Hong Kong: Court Confirms that Corporate Creditors can be Appointed to a Committee of Inspection

Last Updated: 16 March 2004
Most Read Contributor in Hong Kong, October 2018

Written by Tom Vaizey, Partner, Johnson Stokes & Master

Summary

In a recent case, Re Asean Interests Limited [2004] HKEC 184 (decision 19 December 2003), the Court of First Instance has confirmed that, where corporations wish to be members of a committee of inspection in a liquidation, they should be members in their own right rather than having natural persons appointed to represent them.

Full Update

The Issue

The committee of inspection can play an important role in the administration of a court ordered liquidation.  The liquidators must report regularly to the committee, and certain powers of the liquidators are only exercisable with the sanction of either the court or the committee.  These powers include the power to bring legal proceedings, to carry on the company's business, and to make arrangements or compromises with creditors. 

Section 207 of the Companies Ordinance specifies the categories of persons who may be appointed to a committee: they must be creditors or shareholders or persons authorised by them though powers of attorney.  In recent years, the court has interpreted section 207 to mean that only natural persons can sit on committees of inspection, so where a creditor or shareholder is a corporation, an individual must be nominated to represent it. This can cause practical problems : liquidations can last for several years and an individual who is acting as the representative of a corporation might leave his or her employment, or be moved to a different position, so he or she would need to resign from the committee.  Further creditors' and shareholders' meetings would then need to be convened to replace the member.

In Asean, a committee consisting of three corporations and one individual, all creditors, had been appointed.  The liquidators sought confirmation from the court as to the validity of the appointment of the corporations themselves as members.

The Statutory Provision

Section 207(1) states that:

"A committee of inspection appointed in pursuance of this Ordinance shall consist of creditors and contributories of the company or persons holding general powers of attorney from creditors or contributories in such proportions as may be agreed on by the meetings of creditors and contributories, or as, in case of difference, may be determined by the court."

Section 207(5) provides that:

"If a member of the committee becomes bankrupt, or compounds or arranges with his creditors, or is absent from 5 consecutive meetings of the committee without the leave of those members who together with himself represent the creditors and contributories, as the case may be, his office shall thereupon become vacant."

The Prevailing View Prior To Asean

Most recently, the policy of the Official Receiver and judges and masters of the High Court appears to have been guided by a leading commentary on the Companies Ordinance.  This commentary refers to an Australian case, Re Testro Bros Consolidated Limited [1965] VR 18, as authority for the proposition that only natural persons can be appointed to a committee.

In Testro, a provision equivalent to section 207 came under consideration. References, in the equivalent of section 207(5), to bankruptcy (which is a term generally taken to apply to individuals only) led the judge to conclude that the whole provision applied to natural persons only, and so it followed that only natural persons could sit on a committee. 

The Court's Decision In Asean

The decision of Madam Justice Kwan in Asean rests on a broader statutory interpretation than that applied in Testro.  In rule 2 of the Companies (Winding-Up) Rules, a creditor is defined to include both a corporation and a partnership. "Contributory", under section 171 of the Companies Ordinance, covers "every person liable to contribute to the assets of a company in the event of its being wound up...". Finally, the term "person", under section 3 of the Interpretation and General Clauses Ordinance, "includes any public body and any body of persons, corporate or unincorporate...". 

Applying these definitions to section 207, and with reference to section 115 of the Companies Ordinance, which provides for a mechanism through which corporations may be represented in a meeting of creditors by natural persons, her Ladyship concluded that a body corporate which is a creditor or contributory is entitled to be appointed to a committee of inspection; indeed, when a corporation is nominated to serve on a committee, it should be appointed in its own name.

Her Ladyship therefore declined to follow Testro.  She observed that an explanation for the wording of section 207(5) of the Companies Ordinance was that provision is needed to provide for a natural person's bankruptcy because a bankrupt's assets vest in a trustee, and the individual loses capacity except in certain instances.  There is no need to deal with what happens in a corporate liquidation, however, because the company remains the same entity, able to deal with its own assets, albeit through a liquidator rather than the board.  In any event, there was no reason why the wording of section 207(5) should influence the interpretation of the other parts of the section.

The Way Forward

The provision of a fully reasoned decision will provide welcome certainty and guidance to liquidators and institutional creditors where, in the past, the policies of the court and the Official Receiver as to the nature of corporate representation has fluctuated.  Parties can now be sure that the nomination of corporate creditors in their own right to committees of inspection will be ratified by the court.

The original email legal update is copyright Johnson Stokes & Master at the date written first above. All rights reserved. This publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is intended to provide a general guide to the subject matter and is not intended to provide legal advice or a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

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