What you need to know about reopening a receiver’s fees after assessment
as confirmed in the novel case of Ho Chor Ming & Ors v Hong Kong Chiu
Chow Po Hing Buddhism Association Ltd [2018] 3 HKLRD 270
- This Case Report was authored by Douglas Lam SC and David Chen.
Introduction
Shareholder disputes are commonplace. When a membership dispute arises, receivers are sometimes appointed to manage the company pending the resolution of the dispute. If the receivership is prolonged, the receivers might seek payment of their fees during the course of receivership. Their fees might be assessed by the Court (normally a Master) and paid out of the company’s assets while the receivers remain in control of the company.
When the company emerges from receivership, is it entitled to challenge or even set aside the assessed payments? This question does not appear to have been considered in the common law world. In Ho Chor Ming & Ors v Hong Kong Chiu Chow Po Hing Buddhism Association Ltd [2018] 3 HKLRD 270, G Lam J gave a detailed examination into the issue. His judgment has recently been upheld on appeal.
Background Facts
Hong Kong Chiu Chow Po Hing Buddhism Association Ltd (“Association”) is a charitable institution. In 2012, a dispute arose over its membership. In August 2013, the Court appointed a receiver (“Receiver”) over the Association to manage its assets and to verify its register of members. The membership dispute was eventually resolved in November 2015 when the Court concluded that 7 individuals were members of the Association (see [2016] 1 HKLRD 513). In August 2016, the individuals formed a new board of directors of the Association (“Board”).
The Order appointing the Receiver provided that his remuneration was to be charged on a time-costs basis and paid out of the Association’s assets. Subsequent Court Orders and directions confirmed this arrangement, and further provided that the Receiver’s fees and disbursements should be assessed by a taxing master.
Pursuant to these Orders and directions, the Receiver submitted six bills and the Receiver’s solicitors (“Solicitors”) submitted four bills (collectively the “Bills”) to the Court for assessment over the period August 2013 to March 2017 (collectively the “Assessments”). Three out of six of the Receiver’s bills and two out of four of the Solicitors’ bills were assessed before the Board was elected.
The remaining bills were assessed after the Board was elected, but the Board was not notified and therefore did not participate in those Assessments. The total fees and disbursements allowed amounted to approximately HK$15.2 million.
After the Board became aware of the Assessments, the Association applied to set aside the Assessments, for an order that the Receiver do provide the Association with the relevant Bills (with full particulars and supporting documentation), and for leave to participate in the reopened assessments.
First Instance Judgment
The Judge approached the matter by considering the following questions:
(1) Should the Association, in principle, be permitted to take part in the assessment of the Receiver’s remuneration and disbursements (“First Issue”)?
(2) Does the Court have the power to reopen or set aside the “taxation” decisions of the Master made in the absence of the Association as separately represented (“Second Issue”)?
(3) If so, should that be done in this case (“Third Issue”)?
As regards the First Issue, the Judge rejected the Receiver’s submission that the assessment of his remuneration was “strictly between the Court and the Receiver”. The starting point was that as a matter of natural justice, the Association being the paying party ought to be permitted to take part in the assessments if it so desired.
Historically, a receiver’s remuneration and disbursements were matters to be set out in his accounts which had to be passed by the Court. The authorities showed that parties who are interested in the assets which were subject to receivership were normally entitled to raise objections to the receiver’s accounts.
Further, in cases concerning provisional liquidators’ remuneration (which is governed by the Court’s inherent jurisdiction), the Court repeatedly emphasized that natural justice demands that a paying party be afforded an opportunity to be heard (see e.g. Re Boldwin Construction Co Ltd (unreported, HCCW 340/2002, 7 November 2006) and Lu Jun v Yu Qi [2017] 2 HKC 327). The Judge concluded that the Association being the paying party “can legitimately seek to take part” in the assessment of the Bills.
As regards the Second Issue, the Judge held that there are two juridical routes to reopen the Assessments. First, since the Assessments were conducted ex parte without the Association’s independent participation, they may be set aside as an ex parte order under RHC O.32 r.6, which provides that “The Court may set aside an order made ex parte”.
Second, approaching the issue as a matter concerning the Receiver’s accounts, RHC O.30 r.5 provides that the Court may direct a receiver to submit accounts to a party, that such party should have access to the underlying books and papers, and that he may specify items to which objection is taken, which is then to be examined by the Court.
The authorities also show that a master’s decision passing a receiver’s accounts could be opened up and varied if there was a valid objection. In the present case, upon an objection being raised by the Association, the previous Assessments cannot be an answer as they were not rulings on any such objections raised by the Association.
As regards the Third Issue, the Judge observed that the right of access to the court and the right to a fair hearing are fundamental rights. The Court’s orders and directions that the Receiver’s fees should be “assessed” or “taxed” did not mean that the Assessments must be carried out ex parte or without notice to any interested parties. Similarly, the direction that the Receiver’s fees should be paid “out of the assets of the Association” simply indicated the incidence of costs.
The Judge rejected the Receiver’s submission that there must be “legitimate and properly substantiated complaints” about the Bills before the Assessments could be reopened. This point carried little weight in this case because the Association was not provided with sufficient information about the Bills to make any meaningful complaints.
While the reopening of the Assessments would lead to further expenses and time being incurred to complete the exercise, a balance had to be struck between the interests of the Receiver and the interests of the Association being the paying party.
There was no prejudice to the Receiver if he was required to disgorge what he should not have received in the first place. There was no suggestion that the Receiver would be hampered by lapse of time, loss of information or documents if the Assessments were to be conducted again.
In the circumstances, the Judge held in favour of the Association and answered “yes” to all three questions. He directed the Receiver to:
- provide the Association with the Bills (with full particulars);
- the Association to file a statement of objections and;
- that the assessment in relation to the objected items be reopened and referred to a Master for assessment in which the Association do have leave to participate.
The Court of Appeal’s Judgment
The Receiver appealed against the Judgment. On appeal, the Receiver did not contend that his remuneration is a question strictly between the Court and the Receiver. He accepted that the Association had a right to participate in the assessment of a receiver’s remuneration but drew a distinction between a “forward looking” application (when an assessment has not yet been made) and an “ex post facto” application (for reopening a concluded assessment for reassessment).
The Receiver contended that the Association is entitled to participate in a “forward looking” application but could not reopen a concluded assessment unless there were valid grounds or special circumstances. The Receiver also contended that the Judge had no jurisdiction to reopen the Assessments and had in any event wrongly exercised his discretion.
The Court of Appeal held that the Judge was “obviously right” to reject the Receiver’s submission that the assessment of his remuneration is strictly between the court and the receiver such that the Association, being the paying party, would not be entitled to participate in the assessment.
The Court of Appeal confirmed the two juridical routes under RHC O.32 r.6 and RHC O.30 r.5 to reopen the Assessments.
(1) In relation to RHC O.32 r.6, the Court of Appeal rejected the Receiver’s submission that the Association was a party to the Assessments in that the Receiver represented them before the Board was constituted. Given the inherent conflict of interest on the part of the Receiver regarding the assessment of his own remuneration, the Receiver’s representation of the Association was not meaningful or effective.
As regards the Bills that were assessed after the Board was constituted, the Court of Appeal rejected the Receiver’s submission that he was following the directions of the Court in not notifying the Board. This was a disingenuous suggestion because if the Receiver was in doubt as to whether the Board should be notified of the pending assessments, the Receiver should have sought directions from the Court.
Further, applying the distinction drawn by the Receiver between “forward looking” and “ex post facto” applications, the absence of notification to the Board would turn a “forward looking” application into an “ex post facto” application, and effectively deprive the Association of its right to participate, which cannot be right.
(2) As regards the Receiver’s contention that RHC O.32 r.6 does not empower the Court to order the Receiver to provide the Association with the detailed Bills, the Court has inherent jurisdiction to provide for the steps to be taken incidental to the setting aside of an ex parte order. In the present case, the provision of detailed Bills by the Receiver was an incidental step following the setting aside of the Assessments.
(3) In relation to RHC O.30, rule 3 is a general empowering provision, the detailed workings of which are complemented by rule 5, which provides for a mechanism by which objection may be raised to any item in the accounts submitted by the receiver, including his remuneration and disbursement. RHC O.30 r.5 clearly provides a juridical basis to set aside and reopen the Assessments.
(4) As regards the Third Issue, there was nothing wrong with the Judge’s pragmatic approach to direct a rolled-up hearing to deal with the reopening and reassessment of the objected items within the Bills. It was unnecessary to hold a separate inquiry or apply some filtering process separately to ascertain if there was a valid objection against any item in the Bills.
The Master retains the power to rule on the validity of any objection against any item of costs so there is no question of the Association dictating the basis and threshold for any reopening and reassessment. It is unnecessary for the Association to demonstrate some wrongdoing, bad faith or misfeasance on the part of the Receiver in order to raise a valid objection.
The Judge gave due and proper weight to the fact that the Association was the paying party without the opportunity of being heard. It was an exaggeration to say that this factor would necessarily feature in most cases so that the reopening and reassessment of a bill would occur in virtually every receivership, at the election of the subject entity.
(5) In the circumstances, the Association prevailed and the Court of Appeal dismissed the Receiver’s appeal.
Practical Solutions and Actionable Takeaways
- As a matter of natural justice, a paying party should normally be afforded an opportunity to be heard when his assets are potentially being used to discharge an obligation. Within the context of receivership of a company, if the company emerges from receivership, it should be able to challenge the fees paid to the receiver and his agents during the receivership.
- A company’s ability to challenge the receiver’s fees does not necessarily impinge upon the principle that a professional carrying out significant work should be paid within a reasonable time. Instead of seeking an assessment as the Receiver did in the present case, it is suggested that a receiver in a similar position in the future would benefit from seeking interim payment instead. The principal difference between the two is that there is an element of finality in an assessment of a receiver’s fee – the Master would scrutinize the bill presented by the receiver and assess the appropriate amount to be awarded to the receiver. In an application for interim payment, however, the Court would ensure that the amount awarded to the receiver included a sufficient buffer in case the receiver’s bills are subsequently taxed down significantly. The Court might also require the receiver to undertake to repay any excess amount of the interim payment should his fees and disbursements ultimately be determined to be less than the amount received by him: see e.g. Re Lehman Brothers Securities Asia Ltd (No 1) [2010] 1 HKLRD 43 at 55 (§38) per Barma J (as he then was); Re MF Global HK Ltd (No 2) [2012] 3 HKLRD 56 and Chen Yung Ngai Kenneth v Shinewing Specialist Advisory Services Ltd (unreported, HCCW 279/2010, 18 February 2014) at §§15-20 per DHCJ Le Pichon. While these cases concerned provisional liquidators and liquidators, the same principles should apply to a receiver’s application for interim payment.
- If the Receiver in the present case had applied for interim payment instead of assessment of the Bills, he would have been paid a part of his fees during the receivership. After the conclusion of the receivership, the Receiver would submit the Bills for assessment. The Association would be able to participate in the assessment and raise objections to the Bills. The assessed amount, less the amount of interim payment already paid, would be paid to the Receiver. If the assessed amount is less than the amount of interim payment already paid, the Receiver would be required to pay back the excess. The issue of “reopening” a concluded assessment would not arise.
Douglas Lam SC and David Chen acted for the Association. Rachel Lam (now Rachel Lam SC) acted for the Receiver.
