Liquidators have the final say on disclosure of information to creditors

The Hong Kong Court of First Instance (the Court) has examined the issue of the scope of information required to be disclosed by liquidators to creditors and whether the Court should exercise its discretion to order discovery if it is just and beneficial to do so.

The Plaintiff (China City Construction Holding Group Co Ltd or CCCH) initially wrote to the Liquidators of China City Construction (International) Co Ltd (CCCI) for Litigation Information and Fees Information relating to the Other Actions (as defined below). The Liquidators refused to disclose all of the Information requested by CCCH and the Court subsequently held that the information already supplied by the Liquidators to the Committee of Inspection (COI) was reasonable in the circumstances and that it reflected a reasonable stance taken by the Liquidators.    

Background 

The underlying dispute in the case concerned the disposal of a valuable piece of land by the China City Group in March 2021. The land was partly or indirectly owned by CCCI before it was put into creditors’ voluntary liquidation due to financial difficulties in January 2019. During the material period, suspicious transactions and agreements were made among the members of the China City Group, resulting in a change of ownership of the land and the sale proceeds. 

As a result, a number of actions were commenced against various members of China City Group and the alleged conspirators arising from the improper change of ownership and to recover the sale proceeds, including HCCW 30/2022, which was an action commenced by the Liquidators (together, Other Actions).

Request for information

CCCH (the sole shareholder, the largest creditor and a member of the COI of CCCI), requested that the Liquidators disclose information in relation to: 

1. the Liquidators’ plans, strategy, and views on merits as regards HCCW 30/2022 and the Other Actions in relation to the potential recovery of loss and damage suffered by CCCI and/or reliefs (the Litigation Information); and 
2. the actual and estimated future legal costs and the funding arrangements and terms in connection with HCCW 30/2022 and the Other Actions (Fees Information, together the Information). Importantly, CCCH was not a party to the Other Actions

Liquidators’ refusal

The Liquidators essentially refused the request by CCCH for the Information on the basis that they had formed the view that CCCH was connected with the defendants in the Other Actions as there were and continued to be overlapping management personnel between them. Additionally, the Liquidators contended that they had already disclosed sufficient information to the COI, further that CCCH had been unable to provide a satisfactory explanation as to why it needed the Information. 

The Court decision

Court’s discretion to order discovery

CCCH applied to the Court for disclosure of the Information under s.255(1) and (2) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO), which states:

1. “The liquidator or any contributory or creditor may apply to the court to determine any question arising in the winding up of a company, or to exercise, as respects the enforcing of calls, or any other matter, all or any of the powers which the court might exercise if the company were being wound up by the court
    
2. The court, if satisfied that the determination of the question or the required exercise of power will be just and beneficial, may accede wholly or partially to the application on such terms and conditions as it thinks fit, or may make such other order on the application as it thinks just”

CCCH accepted that there is no absolute right to the Information, and so the issue before Court was whether it should exercise its discretion to order discovery if it was just and beneficial to do so. 

Established companies law principles

The Court identified the following established HK companies law principles that were relevant to the exercise of its discretion: 

1. The Court will not interfere with a liquidator’s decision unless it can be demonstrated that the liquidator has not acted in good faith, made an error of law or principle, has not acted impartially and even-handedly, or the decision is perverse
    
2. The Court proceeds on the basis of the rebuttable assumption that the liquidator will normally be in the best position to take an informed and objective view as to what is in the best interests of the liquidation
    
3. The Court accords great weight to commercial decisions of liquidators on the basis that the liquidator is recognised as having both the qualifications and the access to the multiplicity of information which may be necessary in order to make commercial decisions
    
4. The fact that the contributory thinks there is a better decision that might be made is not a ground for challenging a liquidator’s decision

Specifically for funding agreements, the Court emphasised that section 251(1)(b) of CWUMPO provides that a liquidator of a company in voluntary liquidation may without sanction exercise any of the powers in Parts 2 and 3 of Schedule 25 and this covered funding litigation to recover monies or other property owed to the company. 

In other words, a liquidator does not require sanction from the Court or the COI to enter into a funding agreement for that purpose. Further, there is no rigid rule that a liquidator must disclose, notwithstanding the confidentiality clause, the terms of a funding agreement to other creditors in order to be seen to be impartial. 

The Court’s refusal

Having considered the complex corporate structures of China City Group and the evidence before the Court, the Court agreed with the Liquidators and rejected CCCH’s application.

Initially, the Court found that CCCH had failed to explain, and it remained unclear before the Court, why CCCH needed the Information.

For Litigation Information, the Court recognized that there were “intricate and opaque connections” between the two corporate structures. As such, there would be plain sensitivity in disclosing the information to CCCH as it would be detrimental to the plaintiffs in the Other Actions. The Liquidators’ concern on the connections between CCCH and the defendants in the Other Actions was reasonable and the Liquidators’ refusal was impartial.

For Fees Information, there were no valid grounds requiring the Liquidators to breach their obligation of confidentiality under the funding agreement. The Liquidators have provided CCCH with the actual legal costs incurred. There was no adequate explanation as to why information on estimated future legal costs was of immediate interest or even relevant to CCCH. Given that the Liquidators will disclose relevant financial information when there is a settlement offer on the table, or in the event of a successful claim and substantial realisation, the fact that CCCH was insisting on the Information only heightened the Liquidators’ concerns over the true intention of the application.

Accordingly, the Court concluded that all the above called into question the real motive for the application and there was no sufficient reasons for the Court to exercise its discretion in granting the application by CCCH.

Comment

This decision confirms that the non-disclosure of litigation or fees information by liquidators to creditors does not necessarily compromise the impartiality of liquidators. Although liquidators have a duty to act in the best interest of all creditors, they are officers of the court and are not obliged to disclose all information they possess if they consider that it is inappropriate to do so. 

There continues to be a high threshold for the Court to interfere with a decision made by liquidators, which has been set by long-established principles of companies law. The Court will generally not interfere with a liquidator’s decision unless there is credible evidence to show that the liquidator has not acted in good faith, has made an error of law or principle, has not acted impartially and even-handedly, or the decision is perverse in the sense of falling outside the range of decisions a liquidator having proper regard to the relevant principles might make. A creditor will need to satisfy the liquidators that there is a genuine need or justification to receive the requested information. (Find out more about this judgment.)