Discharging Court appointed interim receivers in Hong Kong

In the very recent, but complex, case of Achieve Goal Holdings Limited v Zhong Xin Ore-Material Holding Company Limited (HCA 1987/2005), the Court of First Instance has reminded us of the high threshold imposed in discharging Court appointed interim receivers.  The Court will not easily discharge a receiver, particularly if their duties are onerous, or where they have become so well acquainted with the company's business and affairs that their removal may not be in the company's best interest.

Background

This application was part of an on-going joint venture dispute which dated back to 2005.  Because of the dispute, a deadlock in the management of a joint venture company (the "Company") arose, leading to the Court of Appeal appointing interim receivers on 7 November 2008 to manage the Company.

In June 2009, with the exception of a dissenting shareholder of the Company ("Clarigain"), the parties in the dispute reached a settlement which was sanctioned by the Shaanxi Court (the "PRC Settlement Order").

The interim receivers took the view that the PRC Settlement Order was invalid (as being entered into without the Company’s knowledge and by its lawyers without instructions) and not in the best interests of the Company.  They refused to comply with the PRC Settlement Order, and appealed twice against it unsuccessfully, before applying to the PRC Supreme People's Court for reconsideration. While the reconsideration application was pending, the interim receivers entered into another settlement in May 2012 (the "2012 Settlement") with the other parties in the dispute ("Applicants"). The parties to the 2012 Settlement agreed that they would not comply with the PRC Settlement Order.

In March 2013, the Supreme People's Court dismissed the interim receivers' application and upheld the validity of the PRC Settlement Order.  In July 2013, the Applicants applied for removal and replacement of the interim receivers.  Clarigain opposed the application.

The dismissal application

The Applicants based their dismissal application on the grounds that the interim receivers:

1. failed to act in the best interest of the Company by refusing to comply with the PRC Settlement Order; and
2. were conducting themselves in a way which was, or reasonably perceived to be, in close collaboration with one camp of shareholders, which compromised their neutral position. In particular, that the interim receivers acted upon the instructions of the Clarigain group of shareholders.

Principles for discharge or removal of receivers

In her decision dated 1 September 2014, the Hon Au-Yeung J noted that a Court-appointed receiver is expected to observe an exacting standard of fair conduct and high-mindedness, and set out the following principles:

1. the Court may discharge a receiver if it is just to do (e.g. where the original appointment should not have been made or if default, misconduct or other ground for unfitness is shown). Where the receivers have honestly done their best but failed to discharge their duties by reason of such duties' onerous and irksome nature, the Court will be slow to condemn or discharge them;
2. the Court does not lightly remove its own officers and will, amongst other considerations, pay due regard to the impact of removal on their professional standing and reputation. The onus of proof on an applicant will not be easy to discharge where the receiver has become well acquainted with the business and affairs of the company.  Even if grounds for removal are made out, it is also necessary to take into account the disadvantages that would arise from the removal in terms of costs and delay; and
3. an applicant does not need to make out a case of actual bias. Apparent bias or conduct that was reasonably perceived to be unfair and biased against one party would be sufficient.

Analysis and findings

Hon Au-Yeung J dismissed the application. On considering the two grounds of the application, she held that:

1. the interim receivers' concerns that led to their refusal to comply with the PRC Settlement Order were justified.  The fact that these concerns were dismissed by the PRC Courts could not by itself create doubt about the good faith of the interim receivers when carrying out their duties.  The 2012 Settlement was the best result that the interim receivers could have achieved, even if the PRC Settlement Order had been complied with. As such, the interim receivers acted in the Company's best interest; and
2. the interim receivers were at liberty to receive information from anyone, and there was no evidence that the Clarigain camp had influence on their decisions.   The Court also dismissed the complaint that, in the PRC proceedings, submissions made by the interim receivers' lawyers that frequently referred to the interests of the Claigain camp of shareholders amounted to apparent bias.

Commentary

This case provides a useful restatement, and is a timely reminder, of the principles and considerations that the Court will take into account in an application to discharge an interim receiver.  In particular, the Court will:

1. look at any question of default on the part of the receivers in light of the nature of their duties in managing the company, whether the interim receivers' task is "irksome", and the potential disadvantages of removing a receiver who has become well-versed in the business and affairs of a company; and
2. consider these questions even if grounds for removal are made out.  Even if the Court observes that the interim receivers could have done better, it would not "keep a score sheet" and decide if they have done well in respect of each particular step they take.

An application to discharge interim receivers ought to be brought at or around the same time as the conduct complained of, as any undue delays will likely harm the prospects of any such application.

If you wish to discuss about discharging court appointed interim receivers or generally about the topic, please contact Gareth Thomas or Damien Whitehead of our Hong Kong Dispute Resolution team.