruptcy. One of the grounds relied on as demonstrating the trustee’s bias against the applicants was their refusal to reveal the identity of the funder under a funding arrangement. In addressing this ground Peter Ng J says this in [47]:

“47. As it is well-known to insolvency and bankruptcy practitioners, the sanction of the court is required for such funding agreements, even if signed, to take effect. Under section 82(3) of the Ordinance, the Trustees may apply to the court for directions in relation to any particular matter arising under the bankruptcy. It is common practice for trustees to apply for sanction under that section on an ex parte basis, sometimes simply in writing, as observed by Harris J in re Cyberworks Audio Video Technology Limited [2]in the context of corporate insolvency.”

This observation was obiter. It has no significance to Peter Ng J’s reasoning in rejecting this complaint as demonstrating bias. The Judge does not explain why the sanction of the court is necessary. In a recent comprehensive judgment of Marlene Ng J dealing with a proposed agreement to fund a party in matrimonial proceedings, Re A [3], her Ladyship reviews the Hong Kong authorities starting with my decision in Re Cyberworks Audio Video Technology Ltd [4]. Her Ladyship says this at [178]:

“178. The above analysis clearly shows the distinction between these cases and the Husband’s application for pre-clearance declaratory sanction for the proposed third party funding. Liquidators and trustees-in-bankruptcy who are officers of the court and who act on behalf of the creditors are in a privileged position as a result of their duty to realise the insolvency estate often in circumstances where there are no assets to fund such exercise. Their need to have approval of funding arrangements by, say, assignment of causes of action for value, are recognised and provided for by statutory rules, so even though assignment of a bare right to litigate is frowned upon as raising questions of maintenance and champerty (ie undesirable trafficking in litigation), liquidators and trustees-in-bankruptcy in exercise of their statutory duty are entitled to assign a right of action that excludes the doctrines of maintenance and champerty.”

4. Marlene Ng J does not identify the statutory rules, which she has in mind. It maybe that it was assumed that because there is a series of decisions in liquidation cases commencing with Re Cyberworks in which the Companies Court has approved funding agreements that it was assumed by counsel appearing before the two Judges or the Judges themselves, that the Court’s approval is necessary. As I will demonstrate in the next section of this decision this is not accurate. In [5]–[10] I explain in what circumstances the court’s sanction is required and in [13]–[14] I address the more general question of the circumstances in which the court’s approval of a proposed funding agreement can properly be sought.

Is the Court’s sanction of a funding agreement required?

5. Broadly stated, the principal functions of a liquidator of an insolvent company are to obtain and realise property and rights of economic value and distribute the proceeds on a pari passu basis amongst its preferential and unsecured creditors. The Ordinance specifies certain acts, which a liquidator is likely to be required to undertake during a liquidation that require the sanction of the court and others that do not. The Company is in voluntary liquidation and consequently, the liquidators’ powers are derived from s251 of the Ordinance. Section 251(1) provides:

“(1) Subject to section 243A, a liquidator may—

(a) exercise any of the powers specified in Part 1 of Schedule 25—

(i) in the case of a members’ voluntary winding up—with the sanction of a special resolution of the company; and

(ii) in the case of a creditors’ voluntary winding up—with the sanction of the court or the committee of inspection or, if there is no such committee, a meeting of the creditors;

(b) without sanction, exercise any of the other powers by this Ordinance given to the liquidator in a winding up by the court;

(c) exercise the power of the court under this Ordinance of settling a list of contributories, and the list of contributories shall be prima facie evidence of the liability of the persons named therein to be contributories;

(d) exercise the power of the court of making calls;

(e) summon general meetings of the company for the purpose of obtaining the sanction of the company by special resolution or for any other purpose he may think fit.”

6. Part 1 of Schedule 25 specifies the powers of liquidators in both voluntary liquidations and a winding-up by the Court. In the case of a winding-up by the Court the relevant section is s199, which provides in sub-sections (2) to (4).

“(2) A liquidator may exercise any of the powers specified in Part 1 or 2 of Schedule 25 only with the sanction of the court or the committee of inspection.

(3) Except as provided in subsection (4), a liquidator may exercise any of the powers specified in Part 3 of Schedule 25.

(4) A liquidator (other than the Official Receiver) may only exercise the power specified in item 8 of Part 3 of Schedule 25—

(a) with the sanction of the court or the committee of inspection; or

(b) without the sanction if the liquidator has, before exercising the power, given at least 7 days’ notice of the intention to exercise the power—

(i) (if there is a committee of inspection) to the members of the committee; or

(ii) (if there is no committee of inspection) to the creditors.”

7. Schedule 25 is comprehensive, but does not refer to funding agreements. Paragraph 2 of Part 2 provides that the liquidators may (in the case of a winding-up by the Court with the sanction of the Court or the committee of inspection) “Carry on the business of the company, so far as may be necessary for its beneficial winding-up”. Paragraphs 1 and 5 of Part 3 give liquidators in both voluntary liquidations [5] and a winding-up by the court the following powers:

“1. Sell the real and personal property and things in action of the company by public auction or private contract, with power to transfer the whole of the property and things in action to any person or company, or to sell them in parcels.

…

5. Raise on the security of the assets of the company any money requisite.”

8. Re Cyberworks concerned a funding agreement, which was structured so that the cause of action was assigned by the Company to the funder. As I explain in [5]–[6] of my decision in Re Cyberworks a cause of action is property of the company, which the liquidators have power to sell, by assignment where applicable, to a third party. It is not necessary for the liquidators to obtain the sanction of the court to the sale. In my view, the fact that the consideration for the assignment is the right to receive a proportion of any recovery in anticipated litigation to enforce the right assigned does not change the nature of the transaction so as to require a liquidator to find some power other than that granted in Part 3, paragraph 1 to support his right to enter the funding agreement. This being the case, it is not necessary for a liquidator in either a voluntary liquidation or a winding-up by the court to obtain the court’s sanction of a funding agreement, which involves the sale of a chose in action in return for a right to participate in the proceeds of successful litigation to enforce the chose in action.

9. Not all funding agreements involve an assignment of the relevant chose in action. In Re...