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February 06 2018
In Bespark Technologies Engineering Ltd v JV Fitness Ltd the High Court recently took the opportunity to remind liquidators of their duty to give full and frank disclosure when making an ex parte (without notice) application to the court.(1) A failure to do so could have serious consequences, including a refusal to approve the appointment of a liquidator or an order for his or her removal. The duty to be full and frank applies to all ex parte applications, so there are general lessons to be learned.
In a compulsory winding up, liquidators often apply ex parte to the Companies Court in Hong Kong for orders or directions to regulate a company's affairs. Examples include obtaining the court's approval to enter into funding arrangements with a third-party funder or obtaining a 'regulating order' to dispense with a first creditors' meeting on grounds that it would be impractical.(2)
As noted in High Court Practice Direction 3.5, it is not uncommon for liquidators to apply in writing (by letter) to the judge's clerk, provided that certain thresholds are met.(3) This practice can sometimes reduce costs and promote speed and efficiency in the liquidators' performance of their duties. However, such a practice (as with ex parte applications generally) is not the norm for civil litigation in Hong Kong. Further, applications in writing by letter do not dilute the importance of a liquidator's duty to give full and frank disclosure.
Bespark Technologies Engineering Ltd concerned the winding up of the holding company of a chain of fitness gyms in Hong Kong. On July 14 2016 the court ordered that the company be provisionally wound up and three provisional liquidators appointed. The company was subsequently ordered to be compulsorily wound up on November 23 2016.
The provisional liquidators would usually be required to convene a first meeting of creditors and contributories within three months from the date of the compulsory winding-up order.(4) At such a meeting, creditors and contributories could vote on various matters, including the appointment of liquidators. However, in this case, given the large number of potential creditors the provisional liquidators concluded that it was impractical for the company to convene a first meeting.
Prior to the lapse of the three-month deadline, in February 2017, the three provisional liquidators applied in writing by letter for a regulating order, seeking (among other things) to dispense with the first creditors' meeting. However, the court was not prepared to deal with the application by letter. Therefore, the provisional liquidators took out a formal court application seeking (among other things) a regulating order and an order that two of the liquidators be appointed.
It appears that the court had been unwilling to deal with the initial written application because of an apparent material non-disclosure. In particular, it had come to the judge's attention that the proposed liquidator whose appointment was no longer sought had been fined for contempt of court in separate proceedings. The judge considered that this omission was directly relevant such that it should have been brought to his attention. While a finding of contempt did not come within the formal requirements of a disclosure statement for the office of liquidators, this did not get around the provisional liquidators' duty to give full and frank disclosure.(5)
Interestingly, while the provisional liquidators no longer sought the court's approval for the appointment of the third proposed liquidator, the judge appears to have had concerns about approving their appointment – the concern being that the two of them may have been too willing to accommodate the third proposed liquidator who, in various other matters before the courts, had demonstrated what the judge referred to as "unnecessarily confrontational behaviour".(6) However, the judge ultimately approved their appointment because the cost of replacing the two provisional liquidators with new insolvency practitioners would be disproportionate and prejudice the interests of the unsecured creditors for no real gain.
This decision is a reminder for liquidators of the need to bring all relevant matters to the attention of the court with what the judge referred to as "total candor".(7)
More generally, all applicants should approach a duty to give full and frank disclosure in the same spirit. For example, when deciding whether a matter is relevant (such that it should be brought to the court's attention) the question is more than simply asking whether its disclosure would affect the outcome of the court's deliberations. Rather, in lay terms, a better question to ask is whether the court would reasonably expect to be informed of the matter as part of an applicant's duty to be full and frank.(8) The answer to this question is ultimately fact dependent, as are the consequences of failing to discharge the duty. In this case, the court did eventually approve the two liquidators' appointment.
More specifically, the decision confirms that a liquidator's failure to give full and frank disclosure can be relevant to the court's assessment of his or her suitability to be appointed, as can his or her previous conduct. This is not surprising given a liquidator's duties as an officer of the court.(9) The emphasis on those duties reflects the importance of creditors being able to rely on a liquidator's representations – particularly, in circumstances where a liquidator may apply for a court order pursuant to Practice Direction 3.5. The fact that the initial ex parte written application may have been less formal does not lessen the duty to be full and frank.
For further information on this topic please contact Sumarsono Darsono or Warren Ganesh at RPC by telephone (+852 2216 7000) or email firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
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