Introduction

At the end of a company's life cycle, a liquidator will usually be brought in to realise the company's assets and distribute what remains of them. Commonly, the liquidator is a complete stranger to the company. He may have no clue about the company's affairs until the moment he lays eyes upon the company's books and records. Yet, a liquidator cannot always expect to receive a complete and well-preserved set of documentation in every case. In situations where a company is facing massive insolvency and the disappearance of substantial assets in suspicious circumstances, chances are those who are responsible for the company's doom have already removed or even destroyed the relevant documents and few may survive to reach the hands of a liquidator.

To ensure insofar as possible that a liquidator will obtain everything he needs to carry out his functions, the liquidator is given statutory powers which contain several important weapons to obtain information. One forcible weapon in the liquidator's arsenal is the right to seek orders of the court for examination and production of documents under section 286B of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (s286B).

Overview of s286B

The powers conferred on the Hong Kong court under s286B are said to be wide, general and unlimited. However, in exercising its discretion to order for examination or production, the court will strike a balance between the liquidator's reasonable requirements and the need to avoid making an order that is unreasonable, unnecessary or oppressive to the party from whom the documents or information are sought.¹ Yet, great weight will be given to the views of the liquidator, for he is an officer of the court and alone has the necessary knowledge of the problems facing him in understanding the affairs of the company and his reasons for seeking production of documents.

In view of the width of the court's jurisdiction under s286B, a liquidator's request under this section (save where it is oppressive or unduly burdensome) is expected to be met without question. This is a message reinforced by a recent court ruling in Joint and Several Liquidators of Yes! E-sports Asia Holdings Ltd (in Liquidation) v. Holman Fenwick Willan (A Firm),² in which the court criticised a firm of solicitors for imposing unwarranted conditions for their compliance with a s286B request from the liquidators of their former client.

Re Yes! E-sports Asia Holdings Ltd (in Liquidation)

Yes! E-Sports Asia Holdings Limited (the Company) was incorporated as a joint venture between Capital Creation (BVI) Limited (CCBVI) and NGCH Hong Kong Limited (NGCH). When the relationship between the two shareholders broke down, CCBVI engaged an international firm of solicitors (the Firm) to advise CCBVI and/or the Company in relation to the two shareholders' disputes. The Firm was also instructed to act for the Company and two of its CCBVI-nominated directors when they faced an application from a NGCH-nominated director for inspection of corporate documents. The Company was later wound up by the court upon the petition of a creditor.

When liquidators of the Company were appointed, they requested books and records, and documents held by the Firm for the Company and copies of 11 bills issued by the Firm. Whilst accepting they were the Company's former solicitors, the Firm required: (i) the liquidators to pay HK$40,000 as costs on account to secure fees for work in reviewing the files and extracting the information requested; and (ii) the express consent of the two CCBVI-nominated former directors for whom they were also acting, before releasing the requested documents.

The liquidators rejected these conditions on the grounds that they were entitled to the requested documents, given: (i) any documents prepared by a law firm for the benefit of the client belong to the client; and (ii) any papers belonging to the client shall be returned upon the termination of the retainer. They also pointed out that the former directors could not withhold any confidential information from the Company in respect of their dealings as directors and that no issue of confidentiality could arise.

Unable to persuade the Firm to drop the conditions, the liquidators took out an application under s286B for document production against the Firm and costs on indemnity basis.³ In the face of that application, the Firm released some requested documents but with a caveat that no further document production request would be entertained until they received funds to secure their costs and expense. The liquidators were agreeable to bear the Firm's reasonable costs of supplying a USB device and reasonable copying charges in producing documents. However, the Firm wanted more and demanded that the liquidators bear/secure their costs, as well as the costs of the s286B application.

The Firm subsequently issued a cross-summons and defiantly asked for (i) costs of the s286B application, with the liquidators to show cause why they should not personally be liable for the said costs; (ii) security for costs in the sum of approximately HK$1.2 million and consequential relief; and (iii) costs.

The court's ruling

It was not in dispute that the court has the discretion to award costs to a respondent to an s286B application, although there is no presumption that costs would be awarded and application for costs should be made at the appropriate time (when compliance has been fully achieved or at any rate is well on the way to achievement). The Firm went further and advocated for the proposition that the liquidators should agree to meet/secure the costs of the respondent to an s286B application before the requested documents would be made available. However, the Firm failed to identify any legal authority that supports that proposition. In the absence of any authority, the court held that the Firm could not legitimately require the liquidators to make any payment on account, before it would return to the Company its own files.

As for the Firm's condition for the express consent of the former directors for the release of the requested documents, the court also held that there was no legitimate basis upon which it could be imposed. The court observed that the liquidators (who stood in the shoes of the Company upon its liquidation) were simply requesting for the return to the Company of its own files, rather than seeking third-party documents which could have entailed work in retrieving/extracting relevant documents from third-party files. In this regard, the court noted there was no evidence suggesting that the Firm was retained by the former directors to act for them in other matters that did not concern the Company.

Turning to the Firm's cross-summons, the court found that the jurisdictional basis for that summons was flawed, noting that nothing in s286B dealt with costs incurred in relation to an application made pursuant to it and the High Court rules on provision of security of costs do not cover an s286B application. Worse still for the Firm, a significant portion of the HK$1.2 million security the Firm sought was attributable to costs of compliance based on the Firm's professional fees, despite the Firm being unable to identify any case law where such an award had previously been made. Given the complete absence of legal basis in support of the Firm's stance, the court was ready to infer that the Firm's application for security for costs was but a means of exerting pressure on liquidators to drop their application for documents.

Undeterred, the Firm pressed the court to award costs in their favour, including the costs of compliance, on the basis that documents in response to the liquidator's s286B application had been produced. This was also rejected by the court. The court reasoned that, whilst in an appropriate case (such as where compliance with the order for production would impose a considerable burden on the respondent given its width), it may make an order for the costs of compliance, the court did not see how the present facts justified the exercise of the court's discretion in favour of the Firm.

In the end, the court held that the liquidators were justified in issuing the s286B application and, because they had prevailed, costs must follow the event. On this occasion, the court decided that costs should be awarded on an indemnity basis, given:

• the liquidators' request for documents was nothing out of the ordinary given their role as liquidators;
• the Firm's insistence on the two unwarranted conditions was unduly wasteful of resources and time when all that was required was the return to the Company of its files; and
• the Firm's conduct in this case deserved deprecation given it was not conducive to furthering the objectives of the Civil Justice Reform.⁴ In particular, the Firm failed to ensure the accuracy of propositions they advanced based on case law, which led to considerable judicial time being spent on verifying the accuracy of such propositions. The court further observed that the Firm's repetitive posturing and needless vitriol in correspondence served no useful purpose except to antagonise their opponent.

Commentaries

The decision in Re Yes! E-sports Asia Holdings Ltd (in Liquidation) is certainly a welcome one. Despite the existence of a body of case authorities on the application of s286B, it is perhaps not uncommon for a liquidator's request under that section to meet with indifference, resistance or even rejection. The decision has provided much needed judicial clarity on the behaviour expected of a person who is on the receiving end of a s286B request. As the court noted, requests from liquidators for documents are nothing out of the ordinary given their role as liquidators. They should therefore be ordinarily met.

More importantly, the decision puts beyond doubt that payment of costs of compliance cannot be legitimately demanded as a pre-condition to answering such request. This determination hopefully will put an end to an existing practice of professional service providers demanding remuneration prematurely from liquidators in return for collating and providing documents. In the past, liquidators may simply choose to yield as the costs of taking the matter to court could be even higher. Now, those days are clearly gone.

1. See paragraph 30 of the judgment in The Joint & Several Liquidators of Akai Holdings Ltd. v. The Grande Holdings Ltd. and Others (15/12/2006, FACV18/2006) (2006) 9 HKCFAR 766 for a summary of the general principles governing the balancing exercise which the court is called upon to undertake in exercising its discretion.↩
2. [2024] HKCFI 1197.↩
3. An order for costs on an indemnity basis is one that allows the other party to have a more generous level of costs on taxation than what is usually allowed. Usually, costs on an indemnity basis would be ordered against a person who institutes or prosecutes proceedings that are scandalous or vexatious, or does so maliciously, or for an ulterior motive, or in an oppressive manner.↩
4. The underlying objectives of the Civil Justice Reform are:↩
1. to increase the cost-effectiveness of any practice and procedure to be followed in relation to civil proceedings before the court;
2. to ensure that a case is dealt with as expeditiously as is reasonably practicable;
3. to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings;
4. to ensure fairness between the parties;
5. to facilitate the settlement of disputes; and
6. to ensure that the resources of the court are distributed fairly.