The Blockchain decision seems to be the first ever reported decision where the Court discharged a regulating order and replaced the liquidators in accordance with the majority creditors’ wishes. It indirectly sends a message to the Official Receiver (“OR”) that an application for a regulating order should not be lightly made.
Sections 227A and 227B of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”) confer on the Court the power to make a regulating order. The Court’s power to make a regulating order is aimed at addressing the problem of insolvencies with a large number of small creditors or where it is otherwise impracticable to hold the first meeting of creditors and contributories.
Blockchain Group Co Ltd (“Company”) is a Cayman-incorporated company listed on the Hong Kong Stock Exchange.
A regulating order in respect of the Company came about in the following circumstances:
(a) In October 2018, in light of a winding-up petition against the Company and expecting an imminent winding-up order, the OR decided to apply for a regulating order because the OR thought the Company had hundreds or even thousands of contributories (although in fact the Company had only 69 contributories).
(b) Before applying for the regulating order, the OR consulted 19 known creditors.
(c) On 19 November 2018, as soon as the Court made a winding-up order, the OR applied for a regulating order without doing further investigation or consulting other creditors.
(d) On 21 November 2018, the Court granted the OR’s application on the papers and appointed two individuals of EY recommended by the OR as the liquidators.
In the meantime, hundreds of other creditors were completely unaware of the OR’s ultra-swift actions and the regulating order. The OR was also unaware of the existence of these creditors because the OR did not investigate, although most of these creditors were holders of bonds issued by the Company with public announcements.
On 23 November 2018, the solicitors for the Applicant (one of the creditors) wrote to the OR to urge the OR to convene a creditors’ meeting, and to inform the OR of the Applicant’s intention to nominate liquidators.
On 26 November 2018, the OR responded to the Applicant’s solicitors informing the Applicant of the regulating order and the appointment made under the regulating order.
Naturally, such development surprised and dismayed the Applicant and many other creditors. The Applicant (supported by hundreds of creditors) then applied to discharge the regulating order so that meetings of creditors and contributories could be held to determine the choice of liquidators.
On 27 February 2019, Deputy High Court Judge Maurellet SC ordered the liquidators to, by way of letter correspondence, obtain from all known creditors and contributories their votes on a resolution of whether or not an application should be made to the Court for appointing new liquidators in place of the existing liquidators.
It turned out that a majority of the creditors voted for the appointment of new liquidators, while the contributories voted for the status quo.
The Applicant then returned to the Court to seek the appointment of new liquidators.
Deputy High Court Judge William Wong SC discharged the regulating order and appointed new liquidators in accordance with the majority creditors’ wishes. His Lordship reasoned as follows.
The Court has jurisdiction to appoint liquidators under section 194 of CWUMPO. The principles governing the Court’s discretion under section 194 are well-established. In particular, the cardinal principle is the principle of creditors’ democracy. In the case of an insolvent liquidation, it is the interests of creditors that are of paramount importance and their views should carry weight.
This case serves as a salutary reminder that while a regulating order has a proper role in liquidation, its use has to be based on well-established principles. In particular, “the court must be satisfied it is right in [the] circumstances to make a regulating order and appoint liquidators forthwith, as the creditors’ right to nominate a liquidator of their choice should not be easily overridden”: Re Legend International Resorts Ltd (No 3)  3 HKLRD 289 at .
In the present case, it is hard to see any legitimate justification for the regulating order, nor the way in which its application was rushed through the Court. This in turn necessitated the incurrence of creditors’ time and costs to restore their statutory right to nominate liquidators.
It is also perhaps time to revisit if an application for a regulating order should be allowed to be made on the papers.
Look-Chan Ho acted for the Applicant in this case.