By Stephen Briscoe, Managing Director, BWA
In 1996 Hong Kong’s Official Receiver’s Office (“ORO”) introduced what was known at the time and still is for that matter, as Panel A (Administrative Panel of Insolvency Practitioners for Court Winding-Up). Panel A, as many readers will know, was designed to enable non-summary liquidations i.e. those with assets in excess of $200,000 to be allocated to private sector Insolvency Practitioners (“IPs”) through a roster system. I think it is fair to say that the process has worked quite well and indeed it has worked so well that nowadays only a handful of liquidations each year are actually handed out on Panel A. The reason is that in an increasing number of liquidations, creditors take the pro-active step of nominating a liquidator at the meeting of creditors itself. However what does a creditor do when no meeting of creditors is held?
Before looking at that it is perhaps useful to look at the genesis of its companion – Panel B – or what has become known as Panel T.
As a result of the success of Panel A, the ORO set-up Panel B. Probably in excess of 97% of compulsory liquidations in Hong Kong have assets less than $200,000. Indeed it is probably also fair to say that a substantial proportion of those have negligible assets or no assets whatsoever. The ORO at the time, (about 1997/1998), was coming under significant pressure from the huge increase in its workload, in particular in the number of personal insolvencies with which it had to deal, and so sought to contract out the work associated with summary liquidation cases. In the early days, the IP, who was appointed as the agent of the ORO, was paid a flat fee of $60,000 to deal with all aspects of the liquidation. However, this “agency” model eventually drew criticism from the Court. The Court’s concern was with the wholesale delegation by the Official Receiver of his duties as provisional liquidator and subsequently liquidator. The consequence was the introduction, in 2000, of section 194(1A) of the Companies Ordinance. This gave the OR the statutory power to appoint a provisional liquidator in his place immediately following the making of a winding-up order and where the Official Receiver is of the opinion that the assets of the Company are worth less than HK$200,000. This is an important phrase to which this article will return later.
At the same time, in early 2001 the Government decided that firms who wished to be on Panel B would have to tender, (hence Panel T as it is now commonly referred to), for the minimum subsidy they would expect to be paid in the event that they were unable to realise any assets.
The (almost) inevitable result of the tender system has been a race to the bottom. The average tender price in 2001 was by our calculations HK$16,757, whilst the average price tendered in 2012 was a not so stunning HK$1,768! Remember, this is to do the whole of a liquidation!
There has always been a suggestion that summary liquidations are relatively simple and consequently do not require a great deal of investigation. Undoubtedly that is the case with some, possibly a majority of summary liquidations. However, we are seeing an increasing number of summary cases where that is not the case and where the affairs of the insolvent company do require quite rigorous investigation.
On numerous occasions in the last five years we have been approached by creditors who are unhappy about the fact that a provisional liquidator has been appointed under the Panel T scheme and where they, often the largest single creditor, have had no input into the process. I am also aware from discussions with colleagues in the industry that they are also being approached in increasing numbers about the same issue. The concern of creditors is often that having petitioned for the company to be wound-up they have no say whatsoever in who is appointed as the provisional liquidator.
We are usually told by their advisers that because of concerns about the way in which the company has failed, the creditor wishes to appoint someone of their own choosing to perform a thorough investigation. The consequence is that the creditor has to ask the existing provisional liquidator to convene a meeting of creditors and to pay for that privilege. The irony is that the creditor is usually quite willing to meet the costs that will be incurred in investigating the affairs of the Company – but quite naturally they just want to have a say in who is appointed to undertake that investigation. Incidentally the costs of the investigation are likely to be significantly greater than the amount of the tender submitted by the Panel T firm to the ORO when seeking admission to the Panel T scheme.
All this takes significant time – sometimes 6 or 8 months can pass before liquidators of the creditor’s choosing are appointed. Efforts to ensure that a provisional liquidator is not appointed from the Panel T immediately upon the making of the winding-up order are often frustrated when the creditor is told that the onus is on the creditor to establish that the assets of the Company are worth in excess of HK$200,000. However, as set out earlier, the provisions of section 194(1A) clearly set out that it is for the ORO to satisfy itself that the assets of the company are worth less than $200,000 before appointing a provisional liquidator under the panel scheme.
To summarise, we believe there is a very good argument for saying that creditors really should be given a greater opportunity to influence the appointment and the identity of the provisional liquidator at an early stage rather than being forced to invest further funds and suffer further delays as a result of the current implementation of the Panel T scheme.
The second issue however, which is of somewhat greater concern is that of the level of fees that are chargeable by provisional liquidators. In the event that no assets whatsoever are realised, the fees of the provisional liquidator will be limited to the amount for which they have tendered. As indicated above, for 2012-2014 the average tender is HK$1,768. For that, the provisional liquidators are expected to undertake a thorough investigation of the affairs of the company, which is simply not realistic. Something has to give. Either a thorough investigation is undertaken with the IP suffering (in most cases) a significant loss, in which case it is quite likely that after a few such experiences the IP will stop tendering; or a thorough investigation is not undertaken with the consequences that has for corporate governance in Hong Kong.
In 2007, the late professor Philip Smart of the University of Hong Kong wrote an article setting out, amongst other issues, his concerns about the potential impact on corporate governance caused by the fee structure associated with the Panel T scheme. The only thing that has changed since he wrote that article is that the required level of subsidy has continued to go down.
Since that time nothing has changed and indeed it appears unlikely that anything will change in the foreseeable future. On numerous occasions, having explained this process to creditors or to their solicitors, they respond with suggestions to the effect that directors of insolvent companies have every incentive to ensure that when the company goes into liquidation it has no remaining assets. This will necessarily limit the prospects of a thorough investigation being undertaken in the absence of additional funding by the creditors. This surely cannot be good for Hong Kong.
I believe there is an argument for going back to a system where IPs are paid a fair fee for undertaking the liquidation of a company from “the cradle to the grave”. It need not necessarily be the HK$60,000 that was originally paid when the Panel B scheme was first implemented, but it should at least be set at a level where the IP receives a reasonable reward for the work undertaken.
Whilst everyone accepts the purpose behind the Panel T, I believe there is a general consensus among professionals in the industry that it should be more flexible in order to ensure that as far as possible it works in the interests of creditors and in particular those creditors who have petitioned for the company to be wound-up. This would not require a legislative change as Panel T is simply an administrative scheme. Insolvency professionals appreciate why the scheme runs in the way it does and understand that the ORO has been forced to contract out this work because of continuing pressure on resources. Nonetheless there is a feeling that greater flexibility would lead to greater fairness for creditors.
It is actually interesting to note that on more than one occasion in the last two or three years the author understands that the court has declined to appoint a Panel T provisional liquidator as the full liquidator of the company. It appears that this has occurred on at least two occasions where the Panel T provisional liquidator was from a law firm as opposed to being from an accounting firm.
I have to say that conceptually I cannot see any reason why this should be the case. There is an argument that legal firms may not have the same accounting expertise as firms who have traditionally undertaken liquidation work. However, I cannot envisage that it would be too difficult for them to find accounting assistance where that would be deemed necessary. Indeed, the work undertaken by some of the legal firms who are on the Panel T has, in my opinion, been thorough, professional and beyond critic