Liquidators are of crucial importance where there are risks that a company is approaching the end of its operating cycle. Liquidators protect the interests of creditors and release or transfer economic value that would otherwise be trapped and sometimes lost after a winding-up. However, in two recent cases, we have seen criticism directed at liquidators by the courts in Hong Kong. This is of particular importance where liquidators are appointed by the courts as officers of the court and must uphold high standards required by that appointment and the law.

Re GTI Holdings Ltd

In Re GTI Holdings Ltd [2022] HKCFI 2598, provisional liquidators appointed by the Cayman court worked with funders to commence proceedings in the Cayman court to recognise them as liquidators. This was despite the Official Receiver (OR) having already been appointed as the provisional liquidator of the insolvent company by the court in Hong Kong.

The Cayman judge made a winding-up order appointing the provisional liquidators as joint official liquidators (JOLs) based on representations made to the court. Subsequently, the JOLs made an ex parte application to be heard by Harris J, who had not been involved in the proceedings to appoint the OR as provisional liquidator, to recognise the Cayman appointment and to allow the JOLs to implement a restructuring plan involving a scheme of arrangement. However, this was suddenly abandoned when Harris J, having been notified by the OR that she had been appointed as the provisional liquidator in Hong Kong, passed the matter back to Linda Chan J. The JOLs justified the abandonment on the basis that the funders had decided not to fund the application for commercial reasons.

Linda Chan J was highly critical of the JOLs and found that their conduct had fallen short of the standards one would expect from liquidators for three reasons:

Firstly, Linda Chan J found that the representations made to the Cayman court to appoint the JOLs, the hearing of which was uncontested, were factually incorrect or information had been withheld. The JOLs failed to disclose to the Cayman court the terms of the funding agreement entered into between the funders and themselves.¹ As a result, they were not subject to the usual supervision and scrutiny of liquidators under Hong Kong law while still being able to act as provisional liquidators in Hong Kong despite the representations made to the Cayman court.

Secondly, the abrupt abandonment of the application suggested “that the JOLs would only pursue the Application if it is heard by their chosen Judge and outside the HCCW”. This was described by Linda Chan J as “a matter of grave concern that the JOLs chose to act in this way” particularly where there “is no basis or justification for the JOLs to make the Application outside the HCCW”.

Thirdly, Linda Chan J considered that the liquidators had failed to give full and frank disclosure when making the ex parte application. Even though the JOLs were aware of their duty to give full and frank disclosure, they did not draw to the attention of the court that their representations were inconsistent with the findings in the winding-up judgment, particularly where Harris J was not privy to the winding-up proceedings.

Having been appointed as the provisional liquidator, the OR had conduct of the liquidation in Hong Kong. Armed with a restructuring plan and a funder, the JOLs could have considered approaching the OR to offer their assistance with the liquidation in Hong Kong. In such a case, the OR may, for example, have applied to the court for the appointment of a person in her place. It is unfortunate that the court ordered that the JOLs should not be allowed to receive remuneration from the assets of the company in these circumstances. The work of liquidators, particularly in cross-border liquidations, is difficult and complex but no liquidation should be conducted in a manner that falls short of the standards required of officers of the court.

Re Registrar of the Hong Kong Institute of Certified Public Accountants

A second more egregious example which may have prompted the courts in Hong Kong to increase their scrutiny of liquidators in Hong Kong is the case of Registrar of the Hong Kong Institute of Certified Public Accountants v. Chan Yui Hang [2022] HKCA 805. Five complaints of misconduct were raised against the provisional liquidator (Chan) by the HKICPA which were all upheld by the Court of Appeal. The complaints were that (1) Chan failed to convene annual creditors’ meetings and report his conduct as a provisional liquidator; (2) he failed to file liquidators’ statements of account for the company in time on multiple occasions; (3) he failed to retain overall control of the work delegated to a consulting firm; (4) he failed to obtain approval of the creditors for his liquidators’ fees; and (5) these complaints all constituted professional misconduct.

In relation to the third complaint, Chan claimed that the late filing of accounts was the fault of a consulting firm that he had engaged to carry out the work required under the liquidation. The court held that the delay in filing the accounts deprived creditors of their opportunity to review the process of the liquidation on a timely basis. As the provisional liquidator, Chan should have exercised care to retain overall control of the liquidation and therefore the conduct of the consulting firm.

In relation to the HK$4.7 million received by Chan as liquidators’ fees, Chan claimed that such fees had been approved by a majority of creditors without providing any evidence to show such approval. He had also failed to report such fees on a timely basis and had deprived creditors of the opportunity to object to the fees. The court held that the lack of approval was exacerbated by his failure to hold annual creditors’ meetings. Creditors were kept in the dark about the progress of the liquidation and the actual fees charged by Chan.

From these recent cases, it can be seen that the courts in Hong Kong have increased their scrutiny of liquidators to uphold the high standards required of them. Liquidators are officers of the court and are bound to act honestly and to exercise their powers for the bona fide purpose for which they are appointed. The standards to be met by liquidators in Hong Kong are high and navigating the often complex legal environment in cross-border insolvencies can be difficult.

1. It is established that “where the proposed liquidators accepted the appointment on the basis that their remuneration depends on the approval of a funder or that they are required to seek the approval of the funder before exercising any of their powers … it would not be appropriate for the court to appoint them as liquidators” (Re Goodway Ltd [1999] 1 HKC 141).

2. The article has been written by Richard Keady, David Kwok and Hugo Lo.