We have previously reported that the Official Receiver retains its entitlement to ad valorem fees on the conversion of a compulsory liquidation  to a creditors’ voluntary winding-up (CVL).

This entitlement was challenged in the recent matter of Re MF Global Hong Kong Ltd1 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 Honourable 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 section 193  of the [then Companies Ordinance, Cap 32]”2  (emphasis added). The Official Receiver appealed on the basis that it should be entitled to its 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 section 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 Harris J at first instance was that having been appointed under section 193  CO, the PLs were not “liquidators” within the meaning of section 2(1) CO which defines “liquidator”  as including “a provisional liquidator holding such office by virtue of section 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 Barma J (as he then was) in  construing the meaning of “liquidators”. In the matter of Lehman Brothers Securities Asia Ltd  (No.2)3, his Lordship held in the context of an application for payment of interim fees incurred by  provisional liquidators appointed under section 193 CO that such provisional liquidators fell  outwith the definition of “liquidator” in section 2(1) CO. His Lordship considered those  provisional liquidators as not holding their office by virtue of section 1944.

On this occasion, his Lordship reconsidered the interpretation which he placed on section 2(1) CO  in Lehman Brothers Securities Asia Ltd (No.2)5 and confirmed that having given the matter much  consideration he:

…would accept that the difference between the position of provisional liquidator in the periods  before and after the making of the winding up order is such that all three types of post-winding up  provisional liquidators should be treated as being essentially similar in nature, and so subject to  the same treatment [in respect of the requirement to account to the Official Receiver for ad valorem fees] under the CO… 

…notwithstanding that the provisional liquidators here were initially appointed under section 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 section 194, and so are caught by the provisions [pertaining to ad valorem  fees]…

I also note that a substantial portion of the realisations were effected in the period prior to the  making of the winding up order, when the provisional liquidators were clearly in office only by  virtue of section 193. I do not think, however, that this provides a justification for exempting  the realisations made in that period from the ad valorem fee. While in office under section 193 prior to the determination of the winding up petitions, the liquidators made and held such  realisations for the purpose of preserving the Companies’ assets pending the outcome of the  petitions. It is only after the making of the winding up order (when they will be holding office by  virtue of section 194) that they would have brought such realisations to account in the respective  liquidations...6

Appeal Justices Yuen and McWalters agreed with Barma JA on this interpretation of section 2(1) CO,  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 section 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)7 was correct8.