Introduction

When a company is under liquidation, liquidators have the authority to act on behalf of the company and liquidators’ decisions are usually binding on the company, including not contesting actions against the company. If shareholders or creditors disagree with such acts or decisions of the liquidator, can they challenge such acts or decisions? How should such challenge be made?

The Joy Rich Case

In a recent decision of Revelry Gains Ltd v Joy Rich Development Ltd HCMP 430/2013 (the “Joy Rich Case”), the applicants (“C&C”) applied by a joinder application to intervene to conduct defence on behalf of the company and the court rejected such application by reason that the application was made on a wrong basis. 

Facts

Revelry Gains Ltd (“Revelry”) brought an action against Joy Rich Development Ltd (in liquidation) (“Joy Rich”) to recover a debt and enforce a charge against Joy Rich (the “Action”). The liquidator has indicated that they would not contest the Action. C&C were creditors of Joy Rich and one of C&C was the sole shareholder of Joy Rich.

The Decision

Without deciding on whether Joy Rich had an arguable case against the Action, the court ruled that the application should be made under section 200(5) of the Companies (Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“C(WUMP)O”) to impugn the decision of the liquidators or to apply for leave to defend the Action in the name of Joy Rich, and should not be formulated as a joinder application.

Since the application was badly formulated, and caused Revelry to incur unnecessary time and costs, C&C were ordered to pay costs of and occasioned by the summon for the application on an indemnity basis.

Section 200(5) of C(WUMP)O

Section 200(5) of C(WUMP)O stated that:

“If any person is aggrieved by any act or decision of the liquidator, that person may apply to the court, and the court may confirm, reverse, or modify the act or decision complained of, and make such order in the premises as it thinks just.”

This section gives the power to the court to supervise and interfere with the acts and decisions of the liquidator.

The test

In order for the court to exercise its power to interfere with the acts and decisions of the liquidator, the applicant must be a person aggrieved by the acts or decisions of the liquidator and must demonstration that the liquidator either:

1.       has not exercised his power in good faith or has acted in a way in which no reasonable liquidator could have acted; or

2.       made a ruling or decision in the course of the administration which directly affected a party’s right and has not acted even-handedly as an impartial neutral.

An example of successful challenge

In the case of Re Greater Beijing First Expressways Limited HCCW 338/2000, the applicant (the “Applicant”) successfully challenged the decision of the liquidator (the “Liquidator”) of Greater Beijing First Expressways Limited (in liquidation) (the “Company”).

Facts

The Applicant was the sole shareholder of the Company and was a sub-ordinated creditor for an amount over US$110 millions. The Liquidator has refused to sell some causes of action held by the Company (the “Causes of Action”) to the Applicant. The Applicant was seeking an order from the court to direct the Liquidator to assign the Causes of Action to the Applicant.

The Decision

Since the Company would have no money to pay the Applicant, it seemed that pursuing the claims under the Causes of Action would be the only way for the Applicant to compensate its loss. The Liquidator refused to assign the Causes of Action to the Applicant, the Applicant was clearly a person aggrieved by the decision of the Liquidator.

The court found the refusal to assign the Causes of Action to the Applicant could be regarded as a decision that no reasonable liquidator could have made for the following reasons:

1.       Even the Causes of Action had low prospect of success with weak evidence and the Liquidator had decided not to pursue such claims, it does not mean that the Liquidator should refuse to assign the Causes of Action to the Applicant who was willing to pursue them;

2.       The fact that the price was low is not a sufficient reason to refuse the assignment;

3.       The Liquidator should not speculate on the motive of the Applicant in seeking to acquire the Causes of Action; and

4.       The Liquidator should not speculate whether the Applicant would genuinely pursue the claims under the Causes of Action.

The court ordered the Liquidator to assign part of the Causes of Actions unless the Liquidator could obtain a better offer within 14 days.

Conclusion

Section 200(5) of C(WUMP)O empowered the court to supervise the acts and decisions of liquidators and to assist person aggrieved by the acts and decisions of the liquidators. However, intended applicants are reminded to properly formulate their applications to the court to avoid unnecessary time and costs.

 

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: insolvency@onc.hk                                   T: (852) 2810 1212 W: www.onc.hk                                             F: (852) 2804 6311 19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2017