Did you know... that the court may, in special circumstances, exercise its discretion to appoint pre-existing receivers as a company’s provisional liquidators.
In the recent decision of Re K Vision International Investment (Hong Kong) Limited, the Honourable Mr. Justice Barma confirmed that, where the circumstances require it, the court will exercise its discretion to appoint pre-existing receivers of a company’s assets as that company’s provisional liquidators provided that potential conflicts of interest are identified and appropriately addressed.
The possibility that the same insolvency practitioner may be appointed in more than one capacity in respect of a company and its assets was considered in the earlier decision of the Honourable Madam Justice Kwan (as she then was) in the matter of Re Orient Power Holdings Limited. In Re Orient Power, the court held that it was appropriate, in the special circumstances of the winding-up of Orient Power Holdings Limited (“Orient Power”), for one of the receivers and managers of Orient Power to also be appointed as a liquidator (together with two independent appointees of a different firm of accountants). Her Ladyship made the following observations in making the appointment order:
- as practitioners are aware, whilst a liquidation is a class action designed to protect the interests of a company’s unsecured creditors, a receivership is an entirely different creature, designed only to protect the interests of secured creditors. Accordingly, as the interests of a receiver and a liquidator will necessarily be different and in many cases conflicting, the same person who acts as receiver will not usually be appointed liquidator;
- the court has, in some situations, taken a pragmatic approach and appointed an individual as liquidator despite that person’s prior involvement with the company that is the subject of winding-up proceedings. The rationale for these appointments has been expediency, to promote efficiency and avoid delay and to save costs;
- taking large group insolvencies (as was the case in Re Orient Power) as an example of how the pragmatic approach might be applied, the benefits of appointing common liquidators to companies within a corporate group must be weighed against the potential for conflicts of interest arising within the group and “...where it is possible to manage the conflict effectively by appropriate measures depending on the circumstances of each case...”, appointments may be made. The same principles are applicable in determining whether one insolvency practitioner can effectively “wear two hats”;
- on the facts before her Ladyship, the powers of the receiver and manager (if he was also to be appointed a liquidator) would be curtailed such that certain of his powers as liquidator would only be exercisable with the approval of the other two liquidators (who would form a majority). Moreover, should a conflict arise that is unable to be resolved with the independent liquidators, the matter would be referred to the court for directions; and
- her Ladyship acknowledged that “[a]part from the question of expenses for the ‘re-education’ of new liquidators...and the implication on efficiency, there is the difficulty of replicating the knowledge acquired by the Receivers given the passage of their information would still be available...” such that in the special circumstances of the case, the appointment was appropriate.
As for the possibility that her decision would result in the opening of the floodgates as regards practitioners seeking approval to be appointed over companies in more than one capacity, her Ladyship emphasised that “...the circumstances here are special and each case would be closely scrutinised to see to it that the liquidator appointed is in the best interests of all persons interested in the winding up.”
The Honourable Mr. Justice Barma appears to have adopted the pragmatic approach approved by her Ladyship in Re Orient Power in approving the appointment of the existing receivers as the provisional liquidators of K Vision International Investment (Hong Kong) Limited (“Company”) on the following grounds:
- that the receivers, who had been acting as such for a period of around six weeks prior to the application for the appointment of provisional liquidators, would resign from their position as receivers if they were approved by the court as the Company’s provisional liquidators, thereby avoiding any possibility of conflict of interest; and
- there would be some saving to the creditors of the Company in terms of costs and time if the receivers were to continue in the new office of provisional liquidators such that the interests of the Company would be best served by their appointment as its provisional liquidators.
Satisfied that the other statutory requirements for the appointment of provisional liquidators had been met, his Lordship held that “...there is no reason why the receivers should not be appointed as...provisional liquidators...”. The application for appointment had been made by a judgment creditor of the Company who was able to demonstrate to the satisfaction of the Court that steps were being taken by the Company and its majority shareholder to potentially dissipate the Company’s interest in its only significant asset held in the People’s Republic of China.
Although a distinction is to be drawn between pre-existing receivers and managers co-existing with liquidators (and in the matter of Re Orient Power being the same person), and a pre-existing receiver resigning from his/her position so as to assume the role of provisional liquidator, as was the case in Re K Vision; both decisions are instructive for practitioners in demonstrating that the Court is prepared to be practical in considering the possibility of dual appointments. Some of the potential conflict issues that come to mind when considering the desirability of a dual appointment include:
- receivers and liquidators are likely to be influenced by different factors when conducting investigations into the affairs of a company - a receiver will be guided by what is likely to produce a recovery for his/her appointor whereas a liquidator will be concerned not only with the prospects of recovery for creditors generally, but also with his/her wider duty to investigate the reasons for the collapse of the company and the public interest in pursuing those responsible for any commercial wrong-doing;
- in deciding what claims to pursue in the liquidation, a receiver may prefer to pursue claims that belong as assets of the company (and to which the appointor’s security attaches) so that any recoveries are solely for their appointor’s benefit whereas a liquidator is more likely to pursue all antecedent transactions from which recoveries will be paid into the general pool of funds for distribution generally;
- there would also appear to be a clear conflict of interest if a receiver was appointed pursuant to a floating charge, the validity of which a liquidator has an obligation to investigate (section 267 of the Companies Ordinance);
- in the adjudication of proofs of debt, there may be a perception that a liquidator who is also a receiver may be biased towards his/her appointor in respect of any unsecured portion of the appointor’s debt; and
- as regards the realisation of assets, a receiver might be affected by different considerations from those of a liquidator, moreover the partial sale of a company’s assets by a receiver may have the effect of preventing the liquidator from (1) selling the company’s business as a going concern and/or (2) obtaining the best possible price for the remainder of the assets.