Hong Kong Law Reform Commission

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Chapter 4 - Remuneration (Fees) of Office-holders[22]

4.1 The Consultation Paper made little reference to the remuneration of office-holders. Since the publication of the Consultation Paper in April 1998, there have been developments in the approach of the court to the question of remuneration. Because of this, the recommendations made in this chapter have not been subject to the full consultation process.

4.2 We have, however, consulted the representative bodies of those who would be most likely to be affected by the recommendations, that is, the Law Society, the Hong Kong Society of Accountants and the Hong Kong Institute of Company Secretaries. The bodies expressed broad support for the recommendations. We note, however, that the recommendations set out below in relation to the convenor were not addressed to the bodies as they evolved after the bodies’ submissions were received.

4.3 We do not intend to focus any more than necessary on cases that have been or are before the court on fees as the recommendations attempt to look forward having taken account of the developments both here and in the United Kingdom.

4.4 We need, however, to refer to the Peregrine case[23] to set out recent events in Hong Kong, as this case more than any other has established the court’s approach to office-holders’ fees in Hong Kong. The Peregrine case relates, for the most part, to the fees of the provisional liquidators of the Peregrine group of companies which were wound-up by the court in January 1998. The fees of the provisional liquidators in the Peregrine case, and in other cases, have been the subject of scrutiny by the court.

4.5 The Companies Ordinance does not make provision for the remuneration of provisional liquidators. It is accepted that a private provisional liquidator is entitled to sufficient remuneration to compensate him for the work done, so long as it is properly earned. A provisional liquidator may be appointed once a petition to wind-up a company has been presented and before a winding-up order has been made under section 193 of the Companies Ordinance and, in any event, under section 194, a provisional liquidator acts in all cases after a winding-up order has been made up to the appointment of a liquidator by the first meeting of creditors.[24]

4.6 Questions have been raised in the United Kingdom over the fees of not just liquidators and provisional liquidators, but other office-holders, which culminated in a Report of the Ferris Committee “the Ferris Report”[25] which itself moderated its tone from comments originally made in the “Maxwell case” where Ferris J. had taken a strong view on an application for fees by receivers.[26]

4.7 The Hong Kong court considered that office-holders were:

“... fiduciaries charged with the duty of protecting, getting in, realizing and ultimately passing on to others assets and properties which belong not to themselves but to creditors or beneficiaries of one kind and another.”

The court continued that:

“The allowance of remuneration to office-holders represents an exception to the rule that a trustee must not profit from his trust which rule applies to all kinds of person who are in a fiduciary position. This exception inevitably involves a conflict between the interests of the fiduciary who is to receive such remuneration and the interests of those to whom the fiduciary duties are owed, who will bear whatever remuneration is allowed.”

4.8 The comments of the court in the Peregrine case came after the comments in the Maxwell case but before the Ferris Report.

4.9 The usual method of charging fees for provisional liquidators, receivers and other office-holders in Hong Kong has been on a time costing basis but a scale or percentage basis may also be appropriate. There was no dispute about the level of time cost scale of fees charged by the provisional liquidator in the Peregrine case or, generally, in other cases. The concern of the court was on how the fees had been charged. The court raised serious questions about the way that provisional liquidators have been accumulated their fees and made harsh comments about “cosy relationships” in the insolvency business.

4.10 The court expressed astonishment that accounting firms in Hong Kong did not time cost their work in the same way as firms of solicitors. Solicitors generally charge in units of 6 minutes and are therefore able to account for how every six minutes is spent. The practice of accountants has been to charge on a more general basis with the consequence that they are unable to account for fees in the same detail as solicitors.

4.11 This fine and important distinction is not just a Hong Kong practice and the Ferris Report acknowledged that the time costing practices of solicitors had developed through many years of scrutiny of their bills by Taxing Masters in the courts whereas accountants had not been subject to such scrutiny. This distinction might not have been apparent to the Hong Kong court when some of its comments in the Peregrine case were made.

4.12 The point to be taken is that the court considers that it is a matter of public interest that the matter of fees of office-holders should be open and above board. That the court has support for this view is clear in that submissions on the Consultation Paper have made a number of references to remuneration of office-holders. It is also clear that insolvency practitioners would also like to see matters clarified. This is what these recommendations seek to achieve.

How office-holders’ fees are treated at present

4.13 The Ferris Report identified eleven types of insolvency related practice. As stated, the Companies Ordinance does not adequately address the remuneration of the different types of insolvency practitioner and it might not be the best solution to lay down rigid rules in this respect. We consider that it would be appropriate to set out guidelines within which office-holders should operate.

4.14 At present there is no one body, including the court, which is qualified to consider all aspects of remuneration / fees that arise in an insolvency. These fees range from:

the fees of a receiver appointed by a debenture holder in realizing sufficient assets to cover the amount owed under the debenture (the company might not even be insolvent);

the fees of liquidators, including provisional liquidators;

the fees of solicitors and agents appointed by liquidators; and

the fees of provisional supervisors when new corporate rescue legislation is introduced.

4.15 The Taxing Master is capable of dealing with legal fees but not necessarily with the fees of liquidators, which relate to a different discipline. There are even questions about the jurisdiction of the Taxing Master to adjudicate on liquidators’ or provisional liquidators’ fees. The court is probably less qualified than a Taxing Master to consider fees and, in any event, would not have the time to investigate fees in detail.

4.16 Office-holders are expected to make sure that the fees of their solicitors and special managers are reasonable and provide value for money. The extent to which this obligation might or might not have been honoured in the past is not relevant for the purposes of this report as, rightly or wrongly, the “cosy arrangement” genie is out of the bottle and needs to be addressed.

The Ferris Report

4.17 The Ferris Report, which was published in August 1998, considered:

“the remuneration of office-holders and the amount to be allowed for disbursements paid or to be paid by an office-holder to solicitors.”

4.18 The Report considered the general basis on which remuneration should be fixed including the Official Receiver's scale of fees, percentages of assets realized or distributed, on a quantum meruit with or without a ceiling, by agreement between the parties and even on a contingency basis.

4.19 For the purposes of this report, we note that there was no dispute about the scale fees basis of charging fees for liquidators, provisional liquidators and others: the question was whether fees were properly charged. It might be the work of some other body to look at scale fees at a later date but, for now, we recommend retaining scale fees as the method of establishing fees.

4.20 The Ferris Report noted that the Insolvency Act provided two formulae for assessing remuneration. The Report opted for what it termed the “Provisional Liquidator formula (PL formula)”, being the formula used in the Insolvency Rules, rule 4.30, over what it termed “the Liquidator Formula” in the Insolvency Rules, rule 4.127, on the basis that (i) the PL formula treated time spent in a more logical way (as one of several factors which had to be reviewed in conjunction with each other, not as a separate factor) and (ii) the PL formula was expressed in such a way as to make these factors of general relevance in assessing remuneration instead of appearing to confine that relevance to the choice between adopting a percentage of asset value or time spent as the basis of remuneration.

4.21 The PL formula factors are:

time spent,

complexity or otherwise,

exceptional responsibility assumed,

effectiveness of performance, and

value and nature of the property dealt with.

4.22 We recommend the PL formula as a guideline for office-holders, and for application by the Panel we refer to below.

4.23 The Ferris Report also considered a number of other criteria for assessing remuneration but felt that the PL formula factors already contemplated these other criteria. We recommend, however, the addition of one of the other criteria to the PL formula. The Ferris Report referred to the criterion of “the need for and desirability of investigatory work leading to additional realizations.”

4.24 We recommend the adoption of an amended version of this test, that of “the need for and desirability of investigatory work which may or may not lead to additional realizations”. We consider that while the question of remuneration and realizations are important, there is also an underlying need for a proper minimum statutory investigations of companies and that realizations are not the only issue that need to be considered in assessing the reasonableness of remuneration. We expand on this subject in comments in the chapter on the funding of the Official Receiver's Office.[27]

4.25 If we take issue with anything that has come out of the Ferris Report, it is to the extent that the Report tends to dwell on value for money and realizations in assessing the actions of office-holders. We consider that while realizations are important and while it is important to ensure that office-holders do not squander creditors’ money on investigations or proceedings with little merit or prospects of recovery, there must be some outlet, for example, for a liquidator and a committee of inspection to decide to take an action where the prospects of a favourable outcome are uncertain or to spend money on investigations into the actions of officers of a company which may not necessarily bear fruit. If nothing ultimately results from such an action, an office-holder should not expect to be prejudiced in terms of his remuneration. We would note that this approach has parallels with the comments made by the Chief Master in his assessment of the fees of the Maxwell case.[28]

The need to establish a Panel to scrutinise office-holders’ fees

4.26 The solution, we recommend, is to establish a Panel that would adjudicate all insolvency fees brought before it.

How the Panel / Convenor would operate

4.27 We recommend that the Panel should be established under the auspices of the Official Receiver.

4.28 We are concerned that the Panel should not have the effect of adding greatly to the costs of an insolvency proceeding. For this reason, we recommend the establishment of a system under which every application to the Panel would be considered in the first instance by a convenor who would make an assessment of the merits of the application. Other advantages of a convenor would be that the convenor would be in a position to apply with consistency the rules and precedents that would be established over a period of time and the convenor would be able to do so more quickly than a Panel.

4.29 A Panel would be formed only where one of the parties concerned was not prepared to accept the assessment of the convenor. In such circumstances a Panel would be appointed by the Official Receiver from the Panel list to consider the application and to make a final decision which would not be subject to any appeal.

The Panel to consider disputes as to fees only in cases referred to it

4.30 Looking at the overall picture of insolvency cases, it would be impractical and expensive to provide that fees in every insolvency matter should be brought before the Panel. In an average year, there are over 1,000 members' (solvent) voluntary windings-up, over 200 creditors' (insolvent) voluntary windings-up and about 450 windings-up by the court, not to mention receiverships and bankruptcy. In terms of the three figures quoted above alone, the Panel would need to consider up to six cases per day based on a 5-day working week.

4.31 We recommend therefore that the fees of office-holders, and those of their agents, such as solicitors, save where otherwise taxed, should be capable of being referred to the Panel only in the event of a dispute as to fees. We reiterate that the Panel would not be involved in the fixing of fees, merely in assessing whether the fees have been properly charged and spent.

Who would be on the Panel

4.32 We recommend that the Panel should be made up of Licensed and Registered Insolvency Practitioners when established (but until then by insolvency practitioners appointed to the Official Receiver’s List A Panel and List B Panel), other professionals to be identified, representatives of the Official Receiver's Office and representatives from bodies such as the Protection of Wages on Insolvency Fund Board and the Consumer Council.

4.33 This last recommendation was not greeted with enthusiasm by two of the bodies consulted on the recommendations on the basis that representatives of lay bodies such as the Consumer Council would generally have no experience or knowledge of insolvency procedures or the work of office-holders. It was also stated that it was unclear how the Consumer Council, for instance, could be considered an interested party or what role would be envisaged for them on the Panel.

4.34 There is, however, the need for openness and the need to avoid the Panel being perceived as being part of a cosy relationship. The presence of representatives of bodies such as the Consumer Council would serve to dispel such perceptions. It is clear that the court sees an element of public interest in the fees of office-holders and submissions on the Consultation Paper echoed this view. Lay representatives would quickly accumulate the necessary knowledge to assess claims for remuneration. We would also remind office-holders that the Panel would not consider the level of fees but only how fees had been incurred and whether the fees were reasonable in the circumstances.

4.35 A panel of three would sit in every case referred to it. The composition of each Panel would be made up of different representatives from the areas of interest identified above. This mix on Panels should serve to dispel doubts about self-regulation maintaining high fees.

Access to the Panel

4.36 We recommend that the court, the Official Receiver and office-holders should have the right to apply to the Panel as of right. The court and the Official Receiver would therefore be able to refer fees that it considered questionable to the Panel for assessment and final decision. Office-holders should be able to apply as of right in the event that creditors or debenture holders would not agree to their fees. In an application by the court or by the Official Receiver, the costs of the Panel would be borne by the estate. In the event of an application by an office-holder, the costs would be paid by the office-holder subject to an indemnity from the estate.

4.37 We recommend that creditors, debenture holders and others who may have an interest in the fees of an office-holder should only have access to the Panel by application to the court. In such cases, the costs of the application should be decided by the court depending on the outcome of the assessment. The reason for this is to ensure that applications to the Panel would be of substance. The court would act to exclude misconceived or nuisance applications.

How the Panel would charge

4.38 We recommend that the Panel should be self-funding. The administration of the Panel would be carried out by the Official Receiver and the funding of the Official Receiver's Office in this regard would need to be addressed. The intention would be that the administration costs of the Official Receiver's Office and the costs of Panel members would be covered by fees charged.

4.39 The Panel could charge on the scale employed by the Taxing Master, who charges six per cent of the amount of fees allowed up to $100,000, four per cent for the next $150,000, three per cent for the next $250,000 and one per cent for the remainder.[29] We anticipate that the fees of the Panel would be lower. This should be the case, particularly in cases, which should be the majority, where an assessment by the convenor is not referred to the Panel.

Panel to be inquisitorial

4.40 We recommend that the Panel should have inquisitorial powers along the lines of the powers enjoyed by the Taxing Master.[30] The Taxing Master, in the discharge of his functions may, among other things:

take an account of any dealings in money made in connection with the payment of the costs being taxed;

examine witnesses; and

direct the production of documents.

[22] For definition of “Office-holder” see paragraph 12 of the Introduction.

[23] See re Peregrine Investments Holdings Ltd. [1998] 3 HKC 1 CFI.

[24] Note the Companies (Winding-up) Rules, rules 28, 146 and 147.

[25] Report of Mr. Justice Ferris’ Working Party on the remuneration of office-holders and certain related matters.

[26] Mirror Group Newspapers v Maxwell [1998] BCC 324, the “Maxwell case”. It should be noted that the assessment of the fees of the receivers was allocated to a Chief Master who delivered a judgment on 12 January 1999 which allowed about 99 per cent of the receivers’ fees. The Master approached the assessment by applying the test of reasonableness under RSC Order 62, rule 12(1), (that is, that of a sensible solicitor considering what, in the light of his then knowledge, was reasonable in the interests of his client) and without using hindsight, in accordance with the decision in Francis v Francis & Dickerson [1955] All ER 836. The Master distinguished the Maxwell case to the extent that during his lifetime Mr Maxwell had portrayed himself as a man of immense wealth controlling a range of large multinational companies which were themselves of great value but that subsequent investigations showed that much of this was a facade and the true ownership of assets could only be established by the office-holders after the most painstaking investigation. The Master also noted that had the office-holders not investigated all leads in respect of the property potentially belonging to the estate of Mr Maxwell they would have been open to the severest of criticism. (Extracted from a synopsis of the judgment of Chief Master Hurst prepared by Wilde Sapte, Solicitors, London).

[27] See paragraph 5.15 and paragraphs 11.41 and 11.42.

[28] See the footnote to paragraph 4.6.

[29] See the High Court Fees Rules (Cap. 4), First Schedule, paragraph 19.

[30] See The Rules of The High Court (Cap. 4), Order 62, rule 14.