The recent judgment in Re Proman International Limited¹ reaffirms the court's stance on the suitability of liquidators and the standards of disclosure required of them. To uphold these high standards, the courts in Hong Kong have increased their scrutiny where issues relating to independence would fetter the liquidator’s ability to fulfil their duties, such as taking action for the benefit of a company’s creditors.

At this appeal hearing on 18 September 2023, Le Pichon J upheld the decision of Master J Wong disqualifying candidates from acting as liquidators of Proman International Limited (the Company). Alternate candidates were instead appointed as liquidators after the candidates were deemed unsuitable for appointment as liquidators by the court, particularly given they were disqualified for appointment under s.262B of the Companies Winding Up and Miscellaneous Provisions Ordinance (Cap 32). In so finding, Le Pichon J dismissed the summons for retrospective leave for the candidates to act as liquidators despite the disqualification. Seashore Group Limited had nominated the candidates and brought the appeal as one of the six creditors of the Company.

This decision is significant not only for its criticism of the insolvency practitioners involved, but also for highlighting the standards the court expects from parties in the liquidator’s composite role as agent, fiduciary and officer of the court.² Particular emphasis has repeatedly been placed on the need for independence in the discharge of the liquidator’s duties.³ The independence and the appearance of independence must be preserved to protect the best interests of creditors and release the economic value of the relevant company after a winding-up.⁴ These issues were also most recently alluded to in Linda Chan J’s Re GTI judgment – see Increased scrutiny of liquidators in Hong Kong.

Liquidators’ conflicts, impartiality and independence

These fundamental requirements of a liquidator were in dispute in this case. Le Pichon J drew a rationale from Re Legend International Resorts Limited which discouraged over-familiarisation and emphasised the need to be, and to be seen to be, impartial and independent.⁵ Going one step further, where liquidation calls for the investigation of debts, Le Pichon J highlighted the higher standard set in Re Winspower should be followed, requiring insolvency practitioners to be totally independent and impartial.

The day before the first creditors’ meeting, the candidates submitted a disclosure statement under s.262 of Cap 32, outlining that they were sufficiently impartial and not disqualified to act. The disclosure requirements, set out in s.262A-F, include relationships with the company that may give rise to conflict of interest and are intended to enhance the protection of creditors through the prohibition of conflicted persons acting as liquidators.

Opposing creditors objected to the candidates’ appointment on the basis of documentary evidence stating that the candidates’ firm had served as the auditor of both the Company and its indirect parent company until 7 February 2020 and was therefore conflicted. The end of the candidates’ firm’s appointment was just one year before the winding-up petition, well within the period prescribed in s.262B(3)(e).

The candidates maintained that the disclosure statement was correct but argued that they ceased to be the auditor of the companies after the 2018 audit and did not have a continuing duty that conflicted with the duties of a liquidator. They claimed that 7 February 2020 was in fact the date they confirmed to the provisional liquidator that they had resigned as auditor, not the actual resignation date.

The court found it inexplicable for the “mistaken” date of resignation to continue to be used, with no evidence provided to support the candidates’ argument. The situation “raised more questions than answers, and inspired little confidence” in the candidates. Le Pichon J was of the view that “the statement that the 2018 audit was the last audit engagement for the Company needs to be taken with a pinch of salt in the absence of evidence showing termination of the relationship”. Given the nature of the official relationship, it should be “relatively straightforward to pinpoint exactly the date the relationship terminated from the records”.

It is one of the liquidator’s functions to investigate the causes of the Company’s failure and the conduct of those concerned in its dealings and affairs. In particular, liquidators have a responsibility to conduct an investigation into the audit of a company and determine whether there is any potential claim for audit negligence. As the candidates’ firm had been the auditors, there might have been a perception that liquidators from the candidates’ firm would be reluctant to carry out such investigations or take action against their own firm.

It was further found that the disclosure statement was factually incorrect in confirming no relationships with the Company existed under s.262D(2) of Cap 32. Two out of three of the candidates were directors of the entity that had provided financial and restructuring advice to the Company until 30 September 2022. In this capacity, they strongly recommended restructuring and opposed liquidation.

Le Pichon J stressed that “full and frank disclosure” was the standard required of a disclosure statement. It was concluded on the facts of the case that one “is left with the strong impression that full and frank disclosure has not been made”. The summons for retrospective leave from the court under s.262B(3) of the ordinance was therefore dismissed.

As highlighted in a similar case, Re X Ltd, the omission of any relationship required to be disclosed in the disclosure statement amounts to an offence. ⁶ As such, if the candidates really did not think they were conflicted, they should have acknowledged the relationships in the disclosure statement. Harris J in Re X Ltd stated that, in such circumstances, parties make full disclosures under s.262D(1)(b)(ii)(B) and explain why they believe that the relationship does not give rise to a conflict of interest. Yuen J further remarked in Re Akai Holdings Ltd that it is not every connection or action that can give rise to an allegation of an appearance of lack of independence and impartiality on which the court should act; whether or not the relationship gives rise to a material conflict is a matter to be determined by the court.⁷

The standard required of liquidators as officers of the court is clear. As in Re GTI, the candidates should have been aware of their obligations to make full and frank disclosure.⁸ The court found here that they put their personal interests before those who are ultimately interested in the assets of the company placed in their control. They were biased and had lost their independence in breach of their fiduciary duty.

Are the views of the creditors absolute and binding?

A majority of the six creditors of the Company voted to appoint the candidates as liquidators on 25 October 2022. Arguments in favour of appointing the candidates relied on this majority vote. However, the majority was slim and contained a number of affiliated creditors, a wholly-owned subsidiary and sole director of the Company. Noting the court discretion laid down by Harris J in Re Value Food Supply Limited, Le Pichon J held that a majority vote is not an “absolute right”.⁹ The court has the discretion to consider the case in a way that properly facilitates the liquidation process and promotes justice between all those in the liquidation. Re Value Food Supply Limited outlines that more weight should be given to the voices of creditors who are independent of the Company. Similarly, in Re Samwell Spare Parts Limited, Recorder Rachel Lam SC applied the relevant legal principles as set out in Re STX Pan Ocean (Hong Kong) Co Ltd¹⁰ and found that the views of the majority by number (i.e. the connected creditors) are not decisive and the court will accord lesser weight to them in view of possible unfair preferences. It follows in this case that the two camps essentially had the same number of votes when the affiliated creditors were discounted.

Therefore, Le Pichon J found that in the absence of a transparent mechanism to appropriately discount the votes, they should be disregarded. In light of these circumstances and given the court’s findings on the independence of the candidates, they were disqualified from acting as liquidators.

Commentary

On balance, the dismissal of the appeal and summons was an easy matter for the court. Le Pichon J was of the view that the conduct of the alternate candidates was “beyond reproach” and found that it undoubtedly serves in the best interests of all the creditors that they be appointed as liquidators.

Re Proman highlights that the role of the liquidator as officer of the court, agent and fiduciary requires full and frank honesty, diligence and good faith. Any issues relating to independence, particularly those that fetter the liquidator’s ability to fulfil their duties, must be avoided. As such, liquidators are duty bound to make full and frank disclosure, and not to conceal anything that is material to evaluate their independence. The onus is on practitioners to avoid any conflict of interest, particularly those which may impede the discharge of their duties to the disadvantage of creditors and other stakeholders (see, for example: Increased scrutiny of liquidators in Hong Kong).

1. HCCW215/2021↩
2. Re Timberland Ltd (1979) 4 ACLR 259 at p.286 ↩
3. The Winding Up Provisions of The Companies Ordinance – Consultation Paper 1998↩
4. Re Goodway Ltd [1999] 1 HKC 141 (CFI)↩
5. Re Legend International Resorts Ltd (in Compulsory Liquidation) (7 March 2011, HCCW1139/2004)↩
6. Re X Ltd [2020] 1 HKLRD 745, [2020] HKCU 227, [2019] HKCFI 2959 (CFI)↩
7. Re Akai Holdings Ltd [2001] 2 HKLRD 411↩
8. Re GTI Holdings Ltd [2022] HKCFI 2598↩
9. Re Value Food Supply Limited [2021] HKCFI 2975↩
10. (in liq) [2014] 5 HKLRD 581↩

Emer Lynch, one of the litigation team trainees, is one of the authors.