Hong Kong Court holds that commercial decisions in a voluntary winding up fall in the remit of a liquidator

We previously wrote about the Court’s attitude to liquidators’ applications for directions on matters arising in a compulsory winding up (i.e., by the court) under section 200 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap. 32 (CWUMPO) (see our articles here and here). For voluntary winding ups, a similar provision, being section 255 of CWUMPO, applies. A recent decision illustrates the Court’s approach to a section 255 application by a liquidator.  As this case shows, the Court’s approaches to the two sections have much in common.

Background

In Joint and Several Liquidators of Hong Kong Universal Jewellery Ltd v Fu Hap Enterprises Ltd, Hong Kong Universal Jewellery Limited (the Company) was in members' voluntary liquidation (i.e. solvent winding up) and had substantial inventory, cash, and some real property. The Company had four members, each owning 25% of the Company’s shares.  The members had differing views on the best way of dividing the Company’s assets.

The liquidators of the Company (the Liquidators) applied to the Hong Kong Court of First Instance (the Court) for directions pursuant to section 255 of CWUMPO, with a view to obtaining the Court’s assistance in deciding how the differences between the members should be resolved, and how the Company’s assets were to be realised and distributed between them (the members were the Respondents in this application).

Decision

The Court held that the application for directions had not been framed in the appropriate manner since it failed to precisely state what directions the court was being asked to make. The Court also found that the Liquidators' position on real property distribution lacked clarity.

The Court explained that a liquidator cannot use section 255 to seek the endorsement of the court to a proposed course of action simply because the liquidator is uncertain about its appropriateness. A liquidator must conduct a liquidation exercise using their own professional expertise and judgement and cannot seek the Court’s approval on what is largely a matter of commercial judgment.

The Court further observed that modern common law insolvency regimes were intended to allow liquidators to conduct liquidations without the close supervision of the courts. The Court emphasised that the commercial decisions of liquidators are accorded great weight, and that courts are generally slow to interfere with such decisions. Typically, the Court will only interfere in two categories of cases: (i) where the liquidator has not exercised his powers in good faith or has acted in a way in which no reasonable liquidator could have acted; and (ii) where the liquidator has failed to act even‑handedly as an impartial neutral when making a decision which directly affects a party’s rights.

Therefore, the Court laid down the following principles and consequences as regards a section 255 application:

1. A direction sought from the court pursuant to section 255 must formulate a proposed decision or precise issue which calls for the Court to exercise some legal judgment. It is not permissible or appropriate to simply ask for unspecified directions.
2. If the court’s endorsement of a proposed course of action is sought, the court will approve it unless it is demonstrated that it has not been made in good faith or that it is one that no reasonable liquidator should make after proper consideration of the relevant facts and matters.
3. Section 255 applications are not an opportunity for a contributory or creditor to lobby the Court for a different decision, or an alternative course of action. Such persons should only actively participate in a section 255 application if they are objecting to the proposed plan, which they should only do if there are grounds to challenge the liquidator’s good faith or the rationality of the decision.

Since the application in the present case sought the advice of the Court on a commercial matter which did not call for exercising any legal judgment, the Court found it to be clearly defective and dismissed it accordingly.