To ask or not to ask? That is the question

In Joint And Several Provisional Liquidators Of Hsin Chong Construction Co Ltd (Provisional Liquidators Appointed) v. The Chinese University Of Hong Kong And Others [2020] HKCFI 2434, the Hong Kong Court of First Instance dismissed the provisional liquidator’s application for directions on the distribution of funds, and explained that an application under section 200(3) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) is reserved for cases where a genuine difficulty arises in the course of the liquidation, as where the liquidator or provisional liquidator's proposed decision is being criticised by a creditor as being unreasonable or evidence of bad faith.

The Court of First Instance's decision was reversed by the Court of Appeal on 25 October 2021.  See our blog post on the Court of Appeal's decision.

Background

The first respondent (First Respondent) was the employer under a building contract. It engaged the company (Company) to act as the main contractor in the construction of student hostels at two sites (Main Contract). The second to seventh respondents (Second to Seventh Respondents) were sub-contractors engaged by the Company to perform certain works under the Main Contract; the Company entered into sub-contracts in identical terms with each of the Second to Seventh Respondents (Sub-Contracts).

Provisional liquidators (PLs) were appointed over the Company.

On the PLs’ request, the First Respondent settled all payments due to the Company under the Main Contract, including the sums payable to the Second to Seventh Respondents under the Sub-Contracts.

The PLs sought directions from the Court under section 200(3) as to whether the PLs should make any contributions to the Second to Seventh Respondents (being the nominated sub-contractors) out of funds received from the First Respondent.

Decision

The Court emphasised that section 200(3) is concerned with action which is future at the time of application being heard, and that an application for "directions" under section 200(3) should not lightly be made as liquidators and provisional liquidators (with prior sanction of the Court) are entitled to engage solicitors or counsel to advise them, can then consider the advice given and decide what is the appropriate course without having to incur time and costs in making an application to the Court, particularly so when it is within their power to make the decision and carry out what they consider to be necessary for the protection of assets.

The Court reminded the PLs that they were appointed over the Company pending determination of the petition, and therefore an application under section 200(3) should not be made without the prior sanction of the Court - as the Order under which they were appointed required them to seek prior sanction of the Court before they commenced or defended proceedings.

The Court reiterated that an application under section 200(3) is reserved for cases where a genuine difficulty arises in the course of the liquidation, as where the liquidator or provisional liquidator's proposed decision is being criticised by a creditor as being unreasonable or evidence of bad faith or where they have been confronted with charges of acting unreasonably.

In the current case, the Court considered that when the PLs requested the First Respondent to settle all payments, the PLs already decided, far from having any difficulty or uncertainty, that the money was an asset of the Company and should be paid to the Company, and no one had criticized the PLs' decision or intimated that they would take step to challenge their decision. The Court considered that it was within the PLs’ powers to make the decision and carry out what they considered to be necessary for the protection of the Company’s assets. The Court therefore dismissed the PLs’ application for directions under section 200(3).

Comments

Liquidators are sometimes tempted to make a section 200(3) application for the Court’s directions to protect themselves. However, they should bear in mind that a section 200(3) application should not be lightly made, and should be reserved for cases with genuine difficulty in the course of a liquidation.

Provisional liquidators should check their terms of appointment carefully – if their terms of appointment provide that they should seek prior sanction of the Court before commencing/defending proceedings, then they will need the prior sanction of the Court before they can apply to Court for directions.