Liquidator knows best - Hong Kong court rejects bid to force information disclosure on funding and strategy

Hogan Lovells

Hogan Lovells

A Hong Kong court has rejected a bid to force liquidators to provide information and documents regarding their plans and strategies on related litigation as well as information on legal costs and funding arrangements.

The underlying dispute in China City Construction Holding Group Co Ltd v Patrick Cowley and Lui Yee Man , Joint and Several Liquidators of China City Construction (International) Co Ltd [2024] HKCFI 219 concerned a property holding company which owned land in Miami and a restructuring of the China City Group, one of whose members was China City Construction (International) Co Ltd (CCCI).

CCCI defaulted on bonds issued by it with a face value of RMB 2.5 million and liquidators were appointed. The liquidators brought legal proceedings against alleged wrongdoers for deprivation of its interest in the land, as part of a complex web of other actions. The liquidators entered into a third-party funding agreement in order to pursue the claims.

CCCH sought disclosure of two categories of documents, (i) the liquidators’ plans, strategy and views on merits with regard to the legal proceedings and the potential recovery of loss and damage suffered by CCCI; and (ii) the actual and estimated future legal costs and the funding arrangements and terms in the related legal proceedings.

No absolute right

CCCH accepted there was no absolute right to the information in question. The liquidators had previously declined their request. Section 255(1) of the Companies (Winding-up and Miscellaneous Provisions) Ordinance (Cap.32) provides that: “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.”

Established principles

The court drew on established principles of companies law to guide it in the exercise of its discretion.

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 or even-handedly, or the decision is perverse in the sense of falling outside the range of decisions a liquidator having regard to the relevant principles might make.

The court proceeds on 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. The commercial decisions of liquidators are accorded great weight. The liquidator is recognised as having both the qualifications and access to the wide range of information which may be necessary in order to make commercial decisions. 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.

As for the funding of the litigation, pursuing litigation to recover monies or other property owed to a company is permissible and the liquidator does not require court sanction to do so. There was no rigid rule that a liquidator must disclose the terms of any funding agreement to other creditors in order to be seen to be impartial. (This is in contrast to third-party funding which has been permitted for arbitrations since February 2019 but where the fact that a party is funded and the identity of the funder must be disclosed.)

The Honourable Justice Mimmie Chan found it was “perplexing why CCCH is investing the resources to press for the information in question and to have the resources of the Liquidators expended for the purpose.”

The court dismissed the plaintiff’s application with costs awarded to the liquidators.

Insolvency exception

Insolvency matters have long been an exception to the Hong Kong prohibition on champerty and maintenance which generally bans the participation by third parties in litigation for the hope or expectation of profit. Liquidators typically believed they had to obtain the court’s sanction to enter into a funding arrangement however decisions such as Re A [2020] HKCFI 493 put this notion to rest.

The decision in China City will go to highlight the independence of liquidators in “getting on with the job” when it comes to recovering assets believed to have been removed to the detriment of the general body of creditors.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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