What is in a Name? Provisional Liquidators, Liquidators and Ad Valorem Fees

Richard Tollan, Partner, Justine Lau, Senior Associate, Mayer Brown JSM

The entitlement of an Official Receiver to retain ad valorem fees on the conversion of a compulsory liquidation to creditors’ voluntary winding-up (“CVL”) was challenged in the recent matter of Re MF Global Hong Kong Ltd (unreported, [2015] CACV 251 and 252 of 2012, 2 March 2015) in which the Court of Appeal confirmed that ad valorem fees were payable on the conversion of the compulsory liquidations of two MF Global companies to CVLs.

The matter came before the Court of Appeal in the following manner.

The compulsory liquidations of MF Global Hong Kong Limited and MF Global Holdings HK Limited (“Companies”) were converted to CVLs by orders made by the Hon. Mr. Justice Harris in October 2012 (“Orders”). The Orders provided for the appointment of the then provisional liquidators (“PLs”) as liquidators of the Companies and for the realisations made by the PLs up to the date of the conversion to be paid to them as liquidators “without any deduction being made in respect of ad valorem fees pursuant to the Companies (Fees and Percentages) Order, such fees not being payable by a provisional liquidator appointed under s. 193 of the [then Companies Ordinance (Cap. 32)]” (ibid at §2) (emphasis added). The Official Receiver appealed on the basis that it should be entitled to ad valorem fees. The hearing turned on the question of whether the reference to “liquidator” in each of the relevant statutory provisions which prescribe the Official Receiver’s entitlement to ad valorem fees includes provisional liquidators appointed under s. 193 of the now Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CO”).

The argument advanced on behalf of the PLs and which was accepted by HarrisJ. at first instance was that having been appointed under s. 193 CO, the PLs were not “liquidators” within the meaning of s. 2(1) CO which defines “liquidator” as including “a provisional liquidator holding such office by virtue of s. 194”. As a consequence, they were not obliged to pay the substantial ad valorem fees on the amounts realised by them while acting as PLs; that obligation was statutorily imposed on “liquidators”. The PLs relied on an earlier decision of BarmaJ. (as he then was) in construing the meaning of “liquidators”. In the matter of Lehman Brothers Securities Asia Ltd (No.2) [2010] 1 HKLRD 58, his Lordship held in the context of an application for payment of interim fees incurred by provisional liquidators appointed under s. 193 CO that such provisional liquidators fell outside the definition of “liquidator” in s. 2(1) CO. His Lordship considered those provisional liquidators as not holding their office by virtue of s. 194 (ibid at 68–70). On this occasion, his Lordship reconsidered the interpretation which he placed on s. 2(1) CO in Lehman Brothers Securities Asia Ltd (No.2) [2010] 1 HKLRD 58 and confirmed that having given the matter much consideration “all three types of post-winding up provisional liquidators should be treated as being essentially similar in nature” and “notwithstanding that the provisional liquidators here were initially appointed under s. 193, following the making of the winding up orders in respect of the Companies, they held their office as post-winding up provisional liquidators by virtue of s. 194, and so are caught by the provisions [pertaining to ad valorem fees]…”. Although a substantial portion of the realisations were effected when the PLs were in office only by virtue of s. 193 Barma JA held this was not a justification for exemption. Ad valorem fees were payable as those realisations were held for the purpose of preserving the Companies’ assets pending the outcome of the petitions. It was only after the Orders, when the PLs would be appointed under s. 194, that they brought those realisations to account in the liquidations (unreported, [2015] CACV 251 and 252 of 2012, 2 March 2015, at §25, 28 & 29).

Yuen and McWalters JJA agreed, affirming that in Hong Kong, provisional liquidators continuing in office after the making of a winding-up order will be treated as “liquidators” for the purpose of the CO. As a final note, notwithstanding Barma JA’s view in this decision on the interpretation of s. 2(1) CO, his Lordship did confirm that the result in respect of interim payment of fees in Lehman Brothers Securities Asia Ltd (No.2) [2010] 1 HKLRD 58 was correct (unreported, [2015] CACV 251 and 252 of 2012, 2 March 2015, at §27).